Sunday, January 31, 2016

Portfolios With Purpose Update

At Oxford Club, the editors are engaging in a competition through Portfolios With Purpose. Thanks to our boss, Julia, we are competing against other professionals in paper trades. Whoever has the best paper trades over the course of a year gets to make a donation to the charity of their choice. In my case, the Roberto Clemente Health Clinic in Nicaragua.

The rules were: Start with 5 positions, long or short. You can trade in and out of these five positions over the course of the year, but no new positions.

I went into the contest with gusto, because this gave me a chance to work on a new trading system and track the results. I produced a 46-page top-down analysis of global economies and markets, and finished that in the last week of 2015. I then used a combination of global trends, macro US trends and market trends (using RRG charts) to pick those sectors I thought would do best in the U.S. market in 2016. And then I picked stocks that I thought represented good value and had the potential to be leaders this year, using criteria I spelled out in my report.
I also decided to track options on the stocks. This is not part of the contest, but options would be part of a new trading service.
The contest started January 18. Since that was Martin Luther King Day, we can assume the trades started January 19 (the Portfolios with Purpose website doesn't specify). The entry prices I am using are the ones Portfolios with Purpose is giving me.  Here are how my picks are doing so far.

Pick #1: Facebook (Nasdaq: FB). Went long at 94.97.

I bought this for fundamental reasons I detailed in my report. I expected Facebook to beat earnings handily, and that's what happened. The chart didn't look bad, either.

(Updated chart)

The green arrow shows the week I entered the position (on January 19). Facebook is breaking out now, and should go touch its upper channel before cooling off.

The stock is up 18.15% since my entry.

For options: Well, since this contest is going all year, I'd use longer-dated options (January 2017 expiry). I use at-the-money or near the money options.
Facebook January 2017 95 calls are up 77.3% since the entry. I would aim to take half-gains near the top of that uptrend, then let the rest ride.
Pick #2: Gilead Sciences (Nasdaq: GILD). Went long at 91.43.

I bought Gilead because it seemed to be the best bargain in biotech. It is becoming more of a bargain, and not in a good way. Friday saw a 5.18% drop on four times normal volume.

The Wall Street Press is convinced that Gilead will "shake off biotech gloom."  The price and volume on Friday says otherwise.

(Updated chart)

To be sure, the stock is down only 9.63% from my entry. But part of my reasoning for entering this trade was technical -- that support would hold -- and that just isn't working.

On Monday, I will exit GILD.
For options: GILD January 2017 92 calls are down 47% since the entry. We'll take the loss.
UPDATE: I did not exit GILD on Monday because of the news of approval of one of their new drugs overnight. Certainly, the stock was higher in the morning; we'll see how it finishes the day. Earnings come out on February 2nd, so we might as well wait and see if there is short-covering after the news.

Pick #3: Lockheed Martin Corporation (NYSE: LMT). Went long at 215.99

I am working on the premise that defense spending will only go higher in an election year. LMT's defense component is doing fine -- better than fine. But the company warned that helicopter sales at its Sikorsky division will be hit by the slowdown in the oil industry. The stock was punished on that warning on what were otherwise excellent earnings. But it is coming back strong.

(Updated chart)

My price target remains $237.

The stock is down 2.31% since my entry on January 19.
For options: LMT  January 2017 215 calls are down 9.3%. There is plenty of time.
Pick #4: Check Point Software Technologies (Nasdaq: CHKP). Went long at $75.95.

I believe cybersecurity is one of the megatrends of the coming decade. Check Point is well positioned to ride that trend, and it was a value when we picked it up.

(Updated chart)

Picking up Checkpoint near support seems to be working out. So far.

The stock is up 3.77% from our tracked entry.
For options: CHKP  January 2017 75 calls are up 15%. There is plenty of time.
Pick #5: Skyworks Solutions (Nasdaq: SWKS). Went long at 60.67.

This chip stock was dragged down by doom-and-gloom over Apple. Then Skyworks reported excellent earnings and outlook, and it headed higher.

(Updated chart)

Skyworks remains one of the best values in tech. This or Facebook will probably be where I put the money I take out of Gilead. 

Skyworks' share price is up 13.6% since our entry.
For options: SWKS  January 2017 60 calls are up 45.9% since our entry. The stock should run to at least 80, and potentially much higher, so these options have moonshot potential.
Summary: Out of my five picks for Portfolios with Purpose, only one pick is not doing well and will be replaced. Two of the five are doing really well. And so far, options are working out. 

So far, I am in 21st place in the PwP professional level contest. I know there are at least 85 professionals participating, because I've seen people listed that low. It's a shame we are restricted to the five we entered with, but rules are rules. We'll see how the year plays out.

Friday, January 29, 2016

The Woodchipper of Earnings Disappointment

Earnings for Q4 of 2015 are coming in. Thursday was the single busiest day of the earnings season. Earnings are a bloodbath, yet the market is rallying, and rallying hard. So is the broad market no longer so laser-focused on earnings? YES!

I'll get to that. First ...

Earlier this week, the outlook was downright terrible. As of January 27th, S&P Capital IQ was calling for  6.11% decline in S&P 500 earnings.

Looking at this table, you can see how the outlook worsened over time.

So, that's borders on blood-bath. The good news is, at the end of the week, things look a smidgen better.  S&P Capital IQ says the Q4 earnings for the S&P 500 are estimated to be $28.83. That's a decline of 5.65%. Still bad, but not as bad as a couple days ago.

What's more, as the table shows, 6 of 10 sectors are in contraction. So, it's not just energy. Though the energy sector is being fed, feet-first and screaming, into the Woodchipper of Earnings Disappointment.

I always like to use multiple sources. FactSet says the S&P 500 is now likely to show a 5.8% decline in Q4 earnings, up from a projected 4.7% decline on Dec. 31. What a bunch of party-poops, eh?

Apple missed ... Amazon disappointed ... Chevron whiffed. What a parade of pain!

So, why did stocks rally so hard today? Well, the economic news has been downright awful. And I'm not just talking the fourth-quarter GDP numbers, which came out at growth of a pathetic 0.7%. No, it's also things like the Durable Goods numbers, which tumbled 5.1% in December.

And the Fed spoke this week. And while not saying so directly -- because it never does -- the Fed seems to realize that its rush to raise interest rates is a mistake.

And that is reason #1 why the market is headed higher. The sense that we won't see four Fed rate hikes this year. We might not even see two.

The second reason the market is rallying is that the global economy is getting worse. Japan's economy is doing so poorly, Japan's central bank actually went to negative interest rates

That's kind of a big deal. It's also pushing the value of the Japanese yen down, which pushes the value of the U.S. dollar higher. 

And it's not just the yen. China careens from one crisis to another. Europe has its own messes. This hurts those currencies ... and boosts the dollar.

For my analysis on why the U.S. dollar will be stronger for longer, read my latest piece at the Non-Dollar Report.

Every Tom, Dick and Apple and Amazon which blamed the strong dollar for impacting earnings results doesn't need a stronger dollar. They will scream bloody murder eventually. But the market isn't focused on that right now.

No, the market is focused on the fact that one-fifth of the global economy now is operating under negative interest rates. That gives some on Wall Street the idea that not only will the Fed not hike rates -- it might actually lower them.

The third reason stocks rallied is because oil rallied. And it rallied for no good reason besides speculation.

And that's how we get to a 300+ point rally in the Dow today.

Now, let's look at the chart of DOOOOOM. I'm spelling it with 5 "O"s now because an authoritative Mexican robot says so.

(Updated chart)

Support still holds. There is room for a continued bounce higher. I'll point out that if the Fed does do another round of QE, well, that's usually rocket fuel for stocks.

Still, despite recent action, keep this in mind. The gapped and ferocious crack addict smile the market is wearing today is hiding something; underneath it all, the market is scared. 

Certain politicians will do their darnedest through November to keep people scared. This is very good for gold, by the way, as I pointed out here, and also here a week earlier.

Part of my investment thesis is that the market is more scared than it needs to be. It is anticipating a recession that is not on the horizon.

The market's anticipation of a recession may in itself be a trading opportunity.

Still, we'd be amiss to not notice that there are some dark clouds. JPMorgan Chase just cut its forecast for U.S. stocks by 9.1% -- saying it sees the S&P 500 ending the year at 2,000. 

“There is increasing risk that elevated volatility starts incurring enough technical damage to market psychology,” a team led by Lakos-Bujas wrote in a note to clients on Tuesday. That could spill over and negatively affect business and consumer sentiment, “resulting in a lack of risk taking, and eventually creating a negative feedback loop into the real economy.”

In other words, JPMorgan is saying the thing we have to fear the most is fear itself.

The JPMorgan team also says stocks in the S&P 500 will earn $120 a share in 2016, compared with an earlier $123 estimate. The S&P 500 is likely to post two straight years of flat to negative earnings growth, as the “risk of earnings recession is rising.”

And if you are smacking your desk saying "by Neddie Jingo, that's just what Sean predicted," well, yeah. I get to say "I told you so."

Still, let's check our old friend, the forward P/E ratio of the S&P 500.

The forward p/e ratio is at 16.016 -- higher than it was last Friday. And yet the earnings outlook is deteriorating. A dollar that is stronger for longer -- which is what we seem to have -- will not help the earnings situation. So, there may be good reasons to buy, but a cheap market is not one of them.

Right now, the market is high on the high-speed chicken feed of Fed expectations. The market expects the Fed to stop hiking rates, and maybe even engage in QE. 

If these junkie dreams go unfulfilled -- and junkies usually have Liquid-Sky-high fantasies -- the let-down could be quite severe. The Woodchipper of Earnings Disappointment could come back into play. 

And that might bring us to a washout, which would likely be a great buying opportunity.

Or, watch Yellen announce a new round of QE on Monday and make fools of us all.

Have a great weekend.

Friday, January 22, 2016

S&P 500 Earnings Update and Chart of DOOOM!

My investment thesis, which I have explained in, is that we are not in a recession. We are in a bear market, one caused by a double whammy of falling earnings estimates and the Fed removing the punch bowl of quantitative easing.

In such an environment, earnings become very, very important.

The Q4 2015 earnings growth estimate for the S&P 500 is now -4.3%.(Source: Thomson Reuters I/B/E/S.)

15% of the S&P 500 companies have reported Q4 2015 EPS. Of the 73 companies in the S&P 500 that have reported earnings to date for Q4 2015, 73% have reported earnings above analyst expectations, if you listen to Thomson Reuters.

Or, 64% of S&P 500 companies have beaten earnings if you listen to Bespoke.

In a typical quarter (since 1994), 63% of companies beat estimates. So 64% to 73% is good. The beat on revenues ... eh, it's not so hot.

How about going forward? The Q1 2016 earnings growth estimate for the S&P 500 is -0.6%. (Factset, another information provider, has the same numbers). 

And remember, since most companies beat earnings, odds favor earnings turning out positive if conditions remain the same. 

Next week is the peak of earnings season. Fully 50% of the S&P 500 is reporting. Brace for impact.

Another chart, from Deutsche Bank via Value Walk, shows earnings by sector, and also quarterly results ...

Deutsche Bank says the market's correction is a "profit recession' centered just in certain industries. Anyone who guesses Energy leads the way lower gets a gold star.
Wow, the Energy Sector is expected to suffer a whopping 70% drop in earnings for the fourth quarter. Never mind "wow." Ow!

Next week is the peak of earnings season. Fully 50% of the S&P 500 is reporting. Brace for impact.

And now for the two most important charts. First, an update on the Chart of DOOOM!

You can see that the S&P 500 just tested support from last year's low ... a low that was also support in 2014. That support held, and it seems to be a bottom. 

But is it "the" bottom? 

Now, here's a chart of the S&P 500's forward price-to-earnings ratio, to see where it ended the week ...

At 15.61, the forward price-to-earnings ratio of the S&P 500 is just below the longer-term average. And that's during a time when earnings estimates are trending negative.

The S&P 500 is many things. But the broad index is not cheap on a valuation basis. Not right now.

That doesn't mean it can't go higher from here, of course. On my Facebook page, I talked about how both China and Europe have opened up the sluice gates of easy money. That's what sparked this week's rally.

Hmm ... could the U.S. Fed follow suit and open up its own QE sluicegate? 

That's the trillion-dollar question.

In any case -- Fed QE or not -- remember, a bear market will be over before you know it.

Wednesday, January 20, 2016

We Are Closer to the End of the Bear Market Than the Beginning

Here's what I posted on my Facebook page for Oxford Club this morning: 

Another bad start for the markets. This is driven by worsening earnings expectations, compounded by investor panic over plunging oil prices, China's market chaos, and more.

On earnings: The final numbers for the fourth quarter aren’t in yet. But as I write this, the S&P 500 is expected to report a 5.7% earnings decline for the fourth quarter. That would represent the third straight quarterly drop in profits. And it’s the first time the S&P 500 has seen that since the first three quarters of 2009.

Still, as I posted just a few days ago, by the time Wall Street realizes it is in a bear market, it will likely be almost over, if history is any guide.


And consumers have $17 billion more dollars jingling in their pockets, just due to the year-over-year drop in gasoline prices alone.

In fact, I believe the resurgent consumer has enough firepower to keep the U.S. out of recession.

Consider yourself blessed that you're not Canadian, with their currency rapidly turning into Monopoly money

It will likely be a tough day in the market. Better days are coming. Be ready.

Friday, January 15, 2016

2 Scary Charts Update

On Wednesday, Investment U published a story I'd written about 2 scary charts. Here are updates on those chart.

And now, a chart of the S&P 500 forward price-to-earnings ratio.
You can see that at a forward p/e of 15.27, the S&P 500 is still depressingly close to its average forward p/e. This is not a buying opportunity for the index, at least on a valuation basis. However, you may find values in individual stocks.

If you want to learn more about the significance of these charts, you can read my original article by CLICKING HERE.

Good luck to us all, and good trades.