ETF
Is This the Discount Sale Investors Have Been Waiting For?
By George Leong for Daily Gains Letter | Oct 15, 2014
October has provided the usual bouts of anxiety that have characterized the month in past years. I warned that we could see volatility and so far, this has been the case.
From small-cap stocks to world-class blue-chip companies, we are seeing some selling capitulation emerge in the stock market.
All of the major key stock indices are below their respective 50-day and 200-day moving averages (MAs). As I said in a recent commentary, the chart risk is high.
Bearish investor sentiment continues to grip the stock market. We saw 354 new lows on the NYSE on Friday, followed by 308 new lows on Monday.
The DOW has reported four triple-digit-loss days over the past five sessions and in that period, it has declined nearly 600 points. The blue chip index is down 1.54% this year.
Technology has led the losers so far in October with the NASDAQ down 6.24% and off 6.08% from its peak.
The S&P 500 breached its 200-day MA for the first time since 2012. The index has corrected 5.89% from its record, so we could realistically see more selling in the weeks ahead; be careful. A decline to 1,792 would represent a 10% correction, based on my technical analysis.
Chart courtesy of www.StockCharts.com
A death cross remains intact on the Russell 2000’s chart, with the index down 13.56% from its peak as of Monday’s close.
Now, we could see further weakness should the earnings season disappoint. And Germany and Europe are already seeing contraction in their economies.
You should begin to look at investment opportunities to buy into weakness. Over the past two years, the S&P … Read More
What It Means: Dow Fails to Hold Above 17,000 for Sixth Time
By George Leong for Daily Gains Letter | Sep 29, 2014
Last week was not a great week for chart watchers. The DOW lost 223 points on Monday and Tuesday and was down another 225 points to below 17,000 on Thursday morning.
What concerns me is that this is the sixth time the DOW has failed to hold above 17,000, which is a red flag that suggests vulnerability is on the horizon. There clearly appears to be a multiple top formation in place that could be difficult to break in the short-term, based on my technical analysis.
The small-cap Russell 2000 is also in trouble after the emergence of a bearish death cross on the chart last week when the 50-day moving average (MA) fell below the 200-day MA. Small-cap stocks tend to have a higher beta and generally are the first to be dumped as overall stock market risk rises.
Chart courtesy of www.StockCharts.com
At this point, you will need to be careful, especially when looking at higher-risk stocks.
Just like in sports, you will need a sound defense as part of your overall portfolio strategy. In sports, a strong defense is what leads to a win. The same can be said for the stock market.
The stock market is in its fifth year of growth. The S&P 500 is up 200% in that time. Given this and the fact that the economy and corporate profits are not growing rapidly, it would not be a surprise to see a stock market correction in the works.
The chart of the S&P 500 shows we have not had a stock market adjustment for quite some time and are due for one.
Chart … Read More
Where Oil Prices Are Headed
By George Leong for Daily Gains Letter | Sep 15, 2014
Gasoline prices are finally headed lower at the pumps, but it’s happening slowly. It always seems prices at the pumps rise much faster when oil prices increase, but they move much slower when oil prices decline. I guess that’s big oil for you.
The average price of regular gas across the nation is around $3.55 a gallon. That’s down from the more than $4.00 a gallon we witnessed in July 2008 and again in May 2011.
Lower gas prices translate into more money in your wallet to spend on other goods and services. This is good for the country’s economic growth.
As a consumer, while we are experiencing lower gas prices at this juncture, I’d suggest you enjoy it while you can, as oil companies will look for any excuse to drive oil prices higher—and gas prices will follow.
As an investor, however, you need to pay attention to the bigger picture.
Oil prices have been steadily declining to around $91.00 a barrel from the more than $100.00 a barrel witnessed not long ago.
Chart courtesy of www.StockCharts.com
Some calm to the situation in Gaza and Israel, along with a current truce to the fighting in Ukraine has contributed to the decline in oil prices. Geopolitical events can have a huge impact on the price of oil.
The problem that I see here is that the situation in either region could boil over at any moment, possibly launching gasoline and oil prices sky-high. But my biggest concern is not the events happening in Ukraine or Gaza; rather, the biggest question mark lies in the volatile regions of Syria and Iraq, … Read More
Looking for a Good Gold Play? Here’s What to Watch For
By George Leong for Daily Gains Letter | Sep 8, 2014
I have not talked about gold for some time, as there has been no reason to get excited about the yellow metal. Yes, it’s shiny, but it doesn’t appear to be sparkling at this time.
After the gold bugs got excited about the opportunities in the precious metal, pushing prices to above $1,300 following the onset of geopolitical issues in both Ukraine and the Middle East, the aftermath has been dull.
As I said back in June, the only reason I would trade gold would be to buy on weakness near $1,200 as the fundamentals, in my view, are irrelevant at this time. Gold still seems to be more of a geopolitical trade. (See “How to Make Quick Profits in Gold at This Time.”)
Look, there’s no big buying from India; China is buying, but it is simply not enough to sway the global supply/demand balance in favor of the yellow precious metal.
Chart courtesy of www.StockCharts.com
Consider the fact that the greenback has been edging higher, with the U.S. dollar index at its highest level in more than a year. This move makes the dollar-denominated gold more expensive for foreigners, who have traditionally been major purchasers. The end result is a letdown in demand for the yellow metal.
In my view, gold is simply a trade on the geopolitical risk, as there’s really no major reason to want to buy at this juncture, given the market’s underlying fundamentals.
The gold bugs clearly don’t want to hear this, but I believe that unless the situation in Ukraine or the Middle East worsens, prices could head lower, towards $1,225 or even … Read More
How to Survive This Stock Market
By George Leong for Daily Gains Letter | Aug 22, 2014
The bulls are out in full force again following a pause in the stock market. Investors were initially spooked by the fear of interest rates moving higher in the first quarter of 2015, but that appears to have been pushed to the backburner now as the stock market rally reignites.
The thing is there are few real alternatives to the stock market—unless you are happy with the 2.42% yield on the 10-year bond. Personally, I would rather invest in dividend paying stocks.
There’s nothing spectacular about the stock market and economy at this time. Things seem to be moving just enough to warrant buying and optimism in the stock market.
Jobs are being generated at an average 200,000 per month and the unemployment rate is at 6.2%. These are okay metrics, but we need to see higher jobs numbers going forward.
Housing market growth returned some strong readings in July, with both housing starts and building permits growing at an annualized one billion units, which is excellent.
Consumer sentiment is lagging somewhat, but the stock market is simply pleased that the reading has not plummeted.
This seems like a Goldilocks recovery—not too hot, not too cold, but just enough growth.
The stock market has edged higher in six of the past nine sessions with several key technical moves on the upside as of Tuesday.
Blue chips, which have been comatose, are showing some movement, with the DOW back above its 50-day moving average (MA) and returning to the positive side for this year. As we move ahead, the DOW will likely take another run at 17,000, which has been broken … Read More
This Sector Will Drive the Market for the Next Decade
By George Leong for Daily Gains Letter | Aug 20, 2014
It was just a few months ago that the technology sector stocks, specifically the momentum stocks, were getting bashed around and sold off by the stock market.
Since then, the selling has subsided and we have seen a nice rebound in technology stocks to the point where the NASDAQ is the top gainer in the stock market with a 6.88% advance as of Monday. By contrast, blue chips are hurting, with the Dow Jones Industrial Average down 0.55%.
What the stock market is suggesting to us is that the appetite for risk and higher-beta stocks continues to be prevalent as investors seek the potential for higher gains.
During the past five years of the stock market advance, technology has been one of my top areas for finding a growth investment opportunity. (Health care is another.) This remains my view.
The caveat I’d add, however, is that I would continue to be very careful when buying or trading social media stocks, as the inherent risk continues to be quite high.
I suggest continuing to focus on the Internet sector, as this will remain the dominant area going forward over the next decade as technology advances. Here I’m talking about online retail along with the developers of software and solutions for companies.
The benchmark NASDAQ stock market index is at its highest point in more than 13 years and is within 13.4% of its all-time high at just over 5,100. In hindsight, it’s amazing that it took this long to retrace the steps, but then the technology stock market was extremely overvalued and trading at insidious valuation levels back then.
The chart … Read More
Darker Clouds Ahead for Retail Space…But Not for Retail Investors
By George Leong for Daily Gains Letter | Aug 15, 2014
This past week, as many of my readers may recall, I discussed the slowing that’s occurring in the global economy as demonstrated by consumer spending at both McDonalds Corporation (NYSE/MCD) and Wal-Mart Stores Inc. (NYSE/WMT).
Now, my concerns have just picked up following Wednesday’s retail sales reading. The core reading excluding automotive and food sales grew a mere 0.1% in July, according to the U.S. Department of Commerce, which was below the 0.3% estimate and the weakest reading since way back in January, when Old Man Winter was blamed for everything.
But with the winter excuses over, it still appears consumers are hesitant on wanting to spend. Not only is consumer spending on everyday items drying up, but spending on durable goods, such as furniture, appliances, and electronics, is curtailing.
Department store operator Macy’s, Inc. (NYSE/M) reported a mere 3.3% year-over-year increase in its second-quarter sales. The company’s key comparable store sales managed to rise 3.4% in the second quarter, but things are looking somewhat soft for the whole of 2014, with Macy’s estimating growth in comparable store sales of only 1.5%–2.0%, versus its previous 2.5%–3.0% estimate.
These numbers, along with those from the discounters and big-box stores, show some darker clouds on the horizon for the retail sector, as retailers across the board try to keep afloat.
I don’t expect a sell-off in retail, but the upside looks to be limited for the foreseeable future, as the economy and jobs look to sort things out.
Take a look at the SPDR S&P Retail ETF (NYSEArca/XRT), which reflects the current sideways moves in the retail sector, with this exchange-traded fund … Read More
The Next Best Move for Investors
By George Leong for Daily Gains Letter | Aug 8, 2014
It’s time for some more handholding as we watch the stock market come under some selling pressure. But we’re not surprised, are we? The reality is that the advance of the stock market into its fifth year looks somewhat weary, given that interest rates will be rising in 2015.
Higher interest rates translate into higher bond yields, and that’s not conducive to a higher stock market. The current 10-year bond yield is a mere 2.45%, so it’s not an immediate concern. Yet looking ahead, interest rates will be heading higher, and this could come as soon as the first quarter of 2015, rather than the previous estimate of mid-2015.
The strength of the advance reading of the second-quarter gross domestic product (GDP) growth at an annualized four percent was clearly enough to send some investors to the exits. The fear is that if the upcoming readings are strong, it could signal higher interest rates sooner. Of course, we still have to wait for the third and fourth quarters of 2014 before making a snap judgment on when rates will head higher.
The Federal Reserve has already reduced its monthly bond buying to $25.0 billion, and it’s likely to be eliminated altogether by the Fed’s October meeting. This is a given. Higher interest rates are the issue for the stock market.
In addition, there’s some nervousness towards China and Europe. The reporting of a weaker-than-expected HSBC Services China PMI of 50.0 in July is scaring the stock market. A weaker China is not good for the global economy.
In addition, we also have a potential recession in Russia, which could have … Read More
How to Profit from Russia’s Eventual Demise
By George Leong for Daily Gains Letter | Jul 23, 2014
Simply put, if Russia is held accountable, the downing of Malaysian Airlines flight ML17 in eastern Ukraine could destabilize the situation in the region and filter into the eurozone and Europe. That’s bad news.
When the conflict first surfaced regarding the possible annexation of the Crimea region and the influence of Russia, there were concerns after economic sanctions were levied on Russia. The following vote in Crimea that indicated a desire to leave Ukraine has further raised the geopolitical stakes in the volatile area and intensified the fighting between the pro-Russian rebels and Ukraine.
It’s a mess, and the shooting down of ML17 made the situation much worse. We are seeing increased economic sanctions on Russia, and this will likely impact the eurozone and Eastern Europe. There is also news of a Russian steel company selling some properties in the United States.
Of course, we are also hearing that the rich Russians who count on business in Russia and the global economy are also feeling the economic pinch and are not happy. The problem is that they won’t say anything towards the situation, assumedly due to their fear of President Putin and the Kremlin.
And while Europe is intensifying the pressure on Russia to do something, there’s also a need for the flow of oil and natural gas to continue into the eurozone and Europe, which gets about 40% of its energy needs from Russia.
While the impact on the Russian embargo has yet to be fully felt by the eurozone and Europe, it could worsen if the Ukraine conflict intensifies. In the first quarter, gross domestic product (GDP) growth … Read More
How to Make Quick Profits in Gold at This Time
By George Leong for Daily Gains Letter | Jun 30, 2014
A few weeks ago, I suggested that gold prices could likely head higher should the situation in Iraq escalate into a bigger conflict that brings in Iran and the United States.
In my view, gold is simply a geopolitical trade at this time, contingent upon what happens in Iraq. There’s also the situation in Ukraine. At this time, though, it appears as though President Putin has no interest in escalating the conflict and making the country vulnerable to more economic sanctions.
When I last wrote on the precious metal, spot gold was trading at $1,276 an ounce. The yellow metal managed to edge higher to $1,324, prior to the current stalling on the chart. If you bought any of the SPDR Gold Shares (NYSEArca/GLD) exchange-traded fund (ETF), I would suggest you take the money at this time.
Chart courtesy of www.StockCharts.com
Now, gold could easily surge if Iraq loses control of the country, but I truly don’t believe this will be allowed to happen by the United States and Iran. After spending more than a decade in Iraq and a trillion dollars trying to reform the country, there’s simply too much at stake to lose.
Assuming the advancement by ISIS is eventually eliminated, gold would surely lose its safe haven premium that is priced into the current value. We could, in this case, see prices fall back down below $1,300 an ounce, based on my technical analysis.
I also keep hearing about the massive buying of gold from India and China, yet I truly feel this is overblown at this time. The two countries are the biggest purchasers of the … Read More
Getting Ready for the Stock Market’s Coming Bumpy Ride
By George Leong for Daily Gains Letter | Jun 27, 2014
The S&P 500 traded at an intraday record on Tuesday, but it’s not time to relax and take it easy, as was the situation for the past few years since the Great Recession.
It’s time for some hand-holding again. While the broader market has edged higher, I continue to see some nervousness and selling pressure in the small-cap and growth elements of the stock market. The Russell 2000 is holding above its 200-day moving average (MA), but it’s tenuous.
As has been the case in the past years, the direction of the Federal Reserve is helping to support the stock market. Since taking over for the former Fed chairman Ben Bernanke, Janet Yellen appears to be just as, if not more, dovish than her predecessor, and this pleases the stock market.
The reality is that the Fed has said it will likely not begin to increase the historically low interest rates until sometime in 2015, and even then, it will likely only be a small increase. The central bank wants stronger jobs creation and economic growth.
The disastrous first-quarter gross domestic product (GDP) contraction of 2.9% was horrible despite blaming some of the poor results on the winter. A closer look shows declines on spending across the board that negatively impacted the GDP growth. The contraction in durable goods spending in May also supports the continued fragility in the economy and stock market.
The problem is that investors have minimal options for investing compared to the stock market. While the risk is prevalent, it’s clear investors are willing to assume some of the risk, but not to the same degree … Read More
How to Play the Hot IPO Market for Profit This Year
By George Leong for Daily Gains Letter | Jun 26, 2014
In the late 1990s, the demand and market for initial public offerings (IPOs) was sizzling with the promise of staggering one-day gains for those lucky enough to get in on the ground floor with share subscriptions. We saw millions made in one day for the chosen ones—the rich.
But that was then. The IPO market, while still quite popular, is nowhere near where it was back then. Investors are now pickier on the issue.
Recall King Digital Entertainment plc (NYSE/KING), the maker of Candy Crush Saga. In my view, this has to be one of the most hyped-up IPOs in recent times. Debuting at $20.50 on March 26, the stock is currently trading at $17.00, but even at this price, I think the valuation is crazy, with a market cap of $5.42 billion. This company doesn’t even make money and it’s vulnerable to weakness for those looking for an aggressive short selling opportunity.
In the social media space, the biggest and most highly anticipated IPO following the debut of Facebook, Inc. (NASDAQ/FB) was social media play Twitter, Inc. (NYSE//TWTR). Yet unlike Facebook, Twitter doesn’t currently have any major revenue streams and is still looking for ways to make money. While Twitter is way down from its high of $74.00, I still wouldn’t be a buyer at the current $39.00. The company doesn’t deserve its market cap of $23.0 billion. Until Twitter can provide a valid revenue model instead of its annoying ads placed in the middle of tweets, I would not buy. A decline to below $30.00, however, could provide an aggressive trade.
What’s going to be hot this year … Read More
So Long, U.S. Consumer: Why I’m Looking to China for Profits
By George Leong for Daily Gains Letter | Jun 20, 2014
It’s amazing how analysts try to spin numbers that are horrible. For instance, retail sales edged up 0.3% in May, which is not something to get excited about; however, analysts have been spinning this news, saying that the poor May reading is simply a result of the upward revision in the April reading to 0.5%.
Now, I’m not sure what your thinking is, but my view is that both numbers stink and they foreshadow an economy in which consumer spending is scarce.
My excitement lies 10,000 miles across the Pacific Ocean in China, where the country’s government, under President Xi Jinping, is aggressively trying to encourage consumers to spend. This is contrary to what has happened in past decades, when the massive Chinese economic engine was fueled by manufacturing and foreign investment. Both are still prevalent, but the government also understands that it must drive up domestic consumer spending in order to lessen the impact of slower growth around the world, which has a direct impact on China.
In other words, China wants its consumers to spend the country out of the current stalling, which, at around 7.5% gross domestic product (GDP) growth, is still way ahead of the U.S. and other Western countries. The reality is that with a population of 1.3 billion people and a middle class of approximately 300 million, the potential is significant. Plus, the middle class in China has money to spend, unlike here in America, where people are struggling, just making ends meet.
In May, China’s retail sales surged 12.5% year-over-year to $349 billion, according to the National Bureau of Statistics. This followed growth … Read More
Why Now Is the Opportune Time to Invest in Gold
By George Leong for Daily Gains Letter | Jun 18, 2014
Gold and oil are finally seeing some upward lift, but it has more to do with the geopolitical landscape than inflation and economic growth.
As I said in recent weeks, the price of gold could be headed higher, but only if we see a rise in geopolitical tensions. That’s what we are witnessing at this time, so there could be quick money to be made.
While the Ukraine situation appeared to be settling down, the destruction of a Ukrainian aircraft with soldiers on board will not help the already tense situation. Russia has also halted the flow of oil into Ukraine after failing to reach a compromise on only owing for past oil and the price for future oil. This failure could cause a bottleneck not only in Ukraine, but also in Poland and other European countries that depend on Russian oil. Of course, in the worst-case situation, this could impact growth in the eurozone at this critical time when the region is still fragile, with high unemployment and mixed economic renewal.
We also have the massive uprising in volatile Iraq, where the brutal ISIS (the Islamic State in Iraq and al-Sham) rebel militia is spreading its control in the country, now marching on Baghdad. The negative implications of ISIS increasing its control over the country could wreak havoc not only on the oil production out of Iraq, but it could also create geopolitical instability in this already volatile region that also includes tensions on Syria and Iran.
The two events will likely drive safe haven buying in gold, which has been moving higher after bouncing off some support around … Read More
The Only Sector I Believe Will Deliver as Corporate America Struggles
By George Leong for Daily Gains Letter | Jun 16, 2014
We are a few weeks away from the second-quarter earnings season and again, there’s a lot of hope and optimism that corporate America will be able to deliver the goods. But we also said that for the first-quarter earnings season—and prior to that, we said the same for the fourth-quarter earnings season.
Before, what we saw instead was sluggish revenue growth along with companies having an easier time on the earnings front, as Wall Street does what it usually does—lowering earnings estimates to meet the changing situation, making it easier for companies to meet expectations. In the first-quarter earnings season, it was about the strain placed on companies by the bitter winter. That’s fair, but there really are no more excuses for this quarter.
The nation’s jobs numbers are looking better after the country managed to recover all of the 8.7 million or so jobs lost since the start of the Great Recession. If the economy can continue to generate jobs growth at more than 200,000 new jobs monthly, then we would expect consumer spending and confidence levels to improve. Yet having said this, there’s clearly still some trepidation out there, especially with the decline in wealth levels of the middle class and below.
The rich are getting richer, but even as a group, they cannot spend the economy to stronger growth without the help of the middle class. We need to see income levels expand across middle-class America in order for companies to have any hope of expanding their revenues better than what we are seeing now. This makes sense to me: spread the wealth and the economic renewal … Read More
Student Debt on Course to Sink America’s Economy; Here’s How to Profit
By John Whitefoot for Daily Gains Letter | Jun 2, 2014
In April, the unemployment rate dropped to 6.3%—its lowest level since 2008. While Wall Street and Capitol Hill might be giving each other high-fives, there is still plenty left to lament.
At 12.3%, the U.S. underemployment rate is still eye-wateringly high. (Source: “Alternative measures of labor underutilization,” Bureau of Labor Statistics web site, May 2, 2014.) Sure, it’s down from 13.9% in April 2013, but it’s still at an unacceptable level. And it’s not exactly an encouraging statistic for those entering, already in, or recently graduated from a post-secondary school—or those still struggling to pay off their student debt.
In this economic climate, graduates can either stay unemployed or take lower-paying jobs. Sadly, this could take a serious toll on the so-called economic recovery.
For starters, student debt is the fastest-growing category of debt. At the end of the first quarter of 2014, student debt had soared $125 billion year-over-year to $1.11 trillion. And right now, 11% of all loan debt is either in default or delinquent by 90-plus days. (Source: “Quarterly Report on Household Debt and Credit,” Federal Reserve Bank of New York web site, May 2014.)
Second, it’s going to get worse. With an average graduating debt of $33,000, the class of 2014 is the most indebted ever. They’re also finding it more and more difficult to pay off that debt. Between 2005 and 2012, the average student debt, adjusted for inflation, has climbed 35%. The median salary, on the other hand, has dropped 2.2%. This doesn’t bode well for the graduating class of 2015.
Granted, not all college degrees are created equally. Healthcare and education grads have … Read More
Chasing Risk? This Market Won’t Be Kind to You
By George Leong for Daily Gains Letter | May 29, 2014
My stock screens have been displaying up signals over the past few days, but I’m still somewhat apprehensive about the most recent stock market rally—and you should be too.
The stock market appears to be edging higher again after the S&P 500 closed above 1,900 at another intraday high on May 23. And while there is some buying support on the stock market charts, I still question the sustainability of any strong upside moves at this time, given the lack of any new catalyst. The reality is that the absence of any leadership and continued concerns towards technology and growth stocks suggest the stock market remains vulnerable at this time.
Where I’m sensing the most risk continues to be the technology sector and small-cap stocks, despite some current relief buying.
Some technical analysts might argue that the move of the Russell 2000 back above its 200-day moving average (MA) is positive; however, I would question the lack of mass stock market participation, given the lighter volume and the questionable and flat investor sentiment, based on my technical analysis.
The chart of volume on the NASDAQ (below) shows how weak the trading volume has been since mid-March, when it was above the 50-day and 200-day MAs. Note the downside bearish crossover of the 50-day MA (blue line) below the 200-day MA (red line) as indicated by the blue oval.
Chart courtesy of www.StockCharts.com
The NASDAQ and Russell 2000 remain below their respective 50-day MAs. Their failure to recover this key technical level is a red flag.
Also what concerns me regarding the NASDAQ is not only the presence of a bearish … Read More
Conservative Investor? Why Now Is Your Time
By George Leong for Daily Gains Letter | May 19, 2014
The best way to make money in the stock market at this time is to avoid growth and technology stocks while you take some profits off the table.
The reality is that, despite the failure of the Dow Jones and S&P 500 to hold after establishing new record-highs last Tuesday, the stock market wants more reasons to bid stocks higher. The first-quarter earnings season saw about 70% of the S&P 500 companies beat earnings-per-share (EPS) estimates, but the results were largely based on lowered estimates by Wall Street.
Investors took the opportunity to take some profits following the rally last week. This indicates to me that there’s definitely still some vulnerability in the stock market.
Bellwether retailer Wal-Mart Stores Inc. (NYSE/WMT) reported soft results that suggest the global economy is still hesitant to spend after the company fell short on revenues and EPS. And to make matters worse, the company also revised its second-quarter estimates to below consensus. Clearly, the retail sector is struggling, and this will impact gross domestic product (GDP) growth.
On the charts, technology and growth stocks are risky. The Russell 2000 fell back below its 200-day moving average (MA) after failing to hold for the second time in just over a week.
We are seeing some selling capitulation in the small-cap area of the stock market and it could grow deeper.
Companies in the technology sector, specifically the high-momentum stocks, also remain under pressure, helping to drag the broader stock market lower. I don’t expect this to change anytime soon, so this is an area that you need to avoid, liquidate, or protect with put options…. Read More
Three Ways to Profit from an Exhausted Stock Market
By George Leong for Daily Gains Letter | May 1, 2014
When I’m looking at the screens each day, I notice there’s some selling capitulation occurring that makes me think back to 2000, when the technology stocks imploded.
Now, while I doubt we are seeing a repeat of 14 years ago, you have to wonder about the mad dash to the exits for many of the high-momentum technology stocks along with small-cap stocks. The small-caps are under threat, with the Russell 2000 down nearly eight percent in 2014 so far and close to five percent in April alone. Watch as the index is just above its 200-day moving average (MA).
Chart courtesy of www.StockCharts.com
As I said last week, the fact that the NASDAQ and Russell 2000 have failed to recover their respective 50-day MAs is a red flag, based on my technical analysis. Moreover, the presence of a possible bearish head-and-shoulders formation on the NASDAQ chart is concerning for technology stocks.
The lack of any leadership from technology stocks now, which was so prevalent in 2013, has also hurt the broader stock market.
On the charts, only the S&P 500 is positive in 2014, with a slight advance. All of the key stock indices were negative in April—a month that has historically been positive.
To make matters worse, we are heading into traditionally the worst six-month period for the stock market, from May to October, so it’s not going to get easier anytime soon.
The fact that numerous technology stocks have produced some strong earnings results is encouraging, but the lack of strong follow-through buying is a concern and suggests some exhaustion towards technology stocks.
We also have the uncertainty … Read More
How to Profit 10X the Rise in Bond Yields
By George Leong for Daily Gains Letter | Apr 28, 2014
While I continue to favor the stock market as the top investment vehicle long-term, I am concerned about the pending rise in interest rates and bond yields; of course, higher bond yields translate into a viable option for investors to stash their capital aside from the stock market.
The Federal Reserve has begun the process that will reduce the easy money it has been injecting into the stock market and economy. So far, $30.0 billion in bond purchases each month has been cut, and I expect the remaining $55.0 billion to be eliminated by the year-end.
The end result will be a steady rise in bond yields along the way, which will cause some rotation of capital from the equities market to bonds. We have already seen a big jump in the 10-year bond yield, from about 1.7% in May 2013 to 2.8% as of April 2014. The yields will continue to rise as the Fed reduces its quantitative easing over the year. A move to above the three-percent threshold level will clearly trigger some anxiety among stock investors
The consensus on the Street is for bond yields to rise. The recent auction of $29.0 billion of seven-year notes by the U.S. Department of the Treasury last Thursday yielded 7.317%.
Simply look at the chart below of the 10-Year US Treasury Yield Index from 1990 to 2014.
Chart courtesy of www.StockCharts.com
The first thing you should notice is the rising yields. The chart from 2012 onward reflects the rise in interest rates measured by the bellwether 10-year U.S. Treasury that is surging higher. The yields on U.S. Treasuries have almost … Read More
NASDAQ Foreshadowing a Bearish Event?
By George Leong for Daily Gains Letter | Apr 23, 2014
The three-day buying streak last week offered some optimism that maybe the worst was over for the stock market, but my technical analysis of the charts indicates otherwise.
While blue chip and large-cap stocks are holding up fairly well, this cannot be said of the technology, growth, and small-cap segments of the stock market.
I previously discussed the stock market risk with high-beta stocks, but there are some warning signs on the charts that foreshadow a potential sell-off in the NASDAQ in the weeks ahead.
This stock market index had been down nearly 10%, which is the technical reversal point, but the NASDAQ managed to rally and is currently down only about seven percent.
The index is back above 4,000, but failure to hold would be the third time the NASDAQ failed to do so above this level, which would be a red flag for pending weakness in the stock market.
Take a look at the stock market chart of the NASDAQ Composite below.
As I indicate on the chart, there could be a bearish “head-and-shoulders” formation in development. Note the right shoulder (as indicated by the short blue horizontal line) followed by the head (as shown by the second short horizontal line).
The way this could play out is if the NASDAQ can hold near the current level of around 4,000, it could subsequently rally back to around 4,250.
At this point, if the index fails to extend higher towards 4,350 and falters, then we could see another downside move back towards 4,000 (as shown by the long blue horizontal line in the chart below). Failure to hold here … Read More
Double-Digit Gain or 30% Crash: How to Profit from S&P 500 No Matter Where It Goes
By John Whitefoot for Daily Gains Letter | Apr 1, 2014
After a miserable winter of weak economic indicators (which were mostly blamed on the weather), the warmer spring weather will be a godsend for Wall Street. Unless, of course, there’s more holding the U.S. economy back than cold winds and snow.
That riddle will be answered in the coming weeks, but the long-term prognosis for the U.S. economy is a little murkier. While the S&P 500 is trading at record-highs, there is mounting evidence to suggest the U.S. economy could slow down, putting the brakes on the bull market.
Naturally, it depends on who you ask and what their time frame is. Despite mounting risks, such as ongoing troubles in Ukraine, slower growth in China, and the threat of increasing rates, some predict the S&P 500 will hit 2,075 by the end of the summer. That would represent an 11.5% gain from where it currently trades and a 12.5% gain for the first half of the year. (Source: Levisohn, B., “Don’t Call It a Comeback: Dow Jones Industrials Gain 120 Points, More to Come?” Barron’s, January 7, 2014.)
The double-digit growth is expected to come as a result of increased investor sentiment in the U.S. economy. For starters, investors have experienced a relatively easy ride over the last year. And over the last two years, any corrections on the S&P 500 have been shallow, short, and sweet. It’s the perfect recipe for ongoing enthusiasm and confidence for investors to pour more equity into the S&P 500.
It doesn’t matter if the S&P 500 is overvalued, some investors only care that it keeps going up. And should first-quarter earnings of S&P … Read More
Three Silver Plays That Can Weather a Short-Term Downturn
By John Whitefoot for Daily Gains Letter | Mar 27, 2014
Technically, the Federal Reserve’s job is to oversee the monetary policy (short-term interest rates) of the world’s biggest economy. Obviously, it does, but it’s also important to remember that its opinion and carefully chosen words also have a major impact on the global markets and world economies.
If the Federal Reserve says the U.S. economy is doing well, investors flood the markets. If, on the other hand, the Federal Reserve says the U.S. economy is having difficulty gaining traction, investors turn their attention to precious metals to hedge against a weak U.S. and global economy and inflation.
It’s worked like clockwork since the Federal Reserve stepped in to help kick-start the U.S. economy with its generous monetary policy after the markets crashed. During the first round of quantitative easing (November 25, 2008 to March 31, 2010), silver climbed 65%.
Sensing the economy was still unstable, the Federal Reserve initiated its second round of quantitative easing (November 3, 2010 to June 30, 2011), during which time silver climbed an additional 39%. In September 2012, the Federal Reserve commenced its third, open-ended round of quantitative easing. If history is any indicator, the third round of quantitative easing should have been a boon for silver—but it wasn’t.
Silver prices edged steadily lower over the ensuing months. In April 2013, The Goldman Sachs Group, Inc. famously trimmed its outlook for gold to $1,450 an ounce by the end of 2013 and $1,270 at the end of 2014. The company noted that the banking crisis in Cyprus didn’t have the expected positive effect on the price of gold.
Silver and gold prices fell lower in … Read More
Should You Be Prepared for a Bullish Run in Gold Bullion?
By John Whitefoot for Daily Gains Letter | Mar 26, 2014
After 12 years, gold bullion’s glorious bull run ended with a thud in 2013, retracing 30% and locking in the biggest annual decline since 1981. Many speculate that gold bullion prices melted in 2013 as investors tried to figure out when the Federal Reserve was going to be cutting its generous $85.0-billion monthly bond purchases.
Investors lean toward gold bullion and other precious metals as a hedge against both a weak U.S. dollar and inflation. A tapering of the Federal Reserve’s monetary policy suggests that the U.S. economy is getting stronger. While there was no real sign of sustained economic strength in 2013, just the idea that the Federal Reserve would have to start tapering at some point was enough to send gold bullion prices lower.
That coupled with a strong—but misguided—run on the S&P 500 also helped push gold bullion prices lower. I say “misguided” because quarter after quarter, more and more companies on the S&P 500 revised their earnings guidance lower. At the same time, companies masked their weak earnings and revenues with cost-cutting measures and near-record-high share repurchase programs.
That came to a crushing halt at the beginning of 2014, when the Bureau of Labor Statistics reported abysmal January payroll figures. Instead of adding the forecasted 196,000 jobs—the U.S. economy added just 74,000.
Weak January payroll data coupled with political tension in Ukraine helped send gold bullion prices higher. Between the beginning of January and the middle of March, gold bullion prices rebounded, climbing 15% year-to-date to around $1,390 per ounce.
The bullish run in gold bullion didn’t stop the bears from warning investors to avoid the … Read More
S&P 500 Approaching Inflection Point; How to “Insure” Your Portfolio
By Sasha Cekerevac for Daily Gains Letter | Mar 26, 2014
The winds are changing, my friends. For most of the past year, each time the S&P 500 sold off, it was a buying opportunity. I think we are at an inflection point this year, as we all know nothing lasts forever.
I believe it all began to emerge last week with the Federal Reserve meeting. As long-time readers know, over the past couple of months, I’ve been warning that once the Federal Reserve begins to adjust monetary policy, this will have a negative impact on the S&P 500.
With the Federal Reserve continuing to reduce its asset purchase program, investors are now calculating the length of time until it’s no longer. The reason for distress in the market is that Federal Reserve Chair Janet Yellen announced a tentative six-month timeframe upon completion of the asset-purchase program that the Federal Reserve will begin increasing short-term interest rates.
Why the concern?
Taking a quick look from several angles, this transition won’t be smooth. To begin with, there’s the old saying on Wall Street: “Don’t fight the Fed.” It is obvious that the Federal Reserve is dead set on reducing monetary stimulus and raising interest rates.
Very rarely does the S&P 500 increase during a period of monetary tightening. This is not to say that the S&P 500 will drop tomorrow; the Federal Reserve is continuing monetary easing for the moment. But investors in the market should be aware that once the Federal Reserve begins changing its monetary stance, the S&P 500 will be affected.
Another concern is that economic growth in America isn’t exactly on fire. While it’s true that we aren’t … Read More
Where to Find the Best Buying Opportunity in Stocks Right Now
By George Leong for Daily Gains Letter | Mar 20, 2014
If you own some of the large-cap blue chip stocks on the Dow, it has not been a great year so far. Now, some of you may have thought that after the strong year for technology and small-cap stocks in 2013, the stock market may have been ready to pause in the pursuit of higher-risk assets this year. So far, that has not been the case.
Technology and small-cap stocks are again leading the broader stock market this year.
The small-cap Russell 2000 is up 1.18% in March and 2.87% this year as of Tuesday, easily outperforming both the S&P 500 and Dow. Blue chips are taking it on the chin with a 1.39% decline to date this year and only a 0.15% rise in March. Only the 3.31% advance by the tech-laden NASDAQ is beating the Russell 2000.
Chart courtesy of www.StockCharts.com
What the results in the first quarter suggest is that the appetite for risk that was prevalent in 2013 is continuing to hold as stock market participants seek out the potential for higher returns.
At this point, I continue to favor small-cap stocks and technology growth plays, as long as the economic renewal remains in play and the broader stock market advances higher.
There’s also a sense that we are seeing some new money coming into the stock market this year that may have been on the sidelines in 2013 and missing out on great returns. The trading volume is higher, which suggests more money is coming into the stock market and much of that is chasing the potential of higher returns with growth stocks.
Now while … Read More
An ETF to Boost Your Portfolio Whatever the Weather
By John Whitefoot for Daily Gains Letter | Mar 7, 2014
Despite stagnant wages and increased borrowing, Americans ramped up their consumer spending in January. The United States Department of Commerce said earlier this week that consumer spending rose 0.4% in January versus a forecast of 0.2%. (Source: “Real Consumer Spending Rises in January,” Bureau of Economic Analysis web site, March 3, 2014.)
Unfortunately, January’s boost in consumer spending wasn’t as broadly based as many were hoping. Spending on durable goods, which include cars, fell 0.3%, while spending on non-durable goods, such as clothing and food, fell 0.7%.
Consumer spending on services increased 0.8%—the biggest jump in services since October 2001. The increase in services spending can be attributed to higher heating bills and more and more people signing up for Obamacare. In fact, without the 11.3% jump in utility bills, consumer spending would have essentially been flat.
For an economy that gets roughly 70% of its growth from wide-based consumer spending, these results are not spectacular.
The increase in consumer spending comes on the heels of a report from the Bureau of Economic Analysis that personal income levels climbed 0.3% month-over-month in January after remaining flat in December. (Source: “Personal Income and Outlays, January 2014,” Bureau of Economic Analysis web site, March 3, 2014.)
This is pretty much in step with consumer spending. But there is an economic disconnect happening. While consumer spending fuels economic growth in this country—if left unchecked, consumer spending can also help throw the economy off a cliff.
According to the Federal Reserve Bank of New York, at $11.52 trillion, overall consumer debt levels (including mortgages, auto loans, student loans, and credit cards) are at their … Read More
Should Investors Leave Auto Stocks Behind This Spring?
By John Whitefoot for Daily Gains Letter | Mar 6, 2014
According to Wall Street, the cold winter weather is responsible for holding back an economy that’s just itching to take hold. And as we’ve recently learned, when it comes to poor earnings and revenues, nothing makes for a better excuse than the weather. After all, the cold harsh winter that has blanketed much of North America doesn’t care how much money you make.
But while the cold winter weather might not care what area code people live in, the feeling is mutual—people in the wealthy area codes don’t care about the cold weather either, especially when it comes to auto sales.
February auto sales figures came in earlier this week, and it’s as if auto sales have flat-lined. Overall, February auto sales were unchanged year-over-year at 1.19 million for an annualized auto sales rate of 15.34 million—at the low end of the estimated 16 million the industry expects to sell in 2014. (Source: “U.S. Market Light Vehicle Deliveries February 2014,” Motor Intelligence web site, March 2, 2014.)
Leading the February auto sales’ non-event are the “Big 8” (General Motors Company; Ford Motor Company; Toyota Motor Company; Chrysler Group LLC, Honda Motor Co., Ltd.; Hyundai Motor Company/Kia Motors Corp.; Nissan Motor Co., Ltd.; and Volkswagen AG), which accounted for 1.06 million units, or 89% of the month’s sales.
Nissan and Chrysler were the only two Big 8 automakers to report year-over-year growth. Nissan reported year-over-year auto sales growth of 15.8%—ahead of analysts’ predictions of 12%. And Chrysler reported another solid month with auto sales up 11%—analyst forecasts were expecting an 8.8% increase. Chrysler surprised to the upside in January with an … Read More
Two Precious Metal Plays for Waning Consumer Confidence
By John Whitefoot for Daily Gains Letter | Feb 27, 2014
Against a backdrop of record-highs for stocks, consumer confidence is waning—seeing its greatest drop in four months. The S&P 500 touched record intra-day territory earlier in the week, suggesting the bull market remains intact and the well-earned and (far too) short-lived mini correction may be over.
Investors and analysts, it seems, have embraced blaming the cold weather for all our economic ills, effectively brushing aside weak U.S. housing numbers, jobs data, and manufacturing and retail sales.
Meanwhile, consumers—those who need jobs, houses, cars, and other items that support the companies that actually make up the S&P 500—seem to have lost faith in the economy. Consumer confidence levels in the U.S. fell more than expected in February, as Americans became more pessimistic about the economy and jobs.
Consumer confidence levels fell to 78.1 in February from a revised 79.4 in January. Economists were expecting consumer confidence levels to increase in February to 80.2, proving, once again, that Wall Street does not have its finger on the pulse of American consumer confidence levels. (Source: “The Conference Board Consumer Confidence Index Declines Moderately,” The Conference Board web site, February 25, 2014.)
Not to fear though; The Conference Board said the decline in February’s consumer confidence toward business conditions, jobs, and earnings was only “moderate,” meaning, I suppose, that it could be worse.
But not too much…
Those optimistic Americans claiming jobs are plentiful increased slightly to 13.9% from 12.5%. Those who think jobs are hard to get were virtually unchanged at 32.5% from 32.7%. It’s incredible, really, that The Conference Board can, with a straight face, proclaim that our appraisal of current economic … Read More
Where to Invest When Key Stock Indices Struggle to Climb Higher
By Moe Zulfiqar for Daily Gains Letter | Feb 25, 2014
Key stock indices were going through a rough patch from the beginning of the year until early February. Now, they seem to have some momentum to the upside. With this, investors are asking what kind of upside potential is possible. Will the key stock indices continue to increase and break above their previous highs, or are we due for another sell-off like the one we saw earlier, and only then will we see some good buying points?
Let me begin by saying what I have said many times in these pages before: 2013 was a stellar year for key stock indices, but now they need to breathe a little. The key stock indices may go above their all-time highs made at the end of last year, but the move isn’t going to be as robust. You might see a slow, dreadful move to the upside.
If this scenario does play out—key stock indices moving slowly and breaking above their all-time highs—the fundamentals are suggesting it won’t be a significant move.
Companies on the key stock indices are warning about their corporate earnings. For example, 66 companies on the S&P 500 have issued negative guidance about their corporate earnings in the first quarter of this year. (Source: “Slightly larger cuts to earnings estimates than average at mid-point of Q1 2014,” FactSet, February 14, 2014.) Corporate earnings estimates by analysts are also being slashed. Mind you, we are just in the second month of the quarter.
Major names on the key stock indices are reporting horrible sales. Consider Caterpillar Inc. (NYSE/CAT), a major industrial goods manufacturer, for example. The company reported its … Read More
Extreme Cold Weather Boosting Profits in This Natural Commodity
By Moe Zulfiqar for Daily Gains Letter | Feb 21, 2014
Just like any other commodity, natural gas prices are affected by supply and demand metrics. If demand increases and supply remains the same (or declines), you have a perfect recipe for higher prices. Since the beginning of the year, this commodity’s prices are up more than 40%!
Before you start judging where the prices will go next, you have to see what kind of factors can affect the demand or supply. Consider gold prices, for example. If the demand for gold increases and, at the same time, there’s a discovery of a major mine—the prices may not move as much as anticipated if the mine wasn’t discovered. The reason behind this is simple: there’s supply to meet the demand.
A few factors that affect the natural gas demand and supply are playing out in favor of those who are bullish on it. For example, the commodity is highly affected by weather.
In extremely cold weather, natural gas is used to heat up homes—cold weather disrupts the short-term supply due to increased demand and causes prices to soar. In extremely hot weather, we see a similar situation occur in the commodity’s prices. Power plants use more natural gas to make electricity to meet the increased use of air conditioning units in homes and buildings. This phenomenon, again, causes a disruption in the short-term supply because power plants consume more. This results in higher prices as well.
What’s happening in natural gas prices these days is the very same problem; the short-term supply is being tormented by extreme weather—in this case, extremely cold weather. We have seen some extreme winter storms and … Read More
Top Two ETFs for When Interest Rates Increase, Investor Sentiment Plummets
By Sasha Cekerevac for Daily Gains Letter | Feb 21, 2014
This past weekend, a friend of mine made a statement that there must be a large amount of economic growth coming shortly because of the booming stock market, driven by investor sentiment.
As I told him, the two are not necessarily tied together.
Over the past few months, we have heard about how economic growth is about to accelerate here in America, and this has helped drive investor sentiment in the stock market higher. However, I think there are many questions that need to be answered before we can assume economic growth will reach escape velocity, and investor sentiment is heavily contaminated with a large addiction to monetary policy.
Some of the data has improved; however, many other reports only lead to murkier water.
For example, we all know that economic growth requires the consumer to be active, since consumption is approximately 3/4 of the U.S. economy. But for the holiday season, many retail companies issued disappointing results, even though there were signs that consumer spending was beginning to pick up. This is an interesting data point: during the fourth quarter of 2013, consumer debt increased by $241 billion from the third quarter, the biggest jump in debt since 2007. (Source: “Quarterly report on household debt and credit,” Federal Reserve Bank of New York web site, last accessed February 19, 2014.)
Should investor sentiment view this increase in consumer debt as a positive or negative for economic growth?
A large amount of the debt increase came from the automobile industry, but what really worries me that could impact future economic growth is the combination of higher debt with weaker retail … Read More
How to Profit from the S&P 500—Even if Earnings Disappoint
By John Whitefoot for Daily Gains Letter | Feb 20, 2014
I was reading an article that suggested investors are underestimating the extent that U.S. corporate profits could grow in 2014. And that the only reason the U.S. economy reported disappointing retail sales and weak jobs numbers and manufacturing data was because of the harsh winter weather. (Source: Shmuel, J., “Are EPS estimates currently too low?” Financial Post, February 18, 2014.)
Fortunately, so the story goes, the economy is so red-hot that once the snow thaws, investors will be rewarded with solid quarter-over-quarter corporate earnings growth. This suggests the weather has not just blinded investors to the fact that the economy has recovered (which it hasn’t), but that we are also so short-sighted that we can’t see the great gains waiting for us just around the corner—because if there’s one thing investors lack, it’s a desire to make money on the stock market…
I think investors are losing faith in Wall Street’s earnings potential because the corporations that go into making up the S&P 500 continue to warn us that their earnings are not going to be as great as they had hoped. And it’s not as if this is a new phenomenon.
Throughout 2013, as the S&P 500 marched steadily higher, an increasingly larger number of companies revised their earnings guidance lower each quarter. During the first quarter of 2013, 78% of S&P 500 companies that provided preannouncements issued negative earnings guidance; the second quarter came in at 81%; a record 83% of S&P 500 companies issued negative earnings guidance in the third quarter; and another record 88% did so in the fourth quarter.
For a country that is supposedly … Read More
As Investors Grow More Skeptical Toward Stocks, Time to Move to Safe Haven ETFs?
By Moe Zulfiqar for Daily Gains Letter | Feb 19, 2014
We see there’s a significant amount of economic news mounting against the argument that key stock indices will go higher this year. We see major companies on the key stock indices reporting corporate earnings that are dismal to say the very least. We see indicators of prosperity suggesting the opposite is likely going to be true for the U.S. economy. Lastly, we also see troubles developing very quickly in the global economy.
First on the line are the corporate earnings of companies on the key stock indices—which is hands down one of the main factors that drive these indices higher. We see companies showing signs of stress. Consider General Motors Company (NYSE/GM), for example; the company’s corporate earnings declined 22% in 2013 from the previous year. (Source: “GM reports lower-than-expected 4Q earnings,” Yahoo! Finance, February 6, 2014.)
Some might call this a story of the past; we need to look at what the future looks like instead. Sadly, going forward, companies on the key stock indices and analysts look worried as well. Consider this: so far, 57 S&P 500 companies have issued negative corporate earnings guidance, while only 14 have issued positive guidance. At the same time, analysts’ expectations are coming down as well. On December 31, the consensus estimate expected S&P 500 earnings to grow by 4.3%; now, these expectations have come down to 1.5%. (Source: “S&P 500 Earnings Insight,” FactSet, February 7, 2014.)
Looking at the broader U.S. economy, it’s not moving in favor of the key stock indices, either—the economic data isn’t looking very promising.
Industrial production in the U.S. economy declined in January from the previous … Read More
How to Profit When Consumer Spending Is in Jeopardy
By Moe Zulfiqar for Daily Gains Letter | Feb 18, 2014
Consumer spending is critical when it comes to growth of the U.S. economy. It makes up a significant portion of the U.S. gross domestic product (GDP)—about 70%. So, if consumer spending declines even by a little, it can really impact the trajectory of the U.S. economy.
Since late last year, there’s growing evidence that suggests consumer spending is in jeopardy. The economic data that tells the level of enthusiasm among American consumers is flashing warning signs. Investors who own retail stocks need to be very careful.
For example, retail sales in the U.S. economy declined 0.4% in January from the previous month. But this isn’t the only troubling news. The previous reported number—the change in retail sales from November to December—was revised lower from 0.2% to negative 0.1%. (Source: “Advance Monthly Sales for Retail and Food Services January 2014,” U.S. Census Bureau web site, February 13, 2014.)
The U.S. Census Bureau looks at retail sales of about 13 different kinds of businesses. In January, nine of those kinds of businesses—including furniture stores, health care and personal care stores, clothing stores, and sporting goods stores—reported a decline in their sales from the previous month.
Sadly, retail sales aren’t the only indicator that suggests consumer spending in the U.S. economy is grim. Other indicators like the U.S. manufacturer and trade inventories say the very same; they increased to $1.7 trillion in December, up 0.5% from November 2013 and 4.4% from the same period a year ago. (Source: “Manufacturing and Trade Inventories and Sales December 2013,” U.S. Census Bureau web site, February 13, 2014.)
When inventories increase, it means consumers aren’t buying as … Read More
Why I Recently Turned Bullish on Gold Mining Stocks
By Sasha Cekerevac for Daily Gains Letter | Feb 14, 2014
A friend of mine asked me the other day about the best way to build a long-term investment strategy. This is a great question, but it’s also one of the most difficult ones to answer.
Obviously, different people have various goals and objectives, especially when it comes to risks. For me, the way I put together an investment strategy is by looking to buy things when they are on sale, including stocks.
Over the past couple of months, if you’ve been following my articles, you’ve likely noticed that I’ve started to become quite bullish on gold mining stocks. This is the classic investment strategy of buying when most people are selling. When you consider the current sentiment, it’s clear that gold mining stocks haven’t experienced this much negativity in years.
Of course, you can’t simply have an investment strategy to buy any random stock or sector when it goes down; that’s doomed to fail. At some point, for the investment strategy to work, there must be some fundamental strength over the long term.
We all know about the pain felt by most gold mining stocks. But don’t forget: the market is a forward-looking mechanism. Your investment strategy should not focus on what’s happening today, but what is likely to occur over the next several quarters and even years.
Why did I recently become bullish on gold mining stocks?
I believe part of the reason for the significant weakness in the precious metal, especially in December, was due to institutions continuing to play the trends. You have to remember that large funds are measured by their performance (yearly and quarterly), and … Read More
How to Prepare for the Stock Market Sell-Off I’ve Been Warning About
By Sasha Cekerevac for Daily Gains Letter | Feb 7, 2014
Well, that didn’t take long! Just a few weeks ago, I wrote an article stating that investors should begin to worry about the lofty level of the stock market. Since that time, the S&P 500 has dropped by more than five percent in less than two weeks.
This market correction won’t be a surprise to my readers, as I have been suggesting investment strategies that can help prepare your portfolio for a large downswing in the market for some time now.
When I wrote the article in late January, the S&P 500 was surging, even though the preliminary Thomson Reuters/University of Michigan index of consumer sentiment dropped month-over-month. Since then, we have seen additional data coming from China showing that its economy is beginning to slow.
The Markit/HSBC China Manufacturing Purchasing Managers’ Index (PMI) for January was 49.6, much weaker than expected. (A PMI data point below 50 denotes a contraction in activity.) While many analysts have been expecting China to begin accelerating, this recent data is a dose of reality, as manufacturing jobs in China dropped for the third consecutive month. (Source: “HSBC China Manufacturing PMI,” Markit Economics, January 30, 2014.)
I know what you’re thinking; “Why should investors in the S&P 500 care about what happens in China?” A market correction doesn’t occur based on a single event. When you’re trying to develop investment strategies, especially if you are considering the potential for a market correction in a large index, such as the S&P 500, you have to take many factors into account, as if you’re working on a jigsaw puzzle.
First ask yourself, what are the positive … Read More
Why January Auto Sales Point to Bleak Future for U.S. Economy
By John Whitefoot for Daily Gains Letter | Feb 5, 2014
Despite assurances from analysts, economists, and central bankers, the U.S. economy isn’t faring so well—and the markets are finally beginning to see what we’ve been warning about in these pages all last year.
For sustainable growth, the U.S. economy needs to be reporting consistently strong fiscals. But it isn’t. For starters, the key stock indices, a reflection of the U.S. economy, have extended their sharp January losses. The S&P 500 is down 5.6% year-to-date, the Dow Jones Industrial Average has lost more than seven percent of its value so far this year, the NYSE is down roughly six percent, and the NASDAQ is in the red by four percent.
Every quarter since the beginning of 2013, an increasingly larger number of S&P 500-listed companies have revised their quarterly earnings lower. During the first quarter of 2013, the number stood at 78%. This time around, 81% of S&P 500 companies have revised their first-quarter earnings lower.
Why the big losses? That depends on whom you talk to. The Bank of America, without even a hint of a smirk, blames the much colder-than-expected weather for the weak U.S. economy, meaning the U.S. economy and global markets are performing poorly because of a snow storm…
I suggest the U.S. economy is doing poorly and the U.S. markets are tanking for entirely different reasons. For starters, the U.S. economy needs steady jobs and earnings growth. Instead, the U.S. economy is facing high unemployment and stagnant wages. For the week ended January 25, jobless claims jumped more than forecast to a seasonally adjusted 348,000.
And a record number of Americans rely on food stamps. Interestingly, … Read More
How to Profit as Eurozone Repeats 2009 Financial Crisis
By Moe Zulfiqar for Daily Gains Letter | Feb 4, 2014
When troubles first started in the eurozone years ago, they stemmed from the credit market. The amount of bad loans increased and as a result, banks needed to be bailed out. Greece and Ireland were the first in the eurozone to come under scrutiny, followed by Spain and Portugal; concerns later grew over whether Italy needed a bailout, as well. In 2012 and 2013, we saw a little calm in the eurozone. One of the main factors behind this was the European Central Bank (ECB). It said it will do whatever it takes to save the eurozone. This sent a wave of optimism through the global economy.
Now, we are starting to hear the problems—bad loans—remain in the common currency region…and they’re increasing.
The Bank of Spain’s data showed that bad loans in the country grew to a record-high in November. They stood at 13.08% then, compared to 12.99% just a month earlier. Month-over-month, bad loans in the fourth-biggest eurozone economy grew by 1.5 billion euros. (Source: “CORRECTED-Spain’s bad loans ratio reaches new record high at 13.08 pct in Nov,” Reuters, January 17, 2014.)
This isn’t all for Spain. Recently, after posting a loss in its fourth quarter, the Banco Popular S.A.—the biggest bank in Spain—said that at the end of 2013, 6.8% of all loans at the bank were 90 days overdue. In 2012, this rate was 5.1%. (Source: Neumann, J., “Spanish Banks Still Battling Bad Loans,” Wall Street Journal, January 31, 2014.)
Banks in Italy—the third-biggest economy in the eurozone—are going through something similar. Standard & Poor’s expects bad loans at the Italian banks to increase to 310 … Read More
The One Chart Stock Market Bulls Can’t Ignore
By Moe Zulfiqar for Daily Gains Letter | Feb 3, 2014
There are many indicators that can give us an idea about where key stock indices may be headed. It may seem obvious, but always remember that nothing is certain until it happens. As I say quite often in these pages, trying to predict the exact top and bottom on key stock indices can significantly damage your portfolio in the case that the markets move in the opposite direction.
When I am trying to figure out what the next move will be by the key stock indices, I look at investor sentiment; I look at where investors are placing their money and what kind of assets they are buying. For example, when investors think the risks on key stock indices are increasing, they go towards safer stocks—big-cap companies may be one example. On the other hand, if investors think the key stock indices are moving to the up side, they move into stocks that provide better-than-market returns.
One indicator of investor sentiment that I look at is the relationship between the Utilities Select Sector SPDR (NYSEArca/XLU) exchange-traded fund (ETF) and the Morgan Stanley Cyclical Index. The XLU tracks utilities companies that are considered safer by investors because their products or services are needed regardless of economic conditions, like electricity providers, for example. On the flipside, the Morgan Stanley Cyclical Index tracks cyclical stocks, which are the stocks that move with the markets and are considered riskier assets, like furniture retailers, for example—they are dependent on how the economy is doing overall.
With this in mind, please take a look at the chart below. It shows the movement in the XLU and … Read More
Top Strategies for an Economically Engineered Market
By John Whitefoot for Daily Gains Letter | Feb 3, 2014
Back in December, Bernanke decided the U.S. economy was on solid footing and initiated the first round of quantitative easing cutbacks to begin in January. Instead of dumping $85.0 billion into the U.S. economy, the Fed added just $75.0 billion.
Last Wednesday, in his final hurray as chairman of the Federal Reserve, Ben Bernanke initiated the second round of tapering. Citing growing strength in the broader U.S. economy, Bernanke slashed the Federal Reserve’s quantitative easing program to $65.0 billion a month starting in February.
At this pace, the Federal Reserve will be out of the bond buying business by Labor Day. As for interest rates, Bernanke reiterated the Federal Reserve’s guidance; short-term interest rates will remain near zero until the jobless rate hits 6.5%. But not even that is an automatic trigger. When unemployment does hit 6.5%, it will take inflation, the state of the labor market, and the state of the financial markets into consideration.
In light of the current U.S. economic environment, I’m not so sure I’d hang my hat on the so-called “growing strength in the broader economy.”
For starters, U.S. unemployment remains high. It dropped unexpectedly to 6.7% in December, but that number was skewed by a large number of long-term unemployed workers abandoning their search for new jobs. Of those who did find jobs, most were in the retail industry.
Those working in low-salary jobs don’t have much to look forward to. Wages are stagnant. In fact, workers’ wages and salaries are growing at the lowest rate relative to corporate profits in U.S. history.
Furthermore, for the first time ever, working-age people make up the … Read More
Top Investor Safe Havens for Protection Against Collapsing Economic Growth
By Moe Zulfiqar for Daily Gains Letter | Jan 29, 2014
Troubles in the global economy look to be strengthening, suggesting an economic slowdown may be following. Not only are the major economic hubs of the global economy showing signs of stress—something I have mentioned in these pages many times before—but we see demand slowing down as well.
The Baltic Dry Index (BDI) gives us a general idea about how the demand in the global economy looks. At the very core, this index tracks the shipping price of raw materials. If the shipping prices increase, it suggests there’s increased demand in the global economy. If they decline, it’s not really a good sign. Please look at the chart of the BDI below.
Chart courtesy of www.StockCharts.com
The BDI is outright collapsing. Since the beginning of the year, the BDI has declined more than 42%. This shouldn’t be taken lightly because it suggests demand in the global economy is slowing down very quickly. Looking at the average change in the BDI in January since 2003, this decline in 2014 is the second-biggest on record—in 2012, the BDI collapsed 58% in January.
Another indicator of demand in the global economy I look at is the Chinese economy. It has been known as the manufacturing hub of the world, and the country exports a significant amount of its goods to the world. If we see manufacturing activity in that country slow down, it gives us a hint that a global economic slowdown may be following.
Consider this: In January, the HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI)—an indicator of manufacturing activity in China—plunged to a six-month low. It was registered at 49.6 in … Read More
Why Gold Looks Good to Me in 2014
By Sasha Cekerevac for Daily Gains Letter | Jan 29, 2014
Just the other day, I was talking to a friend of mine who seemed extremely cheerful. I asked why, and he said that his investments have performed well over the past few months and he saw no reasons to worry.
This is a common problem with investor sentiment; people tend to become complacent and only look to the recent past as an indication of what tomorrow will bring.
This is quite dangerous. Investor sentiment is often wrong and can be used as a contrary indicator, buying when others are dumping their stocks and taking profits when others are blissfully unaware of the changing landscape around them.
Americans need to be careful of becoming too complacent in their bullish investor sentiment, because the U.S. is not isolated from the rest of the world.
When the real estate bust and financial crash occurred here in America several years ago, the effects spread to many nations around the world, including the emerging markets.
With the Federal Reserve pushing the gas pedal on money printing here in the U.S., it has created a shock absorber to some extent, temporarily keeping global pressures at bay, especially in relation to the emerging markets.
However, investors do need to be aware that there is much uncertainty around the world. Investor sentiment for global institutions has been aware of these potential issues and is now running for the exits.
Last week this began in Asia, as economic growth appears to be slowing and reports of a financial crisis in China are beginning to grow. With the Chinese shadow-banking sector showing signs of cracking, this is creating negative investor … Read More
Is the Housing Market Recovery a Fake?
By Moe Zulfiqar for Daily Gains Letter | Jan 28, 2014
The U.S. housing market is facing issues that must be addressed. The reality of the matter is that home buyers are still missing from the market—these are the people looking to buy a home and stay in it for a long time. If home buyers don’t come back to the housing market, hopes for the increase we saw in home prices in 2012 and 2013 will diminish very quickly.
Existing-home sales data confirmed this: home buyers are just not excited to buy. According to the National Association of Realtors, in December, first-time home buyers accounted for only 27% of all existing-home transactions in the U.S. housing market. This number had declined from 30% in December of 2012. (Source: “December Existing-Home Sales Rise, 2013 Strongest in Seven Years,” National Association of Realtors, January 23, 2014.)
But that isn’t all. Indicators that suggest home buyers will or may come to the housing market in full-steam aren’t in favor, either. Affordability is the main concern for home buyers; they buy homes when they can afford to. Sadly, we are seeing a rise in mortgage rates. As these rates increase, homes become less affordable for first-time home buyers, who will have to pay higher mortgage payments.
How much have mortgage rates increased? In December of 2012, the 30-year fixed mortgage rate tracked by Freddie Mac was 3.35%. In December of 2013, it increased to 4.26%—or an increase of more than 27%.
This is all too dangerous for the housing market. You want to see a continuous flow of first-time home buyers in the market. Instead, they have been shying away for some time. Investors … Read More
Why This Chart Should Worry Investors
By Sasha Cekerevac for Daily Gains Letter | Jan 24, 2014
Every day it seems as though the S&P 500 makes a new high. This strong performance over the past year is creating complacency, as more retail investors are piling into the market.
However, I would certainly urge caution, especially for any new capital being put to work at these lofty levels. With earnings season upon us, we’ve already seen several sectors in the S&P 500 get hit significantly, especially retail stocks.
We keep hearing about resilience among Americans, but consumer sentiment is not as strong as many analysts believe. This is why I wasn’t surprised when retailers disappointed.
One of the common arguments I hear about the S&P 500 is that the market is not expensive historically. I disagree with this argument, and add that the underlying fundamental strength of the U.S. economy, built on consumer sentiment, is far weaker than most people believe.
Regarding the valuation level of the overall stock market, best represented by the S&P 500, an interesting data point comes from Professor Robert Shiller of Yale University, whose research shows that U.S. stocks currently trade at a 25.4 multiple of the cyclically adjusted price-to-earnings ratio—far above the historical average. (Source: The Economist, January 4, 2014.)
Now, it would make sense for investors to pay a premium for S&P 500 companies if the economy and consumer sentiment were accelerating, But this is not the case.
Profit growth by the S&P 500 companies is decelerating. For the third quarter, total profits by corporations in America were $39.2 billion, down from a $66.8-billion increase in corporate profits during the second quarter. (Source: Ibid.)
Not only are companies within the … Read More
Gold: Slam-Dunk Sell or Trade of the Year?
By Moe Zulfiqar for Daily Gains Letter | Jan 23, 2014
Demand for gold bullion remains high. Each day there’s a new piece of information that continues to attest to this phenomenon. With this, I remain bullish on the yellow shiny metal. But one thing should be noted: I am not saying the bottom has been placed in, but that all the indicators are suggesting a bottom may be in the making.
From a fundamental point of view, the basic factors of price—supply and demand—suggest gold prices may be going higher (which I have said before). Demand is increasing.
We are seeing massive demand for gold bullion from countries like Turkey. According to the Istanbul Gold Exchange, Turkey imported 302.3 tons of gold bullion in 2013. This was more than double what it imported in 2012 and the highest amount since 1995. (Source: Larkin, N., “Turkey’s Silver Imports Surge to Most Since 1999 as Prices Slide,” Bloomberg, January 2, 2014.)
Pakistan is seeing massive imports of gold bullion into the country. As a result, the Economic Coordination Committee (ECC) of the Cabinet has imposed a ban of 30 days on gold bullion imports to Pakistan. This is the second time the country has taken such a step. The first time it imposed a ban on gold bullion imports was in July of 2013. (Source: “ECC imposes 30-day ban on gold import,” The Nation, January 21, 2014.)
The demand for gold bullion from India and China has shown great resilience in the past year, and I wouldn’t be surprised to see it continue. With the Chinese New Year fast approaching—a time when gold bullion is purchased by consumers as gift and good … Read More
Weak Q1 Earnings to Finally Trip Up the Illogical S&P 500
By John Whitefoot for Daily Gains Letter | Jan 22, 2014
Stock markets are only as healthy as their stocks—well, at least they technically should be. But despite its stellar year in 2013, the S&P 500’s component stocks weren’t supporting the growth with strong revenue and earnings growth.
I might sound like a broken record, but the fact of the matter is that the S&P 500 was fuelled by the Federal Reserve and its $85.0-billion-a-month quantitative easing efforts and artificially low interest rates, and the fact that businesses were streamlining operations and implementing aggressive share repurchase programs.
When it comes to financially engineering quarterly results, companies on the key stock indices logged a record-high for share buyback activity. In fact, in 2013, share buybacks amounted to $460 billion—the highest amount since 2007.
Companies on the S&P 500 embraced cutbacks and share repurchase programs because their earnings were nothing to talk about. Despite a year full of all-time highs, each quarter, a larger percentage of companies on the S&P 500 revised their earnings guidance lower—a seemingly obvious disconnect.
During the first quarter, 78% of S&P 500 companies revised their earnings lower; 81% did so in the second quarter; and a record 83% of firms offered lower earnings guidance in the third quarter. Not to be outdone, the fourth quarter saw 94% revise their guidance lower. (Source: “Record high number and percentage of S&P 500 companies issuing negative EPS guidance for Q4,” FactSet, January 2, 2014.)
In spite of the earnings disappointment, the S&P 500 continues to march illogically higher. The index might have gained 30% in 2013—but did it come at a cost? To keep growing, stocks actually have to start posting … Read More
As Consumer Confidence Wavers, Gold Bugs Come Back from the Sidelines
By John Whitefoot for Daily Gains Letter | Jan 21, 2014
If you listen to the Wall Street analysts, January consumer confidence numbers weren’t really all that bad. The preliminary University of Michigan Consumer Confidence index came in at 80.4 versus a forecast of 83.4—and down from 82.5 in December. (Source: “Tale of two consumers continues as US consumer sentiment slips,” CNBC, January 17, 2014.)
Some attributed the blip to the polar vortex that swept through most of North America earlier in the month. The warmer winds of February are expected to pick up the disappointing slack in U.S. consumer confidence levels next month.
But I’m not so sure. Friday’s consumer confidence numbers missed expectations by the widest margin in eight years. It also marks the seventh miss in the last eight months. Throughout 2013, consumer confidence numbers only beat projected forecasts three times, which (surprise!) means Wall Street doesn’t really have its finger on the pulse of Main Street America.
What isn’t surprising is that upper-income households have increased consumer confidence, having benefited the most from strong gains in income levels, the stock market, and housing values. On the other hand, low- and middle-income households that are not heavily invested in the stock market are being weighed down by stagnant wages and embarrassingly high unemployment.
And, since there are more middle- and low-income earners than high-income earners in the U.S., and 70% of our gross domestic product (GDP) comes from consumer spending, it’s fair to say that both consumer confidence levels and the economic outlook for the majority of Americans is bleak.
It’s not as if the disappointing consumer confidence levels have come out of a vacuum. A raft of … Read More
Are Retail Sales Indicators Really as Positive as They Seem?
By John Whitefoot for Daily Gains Letter | Jan 16, 2014
Depending on who you ask, sales in the retail sector may be either brisk or failing to gain traction. Like most things in the stock market, when it comes to the retail sector, it’s all about perspective.
According to the U.S. Department of Commerce, December retail sector sales advanced 0.2% month-over-month, beating analyst forecasts that expected a one-percent increase. Auto sales fell 1.8%, pulling total retail sales numbers down. Not surprisingly, the weak December auto sales numbers are considered more of a reflection of the bad weather than a weak economy. (Source: “U.S. Census Bureau News: Advanced Monthly Sales for Retail and Food Services December 2013,” United States Census Bureau web site, January 14, 2014.) Excluding auto sales, December retail sector sales climbed 0.7% after a 0.2% increase in November.
Are these retail sector sales numbers the latest indication that the economy is getting stronger as we begin 2014?
Well, that depends on how you look at it. Month-over-month, the retail sector sales data looks encouraging. But if you step back a bit and look at the last few months—or even year-over-year numbers—the retail sector and, by extension, the U.S. economy don’t look so bright.
Overall sales of furniture, sporting goods, building materials, garden equipment, electronics, and appliances fell month-over-month. Electronics and appliance stores, two key gift-buying outlets during the holiday season, tripped in November and December. Year-over-year, electronics sales were up a paltry 0.7%.
Department store revenues were essentially flat in November compared to October and were down slightly in December. Overall 2013 department store sales were down 4.7% from 2012.
So now I ask you, will the good … Read More
How American Investors Can Profit from the Canadian Economy’s Demise
By Moe Zulfiqar for Daily Gains Letter | Jan 16, 2014
Our neighbor to the north is facing some headwinds. In Canada, there are troubles developing that may drive the country toward an economic slowdown. In 2008, the ripple effects from the U.S. economy into the global economy caused an economic slowdown in many countries. The Canadian economy was one of the few nations that didn’t suffer a major hit; it was able to stand strong.
Now, Canada may not be able to stay on such strong footing, as it faces a possibly severe economic slowdown due to a few phenomena that are starting to line up to create a perfect storm.
First of all, the housing market in the Canadian economy is becoming much overvalued. According to Deutsche Bank, the Canadian housing market is the most overvalued housing market in the global economy. Looking at the value of the Canadian housing market as a ratio of home prices and rent, this market is overvalued by 88%. (Source: Babad, M., “Canada’s housing market most overvalued in the world, Deutsche Bank says,” The Globe and Mail, December 11, 2013.)
As we move through the beginning of 2014, the Canadian housing market is showing signs of a slowdown. Building permits, one of the early indicators of which direction the housing market is headed, saw a 6.7% decline month-over-month in November. (Source: “Building permits, November 2013,” Statistics Canada web site, last accessed January 9, 2014.) If the housing market soon faces troubles and prices decline, a major economic slowdown could follow.
Secondly, the employment situation in Canada, another indicator of an economic slowdown, is becoming dismal. In December, Canada’s unemployment rate increased by 0.3% … Read More
