Daily Gains Letter

Russell 2000


How to Survive This Stock Market

By for Daily Gains Letter | Aug 22, 2014

Survive a Stock Market with Little ChoiceThe 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


The Next Best Move for Investors

By for Daily Gains Letter | Aug 8, 2014

What Investors Need to Do NextIt’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


Stock Market: Institutions Moving in Opposite Direction of Investors

By for Daily Gains Letter | Jul 30, 2014

Institutions Telling Investors to Ease OffAs we move towards the end of July, trading in the stock market continues to be murky and filled with obstacles and uncertainties. The S&P 500 is holding on to a small gain this year, but there’s still a sense of nervousness among investors in the stock market.

While the small-cap stocks segment of the stock market continues to be apprehensive, and with a slightly bearish bias with the Russell 2000 being negative on the year so far, I’m also seeing some warning signs emerging from the broader stock market and blue chip stocks.

The S&P 500 continues to fall short on numerous occasions as it approaches 2,000. The Dow Jones Industrial Average has failed to hold above 17,000 on four occasions. The failure in both of these situations is a red flag, in my view, which could be foreshadowing a potential stock market adjustment. Look, we may only see a correction of five percent or so, but it’s coming.

This is a time to be prudent and take some money off the table, just as institutional investors have been. In an article I read on Yahoo!, institutions divested $7.97 billion in exchange-traded funds (ETFs) in the last week, while retail investors rushed in, buying up about $379 million of equity mutual funds. (Source: Lewitinn, L., “Why is the big money dumping stocks?” Yahoo! Finance web site, July 27, 2014.) This move indicates that the professional money is taking some cash off the table, given the five-year bull market run and current hesitancy in the stock market.

In fact, over the past year, retail investors have been rushing into the … Read More


Getting Ready for the Stock Market’s Coming Bumpy Ride

By for Daily Gains Letter | Jun 27, 2014

Four Ways to Prepare for the Bumpy Ride Ahead in StocksThe 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


Why I Believe This Market Is Heading Higher—For Now

By for Daily Gains Letter | Jun 11, 2014

Why Stocks Are Heading HigherThis is a stock market that continues to want to move higher despite the lack of any major catalyst.

Sure, the economy is “recovering,” but there are still issues with consumer spending, especially on non-essential durable goods. The headline durable orders reading came in at 0.8% growth in April, above the consensus 1.3% decline but below the revised 3.6% growth in March. For the economy to really confirm the stock market, we need to see growth here. This will also help to drive buying in small-cap stocks that trade with the economy.

The jobs scene is finally beginning to look better since the Great Recession in 2008. Jobs creation came in above 200,000 for the fourth straight month. The unemployment rate held at 6.3%. With the latest batch of jobs numbers, the economy has now recovered all of the 8.7 million jobs lost during the recession. The Federal Reserve will likely refrain from raising interest rates until sometime in mid-2015, but continue to cut its bond buying to zero by year-end.

The fact there’s really a lack of investment alternatives to the stock market is helping. With the yield on the 10-year bond at around 2.5%, I doubt investors or institutions are rushing to buy. Why would you when you can buy higher-yielding dividend paying stocks with capital upside?

The renewal in the global economy is also helping. China hasn’t sunk into the economic abyss as some pundits have been predicting. Its neighbor Japan is finally showing signs of economic growth following decades of doing little. Like the United States, Japan is spending its way to recovery. The country’s first-quarter … Read More


Chasing Risk? This Market Won’t Be Kind to You

By for Daily Gains Letter | May 29, 2014

Why This Stock Market Calls for PrudenceMy 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.

NASDAQ Volume Summation Index Chart

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 for Daily Gains Letter | May 19, 2014

Conservative InvestorThe 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


Investor Beware: More Selling Coming to Tech Stocks

By for Daily Gains Letter | May 12, 2014

Beware of More Selling from TechnologyIf you’ve been keeping an eye on your screens and portfolio holdings (or if you’ve just taken a look), you are probably aware of the current selling capitulation towards small-cap stocks and the technology sector.

The bloodletting on Wall Street has been unabated and, in my view, it has been overdone. I’m not ready to jump in yet, but I would be on additional weakness in the stock market.

In a period of selling capitulation in the stock market, there is minimal regard for the quality of the stock. Sellers rush to the exits and dump everything along the way. I witnessed this on the stock markets in 2000 and again in 2008.

Yes, there is clearly a technical red flag on the growth stock market indices like the Russell 2000 and the NASDAQ. The Russell 2000 broke below its 200-day moving average (MA) last Tuesday, but managed to rally a bit on Thursday. If the buying support emerging continues, we could see the index rally back to its 50-day moving average; albeit, the risk is there in the stock market.

Just the fact that the technology group, which comprises many high-momentum Internet and social media stocks, is down more than 20% from its highs is worrisome. But at the same time, this isn’t really a surprise, given the advances made in 2013 and the previous years in the stock market.

Even with the stock market correction, we continue to see ridiculous valuations with the likes of such stocks as Yelp Inc. (NYSE/YELP), Groupon, Inc. (NASDAQ/GRPN), Facebook, Inc. (NASDAQ/FB), and Twitter, Inc. (NYSE/TWTR), meaning the bloodletting has not stopped, so … 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


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


How to Navigate the Ridiculous World of Social Media Stocks

By for Daily Gains Letter | Apr 10, 2014

investment strategyThe tension in the stock market is clearly evident, especially with the NASDAQ and Russell 2000 breaching their respective 50-day moving average (MA).

What we have seen in the stock market is a shift away from higher-beta growth and small-cap stocks to the perceived safety of blue chips and large-cap stocks, which I recently wrote about.

Driving much of the current malaise in the stock market has been the selling in the technology groups, specifically the high-momentum stocks that attracted major buying euphoria in 2013, in spite of what were high valuations and overdone optimism.

While I continue to like technology for growth investors in the stock market, I have also been quite vocal in not chasing some of the outrageous valuations that were assigned to these stocks by the stock market. With some of the brand-name momentum plays trading at more than 100 times (X) earnings, you have to step back, pause, and consider these metrics are ridiculous and undeserved.

There are some analysts in the stock market coming out and advising to buy on this dip, but I’m not as convinced, especially toward the high-beta and high-valuation momentum plays in the stock market.

The extreme valuation in the stock market is most evident in the social media space, which saw some impressive gains over the past few years even though many were not even making any money. These stocks are definitely not the kind that investment guru Warren Buffett would buy.

Take a look at Twitter, Inc. (NASDAQ/TWTR). This has to be one of the most overvalued stocks in the stock market at this time. The company has … 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 Play Seasonal Anomalies for Profit

By for Daily Gains Letter | Jan 13, 2014

Anomalies for ProfitAs all investors know, no two equities march to the same drum. This would then mean that, technically, it should be impossible to predict future returns based on readily available information. However, this might not be entirely true, as it turns out there may be something to be said for some seasonal investing patterns after all.

First off, when it comes to gathering statistics, there’s no better place to look than the stock markets. Monthly price data for equities on the New York Stock Exchange (NYSE) goes back to the early 1900s and data from the other indices goes back to their infancy. So it’s possible to gather objective data and weed out irregularities.

One of the most popular investing seasonal anomalies is the “January effect,” which really runs from late December to at least the end of February. The January effect theorizes that small-cap U.S. stocks have a history of outperforming the S&P 500.

The January effect was first observed by investment banker Sidney B. Wachtel and published in his paper “Certain Observations on Seasonal Movements in Stock Prices,” which appeared in The Journal of Business of the University of Chicago in 1942. In his paper, Wachtel shows that since 1925, small-cap stocks have outperformed the broader market in the month of January. (Source: Wachtel, S.B., “Certain Observations on Seasonal Movements in Stock Prices,” The Journal of Business of the University of Chicago April 1942: 15 (2); 184–193.)

Why is this? Most analysts theorize that tax-loss selling ramps up near the end of the year, when investors sell losing positions. Larger stocks can absorb the hit—but smaller stocks, not … Read More


Boost Your Returns with These Small-Caps

By for Daily Gains Letter | Jan 9, 2014

Dividend-Paying StocksFor most investors, the past year was about the search for higher-risk assets with the potential for achieving higher returns. This desire helped to propel the NASDAQ and Russell 2000 to returns in excess of 30%, while dividend paying stocks lagged in performance.

Now as we move along in 2014, we could see buying shift to more conservative stocks that pay a dividend to investors. The shift to these stocks could accelerate as comparative bond yields rise, making income investors choose between bonds and dividend stocks.

As an investment strategy, you can consider buying the large-cap dividend plays, such as General Electric Company (NYSE/GE) or The Procter & Gamble Company (NYSE/PG).

But while buying large-cap blue chips always makes sense to your overall portfolio strategy, you can increase your portfolio’s overall potential returns by adding small-cap dividend stocks. By doing so, you can usually add in higher capital appreciation potential.

And while there are numerous small-cap dividend plays in the financial and industrial sectors from which to select, I’d like to highlight a couple above-average stocks that you may want to examine further. As I said, these smaller companies offer dividends and higher capital appreciation potential.

In the area of investment management, a mid-cap company that looks like it may make a good addition to your portfolio is Och-Ziff Capital Management Group LLC (NYSE/OZM), which has a strong dividend yield of 6.7%. The stock has also advanced 61% to shareholders over the past 52 weeks; the S&P 500 returned just 25%. In the third quarter, Och-Ziff managed to beat the Thomson Financial consensus estimate by $0.07, reporting $0.27 per diluted … Read More