Daily Gains Letter

risk


This Single Stock as Lucrative as a Tech ETF?

By for Daily Gains Letter | May 23, 2014

This Stock a Better Buy Than a Tech ETFIf you hold Google Inc. (NASDAQ/GOOG) in your portfolio, you own one of the best companies in the world and a top investment opportunity.

The company just surpassed Apple Inc. (NASDAQ/AAPL) to become the most valuable brand worldwide with an overall value of $158.84 billion, compared to the $147.9 billion assigned to Apple in the Millward Brown’s 2014 BrandZ rankings. (Source: “BrandZ Top 100 Most Valuable Global Brands,” Millward Brown web site, last accessed May 22, 2014.)

Apple’s decline in brand perception was attributed to the lack of new products by the “iPhone” and “iPad” maker, something that has previously hurt Microsoft Corporation (NASDAQ/MSFT) over the past decade. Apple has been modifying its products, but there has not been an earth-shattering new product for quite some time. If Apple wants to avoid the same fate that trumped Microsoft when it only had its MS operating system, then it needs to act.

Meanwhile, Google continues to show investors and Wall Street why it deserves to be the top technology play and investment opportunity in the stock market, bar none.

Google recently split its shares on a two-for-one basis to make the stock more available as a mass market investment opportunity. The stock still trades for more than $530.00 a share, but trust me when I say that Google has excellent long-term potential as an above-average investment opportunity.

Unlike Apple at this time, Google is highly innovative and is thinking outside the box. No longer simply looking at itself as a search engine, Google has been working on numerous advanced technologies in both hardware and software, which makes it a better investment … Read More


Three Ways to Profit from an Exhausted Stock Market

By for Daily Gains Letter | May 1, 2014

How Play Uneasy Market ProfitWhen 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).

 Russells 2000 Small Cap Index ChartChart 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


My Top “Made in America” Stock Pick Selling Under a Dollar

By for Daily Gains Letter | Apr 30, 2014

investment strategiesThe current stock market risk continues to be high for technology and small-cap stocks. Yet with the selling, we are beginning to see some decent opportunities coming to the surface.

The small-cap Russell 2000 is down just over seven percent after previously being down by more than 10% in the stock market. And while we are seeing heated stock market selling in higher-beta technology small-cap stocks, there are also opportunities emerging. Think of it as a current sale in the stock market that could inevitably see bigger discounts to buy equities in the stock market on the horizon.

But a small retail stock that I feel could reward speculators if it can strengthen its balance sheet is American Apparel, Inc. (NYSE/APP), which is based out of Los Angeles. What makes the company interesting is that the maker of fashion apparel for women, men, children, and babies manufactures its products within the United States borders, instead of places like China and Asia, which offer cheaper labor.

You could say that American Apparel truly is a “made in America” company producing its fashionable garments from an 800,000-square-foot facility in downtown Los Angeles. There are also other facilities in California.

American Apparel is a vertically integrated manufacturer, distributor, and retailer. The retail stores are located in major U.S. cities, along with outlets in Latin America, Europe, and Asia.

Considering what many of the major retailers and apparel makers in the stock market are doing with their manufacturing in cheap labor markets, American Apparel is quite astonishing—but the problem that arises is the lack of profits.

The financial risk has been hurting the stock. … Read More


Déjà Vu of 2000?: Tech Sector Valuations Look Suspect

By for Daily Gains Letter | Apr 25, 2014

Why Believe Tech Sector Looks SuspectIn a recent editorial, I discussed the potential red flags surfacing on the chart of the technology-laden NASDAQ. While I’m cautious, especially after its multiple failures to hold at 4,000, my view is that the technology sector stocks are the most vulnerable at this time, given their recent advance.

In the months leading up to early 2000, I recall the explosive buying in the technology sector was based on assumptions and speculations, rather than concrete, solid analysis.

While the recent buying in the technology sector—especially high-momentum technology stocks—was overdone, it was really nowhere close to what we witnessed back in 1999–2000, prior to the stock market imploding. I recall the surge of technology penny stocks trading under $1.00 to over $10.00, and in some cases to over $25.00, which was absolutely ridiculous at the time.

For some of you who were trading during that time, there was a wireless play called United Broadband Systems that was promoted as the next generation of wireless technology. At that time, technology and wireless were extremely hot and speculative. For one of my speculative market letters at that time, I advised readers to buy United Broadband at $0.25 as a speculative gamble. Heck, there was minimal financial history, but what I liked was the company’s story and that was good enough for me! Remember: the company was based on speculation, not on fundamentals, but we were able to turn an impressive profit.

When I see what is happening in the technology sector today, I am reminded of 14 years ago, but today’s technology sector is in no way as euphoric or crazy as it … Read More


How Last Week’s Mini Rally Is Reshaping My Investment Strategy

By for Daily Gains Letter | Apr 21, 2014

Mini Rally Means for Your Investment StrategyThe stock market staged a minor rally last week, but don’t get too excited yet; the buying support was largely triggered by a technically oversold market, rather than solid fundamentals or a fresh catalyst.

What I can say is that investors need to be careful with the high-beta stocks that are extremely volatile at this time and vulnerable to downside selling.

Just because momentum surfaces, it doesn’t mean the risk is dissipating. It’s simply an oversold bounce that could continue or falter again.

The fact that the Dow Jones Industrial Average and S&P 500 recovered their 50-day moving averages (MAs) last Tuesday is positive, but it doesn’t mean the worst is over.

I see the NASDAQ and Russell 2000 were still down more than seven percent as of last Wednesday and below their respective 50-day MAs. In fact, the Russell 2000 is within reach of testing support at its 200-day MA. This time around, we could see a bigger stock market correction, based on my technical analysis.

Until we see some sustained calm return, there could be continued selling pressure in the stock market, especially with the smaller high-beta stocks and large-cap momentum plays.

The most critical point to understand is that you need to preserve your capital base. The reality is that avoiding a loss is just as good as making profits. Imagine letting a losing trade run and before you realize it, the position is down 20%, 30%, or more.

This is especially true with the small-cap stocks. Making up ground following a major downside move is not easy. For instance, say you have a $10.00 stock and … Read More


This Top Stock a Poster Child for Consistency

By for Daily Gains Letter | Apr 17, 2014

My Top Stock for Long-Term Investors to Rest EasyThe chase for high-beta stocks appears to be fading at this juncture, as we are seeing a shift in the risk profile to lower-beta and more conservative large-cap stocks in the stock market.

After the staggering gains made by technology and small-cap stocks in 2013, it’s time to take a prudent approach to the stock market and refrain from chasing risk at this time.

We are seeing a move to consumer staples stocks that tend to fare reasonably well in both up and down stock markets.

While I favor small-cap stocks in an up stock market, the current tension in the stock market makes it dangerous to pursue risk. This is a time you need to be in defensive stocks.

The big banks, consumer staples, and industrial sectors look decent for those wanting to continue to invest at this time. Momentum and growth should be avoided for now.

If you are looking for a singular stock market play that offers diversity and a defensive approach, take a look at time-tested General Electric Company (NYSE/GE), which has offered investors steady returns in the majority of periods since its beginnings in 1892.

General Electric (GE) is precisely what you want in this type of market. It’s extremely well diversified across many industries and geographical areas around the world.

The company prides itself on producing steady results to shareholders. Its management strategy is to hire CEOs for 20-year time spans that allow for stability.

GE is the poster child for consistency in corporate America.

The company isn’t going to make you rich in a short period of time in the stock market, but … Read More


Double-Digit Gain or 30% Crash: How to Profit from S&P 500 No Matter Where It Goes

By for Daily Gains Letter | Apr 1, 2014

Profit from S&P 500After 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


Two Underlying Factors You Need to Consider Before Buying Stocks

By for Daily Gains Letter | Mar 21, 2014

Don't Invest in McDonald'sWhen many investors think of blue chip stocks, a common name that pops up is McDonalds Corporation (NYSE/MCD).

A blue chip stock is traditionally a well-established company generating stable corporate earnings and usually paying out an attractive dividend yield. McDonald’s certainly hits the bull’s-eye on these blue chip metrics, which is especially attractive in today’s low-interest-rates world with its forward dividend yield of approximately 3.3%.

The real question to ask is what is McDonald’s potential for corporate earnings growth over the next few years?

There are two underlying factors that I would like to bring to your attention for consideration: 1) the financial health of the company’s primary customers, and 2) the cost of inputs.

While McDonald’s may keep its blue chip status, the growth of corporate earnings remains in doubt. As we all know, both the U.S. and global economy are becoming increasingly split between higher income and lower income people. As we know, neither the U.S. nor the global economy is firing on all cylinders, as seen by the still significantly high unemployment levels.

Wages remain stagnant, and while companies can increase corporate earnings through share buybacks, at some point, revenues must accelerate.

The problem for McDonald’s that could really impact corporate earnings growth is that the costs of inputs, specifically for beef, are rising substantially. The price of beef in February had the largest monthly increase since November of 2003. (Source: “CPI – Item Beef,” United States Department of Labor web site, last accessed March 19, 2014.)

McDonald’s is already struggling with its one-dollar menu. The company has begun shifting its marketing strategy away from the “McDouble” … Read More


Where to Find the Best Buying Opportunity in Stocks Right Now

By for Daily Gains Letter | Mar 20, 2014

Why You Should Favor These Stocks Over Others This YearIf 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.

Russell 2000 Small Cap Index ChartChart 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


How to Generate Premium Income in a Stalling Stock Market

By for Daily Gains Letter | Mar 6, 2014

Premium Income in a Stalling Stock MarketThe S&P 500 recently traded at a record-high, just before tensions in the Ukraine erupted and the global stock market declined as fear of an escalation and war intensified.

While the charts continue to show the stock market wanting to move higher after excellent gains in February, I still sense the upside moves will be more difficult to come by compared to what we saw in 2013. Even at this point, the Dow Jones Industrial Average and the S&P 500 are still negative this year.

If the stand-off between the Ukraine and Russia doesn’t escalate, I would expect the stock market to advance higher by year-end. If tensions erupt in the Eastern European region, we would likely see major selling across stocks worldwide; commodities such as gold, oil, and grains would edge higher.

If the stock market fails to find its footing—and especially a fresh catalyst—we could see mixed and volatile trading in the months ahead as the market looks for direction.

And if the stock market fails to get any positive leverage heading into the summer months, we could see some stalling in the stock market.

If the stock market does stall, an investment strategy to consider would be to write and sell some covered call options on your stocks in order to generate some premium income. This would also help to lower the average cost base of your positions, while also setting a selling price you would be willing to sell your stocks at. Of course, your goal would be to generate premium income and not look to sell stock, as I believe the stock market will head … Read More


Three Ways to Protect Your Wealth from Global Uncertainty

By for Daily Gains Letter | Mar 5, 2014

Crude oilNothing helps create volatility on the stock market like the threat of war. And just a few short days after the close of the bloated $52.0-billion behemoth in Sochi, Russia has embraced its ne’er-do-well Olympic spirit and invaded the Ukraine. Or, according to Putin, “pro-Russian soldiers” have simply moved into the Ukraine to defend Russian interests.

With a growing threat of war/retaliation on the horizon, investors have been pulling their money from riskier assets, like stocks—sending global financial markets reeling. Crude oil and gold prices, on the other hand, have been on the rebound.

While it seems utterly crass to deconstruct the potential for war down to economics, the fact remains—a stand-off or sanctions could both disrupt gas supplies to the European Union and send U.S. crude oil prices higher.

For starters, any issues in the Ukraine could disrupt the flow of natural gas supplies from Russia to the European Union. That’s because the European Union gets about a third of its crude oil and natural gas supply (and a quarter of its coal) from Russia, mostly piped through the Ukraine. Russia, the world’s biggest crude oil producer, generated 10.9 million barrels a day in 2013 and currently exports close to 5.5 million barrels of crude oil per day.

Since the end of the Cold War, no one really worried about relying on Russia for crude oil and coal. All of that has changed. While the notion of war is remote, it’s still on the table. Nations far removed from Russia and Ukraine might push for economic sanctions, just as the U.S. has done, threatening visa bans, asset freezes, and … Read More


Why These Two China-Based Internet Stocks Are Worth a Closer Look

By for Daily Gains Letter | Mar 3, 2014

China-Based Internet StocksWe all know how hot the social media space is with some sizzling returns shown by such stock market heavyweights as Facebook, Inc. (NASDAQ/FB), Twitter, Inc. (NYSE/TWTR), Yelp, Inc. (NYSE/YELP), and LinkedIn Corporation (NYSE/LNKD) to name a handful.

The valuation of these momentum stocks is especially high, but as long as there are buyers, these stocks will continue to attract major market surges.

Much of the easy money may be gone for now, but there are still some Internet stocks trading here that offer excellent potential for some staggering gains for aggressive traders.

Yet the stocks I’m referring to are based out of China, where the added risk is high due to the questionable reliability of the auditors and subsequent results.

If you are confident on the numbers of these Chinese stocks, it may be worth a speculative trade, but be warned that the risk is high, so don’t go and bet your 401(k) on these speculative Chinese stocks. Use only risk capital and make sure you are diversified; this will take some of the edge off the trade in case the stock goes against you.

If you like Amazon.com, Inc. (NASDAQ/AMZN) but aren’t willing to chase the high stock price and valuation, you may want to take a look at China-based E-Commerce China Dangdang Inc. (NYSE/DANG), which has been referred to as the Amazon of China. The online seller of books, home products, footwear, electronic and personal products, and related accessories has about 8.9 million active users as of its fourth quarter (ended December 31, 2013). The company also said it added about 3.1 million new users in that … Read More


Four Top High-Momentum Stocks to Watch

By for Daily Gains Letter | Feb 27, 2014

High-Momentum Stocks to WatchThere is a lot of money trading the stock market each day, and this is especially true with the momentum stocks that are making many traders rich.

While anyone can trade momentum stocks, to make the real big money, you need to be trading big positions on these momentum stocks and be willing to assume the risk that the trade could go the other way. The key to trading momentum stocks is to make sure you are closely monitoring the price action and the volume on the bid side, especially. A major upward push in bids could foreshadow a pending upward move in the stock. The same can be said for rising volume on the ask side that could suggest traders are exiting the stock.

While there are numerous momentum stocks, the following are examples of momentum stocks that I believe offer the best opportunities as these companies are also leaders in their areas.

Facebook, Inc. (NASDAQ/FB) has been one of the top performers and momentum stocks since bottoming out in 2013. The social media company, with more than one billion subscribers, is managing to drive up its mobile advertising business and monetize its enormous user base. Facebook also made waves last week after the company announced it would be paying a whopping $19.0 billion in stock for four-year-old mobile messaging company WhatsApp. The company was clearly overpriced, but given that the stock price of Facebook has also risen extraordinarily, the $19.0-billion price tag doesn’t seem so bad.

At the low end of Facebook’s stock price at around $17.00 a share, the deal would have been valued at around $4.75 … Read More


Why I Recently Turned Bullish on Gold Mining Stocks

By for Daily Gains Letter | Feb 14, 2014

Gold Mining StocksA 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


Small-Caps with the Biggest Dividends

By for Daily Gains Letter | Feb 13, 2014

Small-Caps Offer the Biggest DividendsAt the beginning of January, I was optimistic that 2014 would deliver some good results to the stock market. I suggested that small-cap stocks would also continue to return profits to investors after a wonderful 2013 as the economy continued to show progress.

But after a disastrous January, in which the small-cap Russell 2000 attracted the most selling and was down more than nine percent from its 2013 record-high, concerns surfaced.

At this stage last year, small-cap stocks were blossoming with the Russell 2000 up more than eight percent by February.

Now there are concerns that small-cap stocks will face a rough ride this year. My view is that I would be inclined to buy this group on market weakness, as I still sense some of the top gains are yet to emerge from small-cap stocks; albeit, you need to be more selective when investing than you may have been in 2013.

In my view, continued economic renewal will drive small-cap stocks higher, as these companies tend to be able to react quicker to a changing economy.

We are already seeing some downside buying in small-cap stocks, as the Russell 2000 has narrowed its loss to one percent in February and is hoping for a return to positive territory.

The thing to remember is that while small-cap stocks tend to decline at a faster rate than the broader market, they also tend to rise faster when the market rallies.

The chart of the Russell 2000 below shows the downside break below the upward trendline that has been in place for some time. We saw some support and a subsequent rally. … Read More


How to Invest in a Stock Market Correction

By for Daily Gains Letter | Feb 12, 2014

Stock Market CorrectionHas the stock market rebounded? Some seem to think so. After recording the worst month in more than a year and the first monthly loss since August, some analysts think the worst is behind us and February will be a winner.

What further evidence do the bulls need than to point to the numbers! After falling more than three percent in January, the S&P 500 is up 0.75%; the NYSE is up a little more than 0.50%; the NASDAQ is up roughly 0.75%; and the Dow Jones Industrial Average is up around 0.50%. Not a spectacular display of strength—but enough to buoy up some investors.

But the euphoria may be short-lived. While stocks are holding up right now, there are more than enough warning signs (technical, economic, and statistical) that are pointing to a correction.

For starters, February is the second-worst-performing month for the S&P 500 and Dow Jones Industrial Average so far, and it’s the fourth-weakest month for the NASDAQ. Plus, according to historical data, February tends to perform even worse when January is negative. Since 1971, when January ended on a negative, the S&P 500 extended its losses into February 72% of the time—falling an average 2.4%. For the Dow Jones Industrial Average it ends down 65% of the time and 57% of the time the NASDAQ ends down, too.

But the stock markets are only as strong as the stocks that make them—so statistics on their own are a little short-sighted. Every quarter since the beginning of 2013, more and more S&P 500-listed companies are revising their quarterly earnings lower. During the first quarter of 2013, 78% … Read More


Gold and U.S. Bonds the New Great Trade?

By for Daily Gains Letter | Feb 10, 2014

Gold and U.S. BondsThere’s uncertainty on the stock market. Troubles are coming from the emerging markets, and they are causing investors to panic and sell their stocks. We see they are scared. But as this is happening, there’s a trade in the making, and those investors who have raised some cash (as I’ve been suggesting my readers do) and are looking to park their money somewhere safer than stocks can profit from this opportunity.

The trade I’m talking about is the trade that’s happening in U.S. bonds and gold bullion—some call this phenomenon a “flight to safety.” I call it a potential opportunity.

We know bonds and gold bullion are one of those asset classes where investors rush to when the risks on the stock market increase. This is something we are seeing now, and it could continue for some time.

In the following chart, I have plotted the prices of U.S. bonds (red line), gold bullion (black line), and the S&P 500 (green line). Take a look at the circled area, which shows the movement out of stocks.

30 Years US Treasury Bond Price Chart

Chart courtesy of www.StockCharts.com

Since the beginning of the year, U.S. bonds and gold bullion prices have increased in value, while the stocks have fallen. We have seen this relationship before as well. A prime example of this is the stock market sell-off in 2009; we saw investors rush to gold bullion and bonds then in hopes of finding safety.

It’s not too late for investors to consider taking advantage of this shift by looking at exchange-traded funds (ETFs), like iShares 20+ Year Treasury Bond (NYSEArca/TLT). Through this ETF, investors can invest in long-term … Read More


February to Be a Repeat of January’s Market Losses?

By for Daily Gains Letter | Feb 7, 2014

Stock Market Since the beginning of the year, key stock indices have fallen, and this is making investors nervous. They are asking what will happen next. The first month of the year is usually good for the stock market, but that wasn’t the case this year. The S&P 500 fell more than three percent and other key stock indices showed the same, if not worse, returns.

Will there be a sell-off in February as well?

Looking at historical returns, February is usually calmer on the stock market than January. For example, observing monthly returns from 1970 to 2013, the average return on the S&P 500 in January has been 1.23%; the average return on the S&P 500 in February in the same period has been 0.19%.

Will the S&P 500 rise in February after declining in January?

Between 1970 and 2013, the S&P 500 has declined in January 17 times. Eleven of those 17 times, the returns on the S&P 500 in February were also negative. The average return in those periods—when the S&P 500 declined in February after a decline in January—was 3.26%. If we take out the outlier—February of 2009 when the S&P 500 declined by more than 10%—this average becomes -2.52%. A simple probability calculation would show there’s almost a 65% chance the S&P 500 can go down in February. (Source: “$SPX Past Data,” StockCharts.com, last accessed February 5, 2014.)

Dear reader, remember that this information is from the past; market returns today can be completely different. You shouldn’t rely on historical facts alone when creating an investment strategy. You have to keep in mind that the stock market … Read More


The One Chart Stock Market Bulls Can’t Ignore

By for Daily Gains Letter | Feb 3, 2014

Stock Market BullsThere 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


First Step to a Winning Investment Strategy

By for Daily Gains Letter | Jan 31, 2014

How to Create a Winning Investment StrategyOne of the more common themes that I keep reading about these days is the strength of U.S. economic growth. It’s important to get at least some understanding of the potential for economic growth, as this will impact your investment strategy.

Recent data is definitely making me ask the question: just how strong is the level of economic growth in America?

We all know that this holiday season was much weaker than expected for retail companies. Considering that consumer spending fuels the majority of economic growth in America, this is certainly not a positive environment for that sector—but that shouldn’t be a real surprise to my readers, as I have recommended an investment strategy that has avoided retail stocks for months.

If economic growth is weak in retailing, are there any bright spots for larger goods?

According to the U.S. Department of Commerce, the latest advance report on durable goods was quite disappointing. New orders for durable goods during the month of December dropped 4.3%, core durable goods orders during December dropped 1.6%, and excluding defense, new orders were down 3.7%. (Source: U.S. Department of Commerce, January 28, 2014.)

Another worrisome data point in the report showed that the inventory level of manufactured goods in December was up 0.8%, the highest total amount since this data series was published and also the eighth monthly increase over the last nine months.

How should you formulate an investment strategy with this information in mind?

Economic growth depends on a continued increase in consumption and production. We saw consumers pull back over the holiday season, which is clearly not a positive sign for … Read More


Is This Currency Losing Its “Safe” Status?

By for Daily Gains Letter | Jan 24, 2014

Profit from the Canadian Dollar's DemiseNot too long ago, I wrote about an economic slowdown in the Canadian economy and how it could take the value of the Canadian dollar even lower. (Read “How American Investors Can Profit from the Canadian Economy’s Demise.”) By no surprise, the Canadian dollar (also referred to as the “loonie”) looks to be in a freefall. Take a look at the following chart.

The Canadian dollar is currently trading at its lowest level since September of 2009. Since the beginning of the year, the loonie has declined more than four percent compared to other major global currencies.

Considering all that is currently happening, can the Canadian dollar go down any further?

Canadian Dollar - Philadelphia Chart-moeChart courtesy of www.StockCharts.com

Simply put, yes, the Canadian dollar may still see some more downside. After the U.S. economy showed a significant amount of stress during the financial crisis, investors flocked to buy the Canadian currency. This may not be the case anymore.

Since the last time I wrote on this topic, some more information on how the Canadian economy is doing has been released. This new information reaffirms my suspicions. It seems the economic slowdown in the Canadian economy is gaining some momentum; even the central bank of Canada looks slightly worried. This could be very bearish for the Canadian dollar.

First of all, wholesale sales in Canada in the month of November remained unchanged from the previous month. Out of the 10 provinces in the country, only four reported an increase in their wholesale sales. (Source: “Wholesale trade, November 2013,” Statistics Canada web site, January 21, 2014.) Wholesale sales can provide an idea about the retail … Read More


Want to Give Up on Picking Stocks and Just Play the Market? Here’s How

By for Daily Gains Letter | Jan 13, 2014

Just Play the MarketThe year 2013 was a stellar year for stocks. The key stock indices have seen record increases: the S&P 500, which showed its best performance since 1997, increased by almost 30%; the Dow Jones Industrial Average saw a similar increase; and the NASDAQ Composite Index performed even better, ending the year with a return of more than 35%.

Looking at these numbers, one must really ask how their portfolio has done. If your portfolio had similar returns—well done! If it lagged, here’s something to note: hedge funds returned only 7.4% for the year. They lagged by almost 23% compared to the broader market return—the most since 2005. (Source: Bit, K., “Hedge Funds Trail Stocks for Fifth Year With 7.4% Return,” Bloomberg, January 8, 2014.)

Two key stocks that beat the returns of key stock indices and the returns given by the hedge funds many times over this past year were Gray Television, Inc. (NYSE/GTN) and Tesla Motors, Inc. (NASDAQ/TSLA).

Gray Television, Inc.

In 2013, this stock opened at $2.28. On the last trading day of the year, it closed at $14.88. If you held Gray Television stock in your portfolio for the entire year, your profits per share would have been $12.60, or just over 552%. (Source: StockCharts.com, last accessed January 9, 2014.) This return is similar to beating the hedge funds return by almost 75 times and beating the returns posted by the S&P 500 by 18 times. Below is the chart that shows this stock’s precise move.

Gray Television Chart

Chart courtesy of www.StockCharts.com

Tesla Motors, Inc.

Tesla Motors opened at $35.00 in 2013. On the last trading day of the … Read More


This Cheap Sector Set to Outperform in 2014

By for Daily Gains Letter | Jan 7, 2014

Outperform in 2014With the new year just beginning, many investors will begin looking at their portfolio and trying to figure out how to shift their investment strategy to include sectors that should outperform in 2014.

One investment strategy I like to use during the beginning of the year is to look for a situation where fundamentals are improving, but market sentiment remains weak.

At year-end, many times you will see tax loss selling occurring. Essentially, investors are selling those holdings that have gone down the most to crystallize the losses for tax purposes. This also presents an opportunity—if the long-term investment strategy is sound.

One sector that has been hit hard is the precious metals sector. This should be no surprise to many readers, as the sell-off in precious metals has gotten a lot of negative media attention. However, I would like to bring to your attention an investment strategy of looking to add industrial precious metals, such as platinum and palladium, to your portfolio.

The vast majority of demand for both platinum and palladium is for industrial purposes, especially for catalytic converters in the automobile industry. These precious metals are crucial for the production of vehicles, and demand in this sector continues to rise.

While total vehicle sales for the full year of 2013 aren’t in yet, it is expected that U.S. auto sales will be the highest in six years, with an approximately 50% jump from the lows experienced in 2009. In 2014, U.S. auto sales will continue to be strong, with an estimated total number of over 16 million units sold.

The investment strategy in these industrial metals is … Read More


How to Build a Successful Investment Strategy for the New Year

By for Daily Gains Letter | Dec 23, 2013

Investment Strategy for the New YearAnother year is soon to draw to an end. In my final commentary prior to the holiday break, I’m going to talk about something that is often not considered by investors when formulating their investment strategy.

But first, let me talk about my dad. He’s in his early 80s and is the most risk-averse investor I have met. He will invest in bonds, regardless of how they are doing. In high-yielding or low-yielding periods (which we are currently in), he will invest in the safety of bonds and squeeze out any last drop of interest. Yet while his investment strategy has always been status quo, this is not the way it should be. Let me explain.

Your asset portfolio should combine the right blend of equities and bonds as an investment strategy. But you need to be careful in your allocation. Too much in equities, and you’re vulnerable to downside risk; albeit, stacking your capital in stocks over the past four years would’ve paid off. Concurrently, if you’re like my dad and hold too much in bonds, then you miss out on some strong gains.

What you need to do for a well-planned investment strategy is consider the key variables, such as asset allocation, diversification, and small-cap stocks, to add potential return.

In my view, you need to be aware of exactly how much you have slotted in equities and bonds. This is also known as asset allocation, which is key to any prudent investment strategy.

By asset allocation, I am referring to how your investable assets are divided up amongst the three major asset classes: cash, bonds, and equities…. Read More


Profit Play on the Great Disappearing “Corporate Earnings Growth” Act

By for Daily Gains Letter | Dec 17, 2013

Corporate ProfitsAs many of you already know, the gross domestic product (GDP) estimate for the third quarter came in above estimates at 3.6%, with most of the increase coming from higher inventory levels.

But I would like to look at something slightly different than the inventory buildup. I think we are all aware of what happens when inventory builds and consumers don’t buy—corporate profits get hit. However, looking at the data a bit closer, there are more worrisome signs aside from excess inventory that are also pointing to tough times ahead for corporate profits.

The S&P 500 has had a stellar run since its bottom in 2009. Part of the reason for this is that corporate profits have expanded tremendously as firms cut costs through massive layoffs, as well as lower financing payments through the cheap money provided by depressed interest rates. But this might be coming to a close, as corporate profits for S&P 500 companies appear to be peaking.

According to the latest data from the U.S. Department of Commerce, third-quarter corporate profits on an after-tax basis were a record 11.1% as a share of GDP. (Source: “National Income and Product Account, GDP 3rd Quarter 2013,” U.S. Department of Commerce, December 5, 2013.)

What this means is that the S&P 500 companies are generating extremely high profit margins. Obviously, this alone is not bad; however, business is always cyclical. We will always move from peaks to troughs, and corporate profits and margins are no exception.

Wall Street analysts continue to tell people that the S&P 500 is a buy, because they are taking the data from the past couple … Read More


Profit from Emerging Markets with Just One Investment

By for Daily Gains Letter | Nov 12, 2013

Profit from Emerging MarketsEmerging market equities have taken center stage these days because, according to some, the key stock indices in the U.S. economy are reaching the overpriced mark. Investors’ returns aren’t going to be as robust going forward; there’s a significant amount of noise about them taking the shape of a bubble.

With all this happening, investors are asking which emerging market economy they should invest in. Should they buy companies operating in India? Or is China still the best emerging market economy in which to invest?

The answer to this question is not as easy as it may seem to some. Investors have to keep in mind that each emerging market is unique—it presents different opportunities, risks, and rewards.

Take China, for example. As key stock indices in the U.S. economy have increased this year—the S&P 500 is up more than 23% so far—the stock market in the Chinese economy hasn’t performed as well; in fact, the key stock indices there have declined. Please look at the chart below: the Shanghai Stock Exchange Composite Index has declined more than 6.4% between January and October.

Shanghai Stock Exchange Composite Chart

Chart courtesy of www.StockCharts.com

Does this mean there’s room for growth? Don’t be too quick to judge. The Chinese economy is going through a bit of an economic slowdown. This year, the country’s gross domestic product is expected to increase much less than its historical average; the growth of the Chinese economy is projected to be lower next year as well. At the same time, there’s noise stating that there may be a credit crisis in the country.

If all of the trouble growing in the Chinese … Read More


Time to Rethink Your Gold Investments?

By for Daily Gains Letter | Nov 11, 2013

Rethink Your Gold InvestmentsIs it time to rethink your gold investments? This question is being asked by those who have held on to their investments as the prices of the precious metal have come down significantly. It wasn’t too long ago when gold bullion prices soared beyond $1,900 an ounce; this year, they are facing scrutiny. Gold bullion prices witnessed plunges in April and June, and now sit close to $1,300—down more than 31% from their peak.

This decline in gold bullion prices has caused concern, and I completely understand why. For example, gold miners’ share prices have collapsed—both senior miners and exploration companies.

With this in mind; I certainly think it’s time to rethink the gold investments that investors hold in their portfolio.

Before going into any details, let me make this very clear: I continue to be bullish on gold bullion prices ahead. I see the most basic principles of economics, supply and demand, are at play; gold bullion is seeing increased buying worldwide, while supply becomes anemic every day that the prices remain stressed.

The reason for rethinking gold investments is due to the basic portfolio management principle that things can change very quickly and investors have to change with them. Investors have to keep in mind that the deeper the losses get, the harder it is to break even. For example, if an investment has come down 50%, it will have to go up 100% just to break even.

Let’s face it: some gold producers have come down significantly and exchange-traded funds (ETFs), which provide leverage to gold bullion prices, have tumbled downward, too.

If investors hold gold producers … Read More


A Global Issue That Could Damage American Stocks

By for Daily Gains Letter | Oct 11, 2013

Damage American StocksThe global economy looks to be in trouble, with the problems brewing quickly. Major economic hubs in the global economy are struggling for growth, but are failing—a fact that is largely ignored by the mainstream.

Long-term investors need to know that an economic slowdown in the global economy can deeply affect the key stock indices here in the U.S. economy. The reason for this is very simple: American-based companies operate throughout the global economy. As a matter of fact, in 2012, for the S&P 500 companies that provide data about sales in the global economy, 46.6% of all sales came from outside of the U.S. (Source: “S&P 500 2012: Global Sales – Year In Review,” S&P Dow Jones Indices web site, August 2013.)

Clearly, if there is an economic slowdown, the demand will decrease and the U.S.-based companies will sell less and earn less profit. As a result, their stock prices will decline.

So what is really happening?

In the beginning of the year, there was a significant amount of noise about how the global economy will experience growth. This did not happen.

The International Monetary Fund (IMF) expects the global economy to grow by 2.9% this year after seeing growth of 3.9% in 2011 and 3.2% in 2012. In 2014, the IMF expects the global economy to increase by 3.6%. (Source: Duttagupta, R. and Helbling, T., “Global Growth Patterns Shifting, Says IMF WEO,” International Monetary Fund web site, October 8, 2013.) Mind you, these estimates were much higher in July, but they have since been revised lower.

We all know how anemic the rate of growth of the U.S. … Read More


How to Prepare for the “October Effect” in Key Stock Indices

By for Daily Gains Letter | Oct 4, 2013

Key Stock IndicesOctober has just begun, and it’s one of the most interesting months for key stock indices. In the past, some of the major crashes occurred during this month. For example, on October 19, 1987, key stock indices, like the Dow Jones Industrial Average and the S&P 500, witnessed one of the biggest daily declines. But that’s not all: we also saw a pullback in October of 1989, followed by another glitch in October 2002. And who could forget October 2008? As you can see, October isn’t only scary for those who go out trick-or-treating; investors are fearful as well.

Looking at historical data, here’s how the key stock indices have performed in October.

The average return in October on the S&P 500 from 1970 to 2012 has been 0.54%. The highest return on the S&P in the month was in 1974, increasing more than 16%; the lowest return was in October of 1987, when the index dropped more than 23%. If we take out the two extremes, then the average return in the month of October on the S&P 500 since 1970 is 0.73%. (Source: “Historical Price Data,” StockCharts.com, last accessed October 2, 2013.)

For the Dow Jones Industrial Average, the average return in the month of October from 1970 to 2012 is 0.4%. The highest return achieved was in 1982, when the index increased 10.65%, and the lowest was in October 1987, when the index declined more than 23%. If we take out both extremes, the average on the Dow Jones Industrial Average since 1970 is 0.72%. (Source: Ibid.)

Dear reader, what I have mentioned are a few of … Read More


Should You Prepare for a Downturn in Key Stock Indices?

By for Daily Gains Letter | Sep 26, 2013

Key Stock IndicesTwo lines from the song “For What It’s Worth” by Buffalo Springfield pretty much sum up what we are seeing on the key stock indices here in the U.S. economy: “There’s something’ happening’ here/What it is ain’t exactly clear.” There is too much noise out there: some are saying key stock indices are going to head lower, while others are saying they have much more room to the upside.

In the summer, the bears said key stock indices would start to decline in the fall due to markets rallying on low volume. The bulls, on the other hand, insisted that earnings are good and consumers are buying, so a higher stock market is ahead.

From a technical point of view, there’s a particular formation that can be seen on this chart that’s not really talked about in the mainstream—a pattern called the “rising wedge.” According to technical analysts, this is considered a reversal pattern, meaning that it suggests the prices will turn in the opposite direction, heading lower from their current higher standing.

Some of the indications that the rising wedge pattern is in the making are the slowing rate of increase (gains and losses are smaller over time), the ideal three resistances on the upper trend line, at least two supports on the lower trend line, and the volume declining as the pattern emerges.

Please look at the chart of the S&P 500 below.

500 Large Cap Chart

              Chart courtesy of www.StockCharts.com

But this is all too technical. In a nutshell, the fundamentals of key stock indices aren’t getting any rosier. Companies are warning about their earnings, the economy is growing slowly, the … Read More


The Basic Principle Smart Investors Shouldn’t Forget

By for Daily Gains Letter | Sep 5, 2013

050913_DL_zulfiqarOver the Labor Day weekend, I met up with my old friend, Mr. Speculator. As always, we had a debate about portfolio management. We had a long conversation about what really is the right way to manage your investments—and, for that matter, if there is any. Should investors invest 40% of their portfolio in bonds and 60% in stocks? Should it be the opposite? Or is there another possible combination?

He said, “Moe, I am a firm believer in going for the fences every time for now, but do you really think I will continue to have the same approach in the long run?” (Turns out, there’s actually a rational investor in Mr. Speculator.)

“The answer is very simple: no,” he added. “When it comes to portfolio management, investors really need to realize there isn’t really a one-size-fits-all approach. I take risks now because I can afford to, but for those who are close to retirement, this is certainly not the way.”

I disagree with Mr. Speculator on many aspects of portfolio management, but on this, I can’t help but agree. Portfolio management differs from one person to another, and the amount of risk an investor should take also operates the same way.

A person who is 50 years old and has accumulated a significant amount of funds in their retirement account should not be taking the same risk as a person who is in their late twenties.

A person who has saved money for their retirement and are closing in on their golden years should be conservative with their investments. They should have more of a focus on assets … Read More


Brace Yourself for a Labor Day Stock Market Sell-Off

By for Daily Gains Letter | Aug 26, 2013

Time to Brace Yourself for a Labor Day Stock MarketLabor Day is coming up. On September 2, the North American key stock indices will be closed for business—no trading will take place. Not only will it mark the end of summer, but it will also be the last long weekend before the Thanksgiving weekend in November.

That said, one question comes to mind: why does Labor Day matter to investors; what’s so important?

First off, during the summer months, the volume on the key stock indices is usually low. This means participation isn’t as high, so major market moves usually don’t occur. In September, the volume then starts to edge higher. Those who were away for vacation come back to their trading desks and start buying or selling—in other words, they start adjusting their portfolio.

Keep in mind that the majority of the crashes we have seen in key stock indices occurred during the time between September and November. This includes, Black Monday (October 19, 1987) and the crash after Lehman Brothers failed and filed for bankruptcy (September 15, 2008).

Further, the key stock indices have accumulated some risks that investors shouldn’t forget, as they have increased significantly. Look at the chart below of the S&P 500:

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Since the first trading day of the year, the S&P 500 has increased roughly 16%; other key stock indices have shown a similar performance. You have to keep in mind that this rise in the key stock indices was based on very weak growth in the U.S. economy—the gross domestic product (GDP) growth rate for the U.S. is anemic. In addition, the unemployment situation remains bleak.

On top … Read More


Save Money and Profit By Taking Your Portfolio into Your Own Hands

By for Daily Gains Letter | Aug 23, 2013

Save Money and Profit By Taking Your Portfolio into Your Own HandsThe common belief among investors is that you need a significant amount of money to have a portfolio that provides exposure to different asset classes. As a result of this misconception, they may end up taking speculative trades, causing their portfolio to face wild swings.

The fact is that investors don’t really need a lot of money to have a portfolio that’s balanced and exposed to different asset classes. They can do this for a much smaller amount than they think, all thanks to financial innovation in the past few years.

The following are a few means investors can use to make a portfolio that holds different asset classes.

Equities

To get exposure to the stock market, instead of buying individual stocks, investors may look into buying exchange-traded funds (ETFs), like SPDR S&P 500 (NYSEArca/SPY). With this ETF, investors can get exposure to the S&P 500. Buying this ETF is like buying the entire 500 stocks on the S&P 500; when the index goes up one percent, the fund does the same. It also has low costs and can be traded during market hours.

Owning individual stocks can be expensive; investors may incur higher transaction costs. For example, buying 10 different companies in the portfolio would result in 10 transactions. Buying the SPDR S&P 500 ETF, on the other hand, is only one transaction and it gives you exposure to 500 companies. Remember, too, that individual stocks have their own risk.

Commodities

To expose their portfolio to commodities, investors have many different options. One example would be United States Copper (NYSEArca/CPER). This ETF lets investors track the performance of copper … Read More


When It Comes to Retirement, Investors Need to Focus on This Little Four-Letter Word

By for Daily Gains Letter | Aug 22, 2013

Investors Need to Focus on This Little Four-Letter Word“I think it’s all about taking risk; you have to take more of it—get out of your comfort zone. You can’t just keep doing the same thing and expect different results—it’s that simple.” These were the exact words from my friend, Mr. Speculator, on portfolio management. “I am not looking for just a menial 10% return,” he added. “I am in it for a much bigger gain. To gain more, you have to risk more.”

Mr. Speculator is right about one thing: to gain more you have to risk more.

However, long-term investors who are saving for retirement, their kids’ education, or anything else for that matter, should not follow the lead of Mr. Speculator. Taking high risks can be dangerous, and at times, it’s no different than gambling. Being willing to risk it all is not a good investment management technique.

When it comes to retirement, investors need to have a very strong focus on one four-letter word—“risk”—or else one move in the wrong direction could make a dent in their portfolio—which may cause them to push back their retirement or give up on their plans altogether.

Take a look at the current bond market, for example; clearly, the risks are increasing. Look at the chart of the yield on 10-year U.S. Treasury notes below:

10-Year Treasury Note Chart

Chart courtesy of www.StockCharts.com

The yields have increased roughly 75% since the beginning of May.

Bond investors are fleeing. According to the Investment Company Institute, in June, U.S. long-term bond mutual funds had a net outflow of 60.4 billion—this was the first since August of 2011. In July, they continued to flock to the … Read More


Become a Better Investor by Avoiding These Five Common Mistakes

By for Daily Gains Letter | Aug 12, 2013

Five Common MistakesLet’s face it: investing isn’t easy, and it becomes even more discouraging when investors face losses in their portfolio. To avoid a drawdown in their portfolio, investors should avoid the following five mistakes.

1. Not having an investment plan

Investors should have some sort of plan put together before they even jump into the world of investing and start allocating their portfolio to different investments. Having a plan guides them in what kind of investments they should be making and the risks they should take. An investment plan doesn’t have to be very lengthy; it just needs to explain the investor’s risk appetite, investment horizon, and purpose for investing their funds. Without a plan, an investor may turn into a speculator and take risks that can impact their portfolio significantly.

2. Investing in what you don’t understand

This is a very critical error. Investors need to know how the company operates before they purchase its shares. Keep in mind that this isn’t limited to stocks alone; investors should understand how any investment works before they decide to hold it in their portfolio.

For instance, long-term bonds are more sensitive to interest rates compared to short-term bonds. Investors saving for the long term must consider interest rates before buying bonds.

3. Getting emotionally attached to investments

After the crash in the stock market in 2008 and 2009 and the prior tech boom, one observation should be very apparent: markets tend to swing up and down. Investments that are good for the portfolio now may not be so great in two years. Investors need to realize this and not get emotionally attached … Read More


Three Current Risks You Need to Be Aware of to Protect Your Portfolio Now

By for Daily Gains Letter | Jul 23, 2013

Aware of to Protect Your PortfolioKey stock indices are roaring higher—and this is making bulls happier, while bears are arguing the rise isn’t sustainable. Noise is at its peak. Regardless of this, investors shouldn’t lose sight of what is happening, and always manage their risk.

Since the beginning of the year, the S&P 500 has increased more than 18%. Other key stock indices, like the Dow Jones Industrial Average, have shown a similar pattern and have provided stock investors with profits.

Take a look at the chart of the S&P 500 below. At the very least it’s in a breakout mode. The S&P 500 broke above its long-term resistance, the price level where sellers dominate, around 1,550–1,575. It was tested twice—once in early 2000, and then in 2007—but failed to break above. Technical analysts would say what happened on the chart of the S&P 500 is simply bullish.

They would argue that when a resistance breaks, it becomes the support level—the price area where buyers dominate—and when the support breaks, it ends up becoming the resistance level.

S&P 500 Large Cap Index Chart

Chart Courtesy of www.StockCharts.com

I’m not saying key stock indices will decline from here and the S&P 500 will come crashing down. The path of least resistance seems to be towards the upside, while I focus on risk management—knowing what kind of risks are present and what kinds of events investors can expect.

The first and most important thing investors need to note is that the key stock indices rising upwards of 18% in the first half of the year—for a 36% yearly move—may be too much to handle.

It wouldn’t be a problem if the U.S. economy … Read More


How to Manage Your Risk in These Volatile Markets

By for Daily Gains Letter | Jul 1, 2013

Risk Management in Today’s Gold MarketDuring the financial crisis, investors saving for retirement were punished for staying in the stock markets. The key stock indices plummeted and took many investors’ wealth.

After seeing the crash taking a heavy toll on their portfolios, investors moved into safer asset classes. They rushed to bonds, gold, and gold miners because they thought that’s where the value was—and where they could make some of their lost savings back.

Things are different now. If investors are still tied to those asset classes, chances are they are feeling a pinch. Gold prices are down significantly from their peaks and bond prices appear to be in a freefall. Since the beginning of the year, gold has fallen nearly 30% in value, and bond yields—those of 30-year U.S. bonds—have soared more than 20%.

Sadly, even with all the financial innovation, there isn’t an investment instrument that protects an investor’s portfolio completely from market fluctuations. However, investors can minimize their downside risks significantly by managing their risk properly.

Managing risk may sound like an easy concept at first, but it’s far from it. It ultimately consists of three steps and requires a significant amount of research. The three risk-management steps are risk identification, risk evaluation, and risk reduction.

Risk Identification: This is the most important part in risk management. Investors need to find what kind of risks will affect their portfolio. For example, imagine a person heavily invested in one sector; even if he or she is diversified across different companies, troubles can take a chunk out of their portfolio. Take gold as it stands now: even if investors bought different gold miners when … Read More


With Both Bonds and Stocks Declining, What’s a Smart Investor to Do?

By for Daily Gains Letter | Jun 28, 2013

U.S. bondsStarting near the end of 2012 and then going into 2013, there was a significant amount of noise around the concept of the “Great Rotation.”

The idea behind this concept is that low yields on U.S. bonds would cause investors to sell their bonds positions, which would eventually bring bond prices down, driving investors toward stocks. That would send the key stock indices higher.

Now, since the Federal Reserve announced that it might be pulling back on its quantitative easing, the concept of the Great Rotation seems to be gaining some traction once again. And investors are asking if it’s really going to happen.

Looking at the chart below of 10-year U.S. bond yields, it’s very clear that investors don’t like the U.S. bonds—they are selling. The yields on 10-year U.S. bonds have skyrocketed; they are now more than 44% higher than they were at their lowest level in August 2012.

STNX 10 Year Treasury Note Yield INDEX

Chart courtesy of www.StockCharts.com

According to TrimTabs, an investment research company, through to June 24, investors sold $61.7 billion worth of bond mutual funds and exchange-traded funds (ETFs). While this may not sound big, this is the highest sell-off since October 2008, when investors sold $41.8 billion worth of mutual funds and ETFs. (Source: Bhaktavatsalam, S.V., “U.S. Bond Funds Have Record $61.7 Billion in Redemptions,” Bloomberg, June 26, 2013.)

Now that we see investors fleeing the bonds market, shouldn’t they go to the stock market, thereby causing the markets to climb higher?

Yes, according to the concept of the Great Rotation, the key stock indices should be climbing higher. Sadly, the reality is the opposite: as the bond prices … Read More


After Yesterday’s Collapse: The One Stock to Buy and Hold

By for Daily Gains Letter | Jun 21, 2013

Buy-and-Hold Strategy Still Effective in Today’s Stock MarketA friend of mine, let’s call him Mr. Speculator, recently asked me if the buy-and-hold investment strategy even makes sense anymore. On one day, the stock markets are up on bad economic news, and then on the next, they are sliding lower on good data. “I don’t think investors should bother with fundamentals anymore; they don’t matter,” said Mr. Speculator. “They should just trade the directions markets are going in and hopefully they will do alright in the end.”

First of all, Mr. Speculator’s argument does have some merit. The stock markets here in the U.S. economy, according to many, have gone up too much, on very little economic growth. Since the sell-off from 2008 to 2009, key stock indices like the S&P 500 have roughly gained more than 120%.

Looking at the performance of the economy, it’s mediocre, to say the least. The jobs market remains under pressure; the Bureau of Labor Statistics reported that the unemployment rate in the U.S. economy stood at 7.6% in May. That’s certainly lower than its peak in 2009, but nowhere close to the pre-financial-crisis level, when it was around 4.7% in 2007. (Source: “(Seas) Unemployment Rate,” Bureau of Labor Statistics web site, last accessed June 19, 2013.)

Other economic indicators are showing very similar performances, if not worse. For example, the housing market is still depressed, companies are piling up inventories, the number of individuals in the U.S. economy on food stamps has been continuously increasing, the government keeps on spending more than it earns, and cities across the country are struggling with budget deficits.

That said, Mr. Speculator is sadly forgetting … Read More


Civil Unrest, Summer Vacations, Hurricanes: Energy Sector’s Hot This Summer

By for Daily Gains Letter | Jun 20, 2013

Civil Unrest, Summer Vacations, Hurricanes: Energy Sector’s Hot This SummerWith the start of summer less than one day away, it’s the perfect time to think about those stocks and sectors that could perform well over the next few months. Seasonally, the U.S. energy sector goes through a period of strength between July and October.

What about this year? Judging by the spot price of light crude oil, the U.S. energy sector is already beginning to heat up. West Texas Intermediate (WTI) crude oil is up 4.4% since the beginning of June and 13% over the last two months.

Why the early run-up? It’s not as if the U.S. economy is charging ahead. One reason for crude oil’s strength is due to ongoing tensions in the Middle East, particularly with the Syrian civil war, which has been raging since March 2011, with protestors demanding the resignation of President Bashar al-Assad. According to the United United Nations’ (UN) estimates, more than 90,000 people have been killed.

Earlier this week, the G8 leaders met in Northern Ireland, calling for Syrian peace talks to be held in Geneva “as soon as possible,” though no date has been set. Of course, the civil unrest in Syria and rising tensions in the Middle East continue to affect oil prices and the energy sector globally.

Additionally, summer travel plans are up 17% from last year, with more than two-thirds (69%) of consumers planning to get away in the next three months. This compares to just 59% of consumers who traveled last summer. (Source: “Summer Travel Soars; Many Americans to Spend More,” American Express web site, June 4, 2013.) Of course, as Americans pack up their cars … Read More


How to Profit from Insider Transactions

By for Daily Gains Letter | May 13, 2013

Profit from Insider TransactionsIf an executive of a publicly traded company buys or sells shares of their own firm, should this be taken as a signal by investors about what might happen to the stock prices? This question has taken center stage these days, as the markets are reaching new highs on a regular basis and insiders—those who hold some of the key positions in a company—are selling their shares.

According to TrimTabs Investment Research, in February, executives of companies sold $35.30 worth of shares in their own companies for every $1.00 worth of shares they bought. As the firm noted, this was the highest amount since it started tracking insider transactions in 2004. (Source: Taylor, C., “U.S. insider stock sales send up red flag for investors,” Reuters, April 11, 2013.) They were most bearish.

When an executive of a company purchases or sells shares of the company they work for, it is called an “insider transaction.” Insider transactions can happen for many reasons; for example, insiders may sell shares because they might have accumulated a significant number of shares over the tenure of their work and want to liquidate to pay for expenses.

That said, should investors follow insiders at all? The above is true, but investors need to keep this in mind: insiders of a company are usually the first ones to see what will happen to the company in the upcoming future. They find out certain details before investors hear about them.

Now comes the question: how does one actually profit from this? Information about insider transactions is publicly available, but for investors, it may just become a hassle to … Read More


Lumber Sales Forecasting Stronger Housing Market?

By for Daily Gains Letter | Apr 30, 2013

Lumber Sales Forecasting Stronger Housing Market?Reflecting the strength in the U.S. housing market, Weyerhaeuser Company (NYSE/WY) reported very good financial results in its first quarter.

The company’s 2013 first-quarter revenues leapt to $1.95 billion, way up from $1.49 billion in the same quarter last year, on solid demand from all its business lines.

Net earnings grew significantly to $144 million, way up from earnings of $41.0 million in the same quarter last year.

On the stock market, Weyerhaeuser is expensively priced, but it certainly is great to see this mature company reporting solid business growth.

Stocks related to the U.S. housing market have been on a tear for the last couple of years, but it is very much a sector that is chock-full of risk.

It is not a group of companies on the stock market that a conservative investor would want to use while saving for retirement.

The Home Depot, Inc. (NYSE/HD) is a component company in the Dow Jones Industrial Average and has been a powerhouse wealth creator recently.

On the stock market, Home Depot has doubled over the last 18 months, which is pretty spectacular for such a mature, large-cap company.

It is a reflection, however, of the enthusiasm that institutional investors have for the U.S. housing market and the resurgence that it is now experiencing.

Of course, there is no runaway bull market in housing, but the action in the stock market reflects a recovering housing market, as does the fact that earnings from housing-related companies are going up.

D.R. Horton, Inc. (NYSE/DHI) reported excellent growth in its latest quarterly revenues of $1.4 billion, up a spectacular 49%.

The company’s earnings … Read More


Are You Programmed to Be a Successful Investor?

By for Daily Gains Letter | Apr 24, 2013

Are You Programmed to Be a Successful Investor?

When it comes to investing, our retirement planning rests in our ability to make sound economic judgments based on mathematically quantifiable numbers. We weigh the financial risks and rewards, and then make our decision.

Fortunately, or perhaps unfortunately, we are a little more complex when it comes to making decisions. For one thing, our emotions, developed after a lifetime of experiences, play a large part in how we act.

This fight-or-flight tendency helps us make good (some might argue “safe”) decisions; it prevents us from swimming with sharks or walking barefoot on lava flows. Granted, some aspects of nature can be somewhat predictable, but interacting with unpredictable investors on Wall Street is entirely different.

Despite our best intentions of trying to make rational decisions on something as black-and-white as finances and quarterly results, our plans are complicated by having to work with others who are attempting to interpret the same information—and coming out with different conclusions.

Too much avoidance of risk and/or fear can get in the way of making some really good investing decisions. We distrust our own conclusions and end up following the herd to financial mediocrity, or even ruin.

By better understanding who we are, where we come from, and what our fears and risk tolerances are, the better we can be at creating a solid, well-diversified retirement portfolio.

For example, at the most basic level, we know that the better we feel, the more apt we are to rush into something—and possibly make mistakes. A large number of optimistic investors—those who didn’t think revenues or earnings were important—saw their retirement fund take a beating at the … Read More


How to “Short Sell” Without the Risk and High Costs

By for Daily Gains Letter | Apr 24, 2013

How to “Short Sell” Without the Risk and High CostsIt isn’t a hidden fact that investors can make money when stock prices go down. One way to do this is by shorting shares of companies that investors believe won’t perform well because profits will be lower, sales will be stagnant, and so on and so forth.

No doubt, short selling is beneficial when stock prices are falling, and it certainly lets investors make money; however, if the stock prices go in the opposite direction, investors can be in for a long period of misery—their losses can even be more than 100%. In addition, in order to short, investors need to meet a certain amount of capital requirement in their portfolio.

Instead of just short selling a stock and putting up the capital, thereby exposing themselves to greater risk, investors can make money when the stock price is falling by using an option strategy called the “bear put spread.” This option strategy provides investors with a limited-risk, low-capital option.

Consider this: Google Inc. (NASDAQ/GOOG) trades well above $700.00. To simply short 100 shares of this company, investors require a significant amount of capital.

At the very core, a bear put spread requires investors to buy a put option strike price above the current stock price, in anticipation of stock prices falling, and a write/sell put option at a lower cost than the current stock price. One key aspect investors must remember is that these two put options should have the same expiry date.

Suppose ABC, Inc. is trading at $30.00 per share now, but an investor believes that the stock price will decline. So, instead of short selling, he/she decides … Read More


Weathering the Storm: Three Tips for Outlasting the Eventual Stock Market Correction

By for Daily Gains Letter | Apr 19, 2013

190413_DL_whitefoot

“Buy low, sell high.” It seems so easy. Could there be a more simplified (read: misguided) piece of investing advice out there? In this economic climate, many investors who want to come in off the sidelines are wondering if a better adage would be, “buy high, and sell higher.”

On the other hand, after an explosive ascent, other investors are waiting patiently to buy on the eventual dip. The big question, of course, is when will there be a dip or market correction (a pullback of 10% or more) for investors to take advantage of?

It’s not as if there isn’t enough of a global impetus to drive a market correction. The U.S. is racked with massive debt and high unemployment, gross domestic product (GDP) growth has been revised downward, consumer confidence is down, retail sales are down, and personal debt is up. Building permits have declined since January, while foreclosure rates are picking up.

Not surprisingly, poor economic numbers are finally catching up with the red-hot S&P 500, where 78% of the listed companies have issued negative earnings per share (EPS) guidance. U.S. first-quarter corporate earnings results are trickling in, and it’s not looking great—Bank of America Corporation (NYSE/BAC), Yahoo! Inc. (NASDAQ/YHOO), and Intel Corporation (NASDAQ/INTC) all disappointed.

Then there are the global economic indicators. Jens Weidmann, the head of Germany’s central bank, said it could take 10 years for Europe to recover from the debt crisis. Those ever-optimistic bulls need only look to Cyprus to be reminded of the fragile state of the eurozone—and how the global markets would respond if the local governments (Italy, Spain, etc.) followed … Read More


Mountains of Cash Growing; Will Corporations Stop Hoarding and Pay Out?

By for Daily Gains Letter | Apr 12, 2013

120413_DL_clark

Corporations, like investors everywhere, are very reticent about current business conditions. They have been this way for years. And they have way too much cash, which is why dividends have been increasing.

The financial crisis really was the catalyst for a huge change in the way corporations allocate their capital. Corporations hunkered down on costs and became extremely tight with their money.

It is highly likely that large corporations will increase their dividends this earnings season. Of course, this will be great news for those investors who seek out dividends from blue chips.

This market is at a high, but it is fairly valued and has a lot of potential to increase further—if corporations can produce growth and there is no major new shock from an event, like a currency default in Europe, for example.

There is still tremendous reticence on the part of corporations to invest in new business operations, new plant and equipment, and new full-time employees. And while this is not a positive for the Main Street economy, it is a positive for shareholders collecting dividends.

Corporations are sitting on a mountain of cash. In many of the earnings results so far, large corporations are reporting too much free cash flow. And they need to do something with all this money, because cash does not earn a rate of return greater than the rate of inflation.

One of the easiest ways to do this is to return the money in the form of dividends to stockholders. I still firmly believe that blue chip investing will do well over the long term.

There may be some spectacular downside … Read More


Don’t Compromise Exposure; These Funds Key to a Diversified Portfolio

By for Daily Gains Letter | Apr 11, 2013

110413_DL_whitefoot

Stock advisors banter about asset allocation numbers all the time. Invest the percentage of your age in bonds and the rest in equities; unless you’re younger, then it’s wise to invest more in stocks. But then again, if you’re late to the investing table, maybe you’ll need to put more of your retirement portfolio in stocks to make up for lost time.

Asset allocation numbers can change depending on your age and your risk level. And since no two people are alike, no two asset allocation numbers are alike. It’s up to you and your risk level—and what you want your portfolio to accomplish.

Having said all that, more and more unhappy, cash-poor investors, tired of low interest rates, low returns, and high investment management fees, are turning their attention to the cost-effective and varied world of exchange-traded funds (ETFs).

ETFs are investments that mirror (or at least attempt to mirror) the return of a particular index. ETFs allow average investors the chance to add a basket of equities to their retirement portfolio that they could not otherwise afford to purchase individually.

Whatever you want to invest in, there’s an ETF for it. Currently, there are approximately 1,200 ETFs available in the U.S. The more obvious ETFs follow the Dow Jones Industrial Average, the S&P 500, Russell 3000, and the Toronto Stock Exchange (TSX). Then there are currency ETFs that track the Swiss franc, Japanese yen, or the euro. Commodity ETFs track oil, natural gas, gold, livestock, grain, and precious metals. There are even religious-based ETFs.

Many investors choose to buy ETFs in an effort to diversify their holdings, reduce … Read More


Stuck in a Declining Market? Use This Strategy for Portfolio Growth

By for Daily Gains Letter | Apr 8, 2013

080413_DL_zulfiqar

With financial media always talking about what to buy and where to buy, not a lot is said regarding the sell-high/buy-low strategy. Yes, I am talking about short selling—a way to make a profit in the falling market.

At the very basic level, short selling is the opposite of buying a stock—or “longing” a stock. When an investor longs a stock, their hope is that it will go higher in value, and eventually they can sell it for profit. In short selling, an investor sells the stock first and buys it a lower price—banking the difference between the two prices.

When an investor puts in an order for short selling shares of a company, they are essentially borrowing them, and selling them. Once the price reaches their perceived price, they buy them, and return those shares. Before going into further details, don’t worry; your broker will take care of this.

Short selling may be a familiar topic to many investors, but what you may not realize is that this strategy has many advantages that can help to grow your portfolio, even when the overall market is falling. Similarly, those who actively do short selling may not understand its underlying risks.

One of the biggest advantages of short selling is that investors don’t really have to wait for prices to drop for them to buy; rather, they can profit from them. In addition, it provides them with an alternative way of profiting—they can long when prices are going up, and short when prices are going down.

But while it has its advantages, short selling does have some disadvantages as well.

If … Read More


Investors Beware: Dollar Cost Averaging Deadly

By for Daily Gains Letter | Apr 4, 2013

040413_DL_zulfiqar

If the price of a stock or any other financial instrument is headed downward, should you buy more or sell? Investors are faced with this question every single day when they see their holdings decline in value. In situations like these, investors sometimes make a mistake of buying more of something when they should have been selling it—this is often referred to as dollar cost averaging.

At the very core, dollar cost averaging is simply buying a security constantly regardless of the price. The idea behind this method is very simple: investors don’t really have to worry about market timing or getting into a stock at the right price. This strategy can be used as a way to accumulate a security over time.

If an investor buys a stock while it’s going down, their thinking is that the average cost will decrease, and they will be able to profit more once the price rebounds a little—the price doesn’t have to return to the same point it was at before.

Look at it this way; you buy shares of ABC Inc. at $10.00 each. A few weeks later, you find that the price has gone down to $8.00—a 20% decline in value. You go ahead and buy even more shares. Now, if you take the average of the two prices you paid for ABC shares, you will find that your cost is actually $9.00—your cost has gone down by buying the stock at a lower price.

With this comes one question: does buying more when something is falling in price really add any value to your portfolio or reduce the risk? … Read More


Three Smaller Firms with Reliable Dividends

By for Daily Gains Letter | Apr 4, 2013

040413_DL_whitefoot

Just because the S&P 500 and Dow Jones Industrial Average are in record territory, that doesn’t mean the overall stock market is worth looking at. At the same time, it would be a mistake for investors to consider reducing their positions in equities in favor of cash or bonds, Treasuries, and certificates of deposit (CDs).

Banks provide interest rates barely above zero percent; bonds are near three percent, and jumbo five-year CDs yield returns of just 1.5%. In a nutshell, investors looking to buy bonds are basically saying they are happy locking their hard-earned dollar into negative inflation-adjusted returns. They’re okay using an investment vehicle that loses money.

In light of the ill-begotten euphoria on Wall Street, investors looking to increase their retirement fund nest egg just need to be more discerning when looking at stocks. It would be a mistake to think that big stocks are the only place to make solid profits. At the same time, it’s important to remember that investors cannot earn income without taking some risk.

Right now, there is an increasing number of fundamentally and technically strong smaller companies offering regular, high dividend payouts that trump the paltry interest rates offered through other investing channels.

In the past, dividend-hungry investors had to turn to big banks and utilities. But now, regular payouts are being offered by smaller companies in less conventional sectors.

The joy with some smaller companies is that they tend to outperform their larger peers during an economic recovery. And because smaller companies can experience faster growth, patient investors get paid to wait for both capital gains and a dividend yield.

On … Read More