Chart of Interest

CELG, a major holding of ours, is on the verge of a multi-year high breakout. The previous price high was 68.25.  What I would typically like to see on a breakout is above average volume and closing near the high of the day. Below is a chart of CELG. Please click to view image.

Bottom Line:  A breakout of the 68.25 area with decent volume could clear the way for this stock to run into the mid 70's.  Technical aside, the company will be giving 2012 guidance on January 9th at the JPM healthcare conference. Thank you for reading.

Italian Bonds

Complacency is running extremely high as the EU countries start their two day meeting this week Thursday and Friday.  The meeting to discuss how to restore confidence in the European financial system.  Right now virtually nobody wants to loan money to financially troubled countries in the EU and nobody wants to lend money to major European banks. Europe was able to bail out Greece, Ireland and Portugal, but bailing out Italy is a whole different story.  All debt in Italy is 1.9 trillion euros or 120% of GDP.  Italy is indebted to France for 309 billion euros and Germany for 120 billion euros.  So its easy to see why France and Germany are in the public light when it comes to the EU debt crises, Italy owes a majority of its debt to those two countries.
The solution of countries needing  to cut back on spending during a time of high unemployment in the EU, will not make matters any better either.  Austerity measures in these countries becomes near impossible to do when they are in a recessionary environment. Below is a chart of Italy 10 year bond yields.  They reached a high of around 7% before just recently pulling back to under 6% yield, which is positive.  This move up in yields happened all during ECB bond intervention.  Another words the ECB has been buying Italy bonds in an attempt to keep yields from moving higher.

Bottom Line:  This two day summit in the EU Thursday and Friday may give us some clarity on how they intend to get out of this debt issue mess.  The end result for US stocks revolves the currencies ( Euro and USD ).  A default of Italy or a breakup of the European Union could send the US Dollar higher, which would have a negative effect on US stocks.  This, all outside of the possibility of a global recession occurring in 2012 all on its own.  Complacency is running high as stock markets rally higher in what many do not want to miss out on the Santa rally in December, or funds that find themselves under invested.  The fear of missing out on a market run is greater than the fear of losing investment capital at this time.  Thanks for reading.

Sector Comparison

Here's a comparison of two sectors that have high and low ticket items. Below is a chart of Ford, GM and a major auto supplier Lear.  Ford and GM are both down approximately - 40% and Lear is down around -18% this year alone. These are companies that sell high priced items to the consumer, or provide items to the auto industry as Lear does.

Copper a leading economical indicator is down - 27.63%, as shown by the the copper ETF (JJC). Copper is used in just about any large scale building including auto and homes.

Not to show just bearish looking charts, below is a nice looking chart of stocks that cater to people looking for low cost items and food.  McDonald's, Dollar General, Dollar Stores, and Walmart all fit this category and are all higher for the year with Dollar General up 28%.

So what we have is a tale of two industries.  Car manufacturers and anything heavy duty including copper has been sold off hard which is expected in a struggling economy. McDonald's, where you can feed a family of four for around $20.00 and the $1 dollar stores have seen their stocks appreciate this year.  

Bottom Line:  Monitoring charts like these can be helpful in determining the mindset of the consumer.  Is the consumer still pulling back and staying away from high priced ticket items and continuing their cost conscious ways by visiting the economical low cost stores, or have they opened up their wallets to higher ticket items that have a longer term obligation to pay off.  For now, the consumer is extremely risk averse with their purchasing habits.  I would expect those charts to reverse when the economy starts a recovery.  A potentially good trade would be to go long the autos manufacturers and sell short the low cost providers when the economy does rebound.

 

Market Recap - Wednesday November 16

Today is a perfect example of the kind of stock market we currently have been experiencing.  Today around 3:00 pm stocks started to sell off under heavy volume.  From what I can see the 3:00 pm reversal down was caused by three reasons. The price of oil breaking 102.00 per barrel to the upside, a stronger US Dollar Index, unsolved EU Debt Issues.
First let's take a look at a 5 minute one day chart of the S&P 500 (SPY).  Notice the 3:00 pm sell off on heavy volume.

Below, is a chart of oil breaking out above the 102.00 dollar range.  Expect higher gas at the pump soon.

Bottom Line:  What we have is a very fragile market that has been moving on headline news primarily about what's going on in Europe.  Couple that with high oil, and you have a market ripe for a sell off.  Those who are bullish, are expecting a Santa Claus rally into the new year.  I think the chances of such a rally are diminishing quickly.  The headwind of high oil alone is enough to keep the market from putting in a year end rally. Thank you for stopping by.

World Stock Market Performance

Stock indices around the world have been performing poorly on a relative basis to the US S&P 500 Index.  Part of the reason for that is because capital is coming out of Europe and into US stocks. Below is a chart showing the various country indexes from around the world.  They include Brazil, China, Germany, Japan and Hong Kong.

As you can view above, all the major indexes around the world are currently down double digits this year.  The best place to have placed your investments this year would be the S&P 500 and not on the other major indexes around the world.  Stocks as of late sure have a bullish tone to them, with every dip in the market being bought.  Thank you for reading.

US Dollar and Stocks

What's moving the stock market these days?  The answer is the strength or weakness of the US Dollar Index.I wrote about this phenomenon some time ago here U.S. Dollar Weakness and the Markets.  Below is a chart of the inverse correlation or non-correlation between the US Dollar and the S&P 500 Index. Notice when the dollar strengthens like today, and yesterday, the stock market moves lower.  Notice the chart of the non-correlation between the two.  US Dollar in red, S&P 500 in black.

Stocks like a weaker currency, because in general companies become more competitive selling their items world wide.  The dollar has gained strength for two reasons:  First Japan is actively intervening in their currency to drive it lower to become more competitive, and secondly, the debt problems in Europe have also led to a lower Euro vs. the Dollar.  

Bottom Line:  Monitoring currencies has become just as important as stock indexes around the world.  So for now if we keep experiencing dollar strength then I would continue to expect some weakness in stocks at the same time. Thank you for stopping by.

ACOM Third Quarter Results

Ancestry.com posted 3rd quarter results after the bell.  Revenues were in line and earnings per share exceeded analyst estimates by .05 cents to .40 versus the .35 estimate.  The company achieved bottom line by recording a very low G&A of just 9.5% of revenue, and a lower tax rate, ( the lowest in the last two years).
I previously wrote about ACOM's 2nd quarter results here ACOM Results.  My biggest concern for the stock in the near term was the sequential drop off in subscriber growth rate, which I posted below.
2010
14.00%, 8.00%, 5.00%, 1.30%.
2011
15.77%, 3.52%, 1.67%, 1.17%
The current guidance for sequential subscriber growth rates now looks like this.
2011
15.77%, 3.52%, 1.73%, -.65%
These subscriber numbers are not surprising, and actually I expected a marginal drop off due to a very challenging environment.
VALUATION:
Attractive at these price levels.  I just reviewed NFLX and AMZN results the last couple of days.  Those results compared to ACOM look terrible and the stocks are still overvalued even after their selloffs.  I have ACOM trading at a forward P/E ratio of 12.78, which is the lowest this stock has seen in the last two years. I have a price target in the 40's.
TECHNICALS:
ACOM has shown support in the low 20's area over the last six weeks time period.  Below is a weekly chart of ACOM.  The stock is very over sold on a weekly basis.  

Bottom Line:  Although the company achieved bottom line results by managing a lower G&A line and tax rate, these results are good comparatively to other consumer oriented stocks, and I believe the stock has already discounted the subscriber drop off rates going forward.  The company has announced a 50 million dollar share buyback also, and could seek an existing credit facility for the buyback.  The company had cash of around 46 million, end third quarter. Buying in the low 20's makes sense if you plan on holding the shares for a while.  

Contact: 586-431-8000

Fed Announces "Operation Twist"

So what is "Operation Twist"?  Basically the Fed will buy 400B worth of longer dated bonds and fund the purchase by selling an equal amount of bonds with the maturity of 3 years or less to fund that purchase.  This will all be done prior to June 2012.  The feds balance sheet will not expand as it did during the release of QE1 and QE2 (quantitative easing).  Bonds in the range of 6 to 30 years will be purchased, and an equal amount of bonds 3 years and under will be sold, all in the hopes of stimulating the housing market.
How did bonds react after the announcement of this stimulus package.  Below is the 10 year bond TLT.

Unlike QE1 and QE2, this stimulus package does not look to benefit stocks and commodities.  Under QE1 & 2, the feds balance expanded by purchasing mortgage backed securities and treasuries, and the liquidity found its way into stocks, commodities and bonds worldwide.  I don't see this stimulus as being as equity friendly as the prior two stimulus packages, that did not see a rapid economical improvement anyway.  

Bottom Line:  I believe the Fed Reserve is out of ideas to stimulate the economy and chose now to focus solely on the housing market.  I am not sure what another 50 basis points lower will do to spur the housing market.  Also, unlike QE1 and QE2, this package will not have a direct effect on stocks or commodities, but should lift longer maturing bonds (lower yields) in an effort to boost the housing market.  I expect stocks to be under pressure in the near term based on the makeup of this stimulus package.  Thank you for stopping by.

Macro Data

We have an important week ahead for the markets with these reports to consider.
* ISM data on Tuesday
* Jobless claims on Thursday
* President Obama speech Thursday evening 7 p.m.(His latest proposal to create jobs and boost the economy).
There are fewer safe havens to preserve assets globally at the present time. Below is a chart of Germany's DAX index.  Germany is a top exporter of higher priced goods worldwide. What you see below is a market crash as the index is down approximately 30% from the high this year and has taken out the 2010 low today.

I have noticed a very tight correlation (markets that track each other) between Germany's DAX and the S$P 500 index.  So what is that correlation telling us now.  Below is a chart overlaying the two indexes.  Notice the recent skew today, or the fact that the correlation needs some catching up to do.  Is Germany's DAX index a leading indicator for US stocks?  It will be interesting to see how that correlation plays out in the coming weeks.

Finally just to show a comparison between 10 year bond yields today compared to the crash low yield of 2009.  Safety of capital is driving yields lower.

Bottom Line:  Markets around the world are on shaky ground as shown by the crash that has occurred with Germany's DAX index.  The 10 year bond yield shows a flight to safety also. The presidential address Thursday evening will have my attention to see if any new plans are in the works to create jobs and stimulate the economy. We have no positions above.  Thanks for stopping by.

The Stock Market Through Charts

The reason we look to the charts is to get an idea where stocks have been and what a potential scenario lies ahead for equities.  Even though we are intermediate to longer term investors, viewing charts can give us an edge on entering or exiting a position or hedging a portfolio in the short term need be.  So what are the charts showing us through mid week. Stocks have been consolidating recent gains over the last three days as shown below by a 60 minute chart of the S&P 500 index.

I talked about Fibonacci retracement levels before in this post Fibonacci Retracement.  The chart below shows that stocks have consolidated around the 38.2% level, which is typical Fib consolidation prior to a potential move higher. 

Bottom Line:  Charts are just one of many tools to help manage risk. Fundamentals and valuation are two other important areas of focus when analyzing individual stocks or the market as a whole.  This weekend I am going to dedicate a post to just the fundamentals of the market and where stocks are at present.  As always thanks for stopping by.

Market Capitulation?

Many characteristics of a market bottom were displayed today.  Highest volume day of the year, VIX fear index breaking higher, and bonds all moving higher at the same time. First lets take a look at the S&P 500 ETF (SPY).  This index traded the highest volume of the year.  Notice the high volume today.

The VIX index, also known as the fear index, rises when puts are purchased to protect portfolios.  As seen below this index rose 35% today.  Not quite as high as last years market correction, but still high.  I look at this index as a contrarian indicator.

Bonds moved higher yet again as investors move into a safe haven regardless of the low yielding return.  Below is a chart of the bond ETF (TLT) breaking higher for the year.

Bottom Line:  Just because these are the signals I look for in potential market bottoms, does not necessarily mean we are there yet.  But as always, there will be some stocks beaten down for little reason other than the overall market moving lower.  Thanks for stopping by.

DNDN 2nd Quarter Results

We held shares of DNDN back in May here Dendreon Preview before they reported 1st quarter results.  We sold the shares in after hours after they announced 1st quarter results for a small profit. I did not feel at the time that the guidance was particularly strong and they would struggle to meet 2nd quarter results, so we sold the shares. Today investors are fleeing the stock as 2nd quarter results missed revenue estimates.  Analyst were calling for 58M in revenues and the the company only produced 49M.  But also the company refrained from giving any future revenue guidance.  Below is a chart of DNDN with the after hours drop in share price of -61%.

Bottom Line:  Growth stocks that do not perform as expected will get sold off.  I wonder how many investors went into earnings holding shares without any option hedge or worse yet owned shares on margin.  For a small amount they could have bought put protection, and this sell off could have cost them next to nothing.

ACOM Second Quarter Results

Ancestry.com, (ACOM) posted second quarter results after the close yesterday.  They posted a modest top and bottom beat for the quarter, and guided modestly higher for the third quarter and year end revenues.  If there was a red flag with the results it would have to be the slower rate of subscriber growth estimated by the company through year end.  I'll touch later on that. Also, average cost per subscriber increased 10% sequentially to $81.73 from $74.04.  Churn increased to 4.6%, which is similar to the 2nd quarter churn increase in 2010, and that was expected.
Comparing sequential (q to q) subscriber growth rate of 2010 against 2011 you get these numbers:
2010
14.00%, 8.00%, 5.00%, 1.30%.
2011
15.77%, 3.52%, 1.67%, 1.17%
Notice the sequential drop off from a year earlier, there lies the issue and the sell off.  Granted the first quarter had a huge increase of 15.77%.
VALUATION:
Selling in the mid thirty range ACOM is selling at a discount to my price target of $46.00, and is selling at its prior forward p/e ratio of 22.23, similar to what I estimated after its fourth quarter results here ACOM Results.  ACOM also sells at a discount to NFLX which sports a forward p/e ratio of 39.12.
TECHNICALS:
The stock fell through the 50 dma with little effort and is testing the 200 dma today.  There is some support at around 34.50 area as shown below on a daily chart.  But technically, in the short term this is a broken stock.

Let's take a look at the weekly chart to get a longer term view.  Below the weekly chart shows strong support at around the 30.00 dollar level.

Bottom Line:  Am I a buyer here?  Maybe, in the low thirties for a longer term play, allocated properly in the portfolio.  The overall market first has to figure out the direction that it wants to go.  Another words, a healthy market will reward risk taking with growth stocks.  A market correction obviously will not. Thank you for reading 

Fibonacci Retracements Levels

Another tool I occasionally use is Fibonacci retracement levels.  Stocks or major indexes will often pull back or retrace a percentage of the previous move before reversing. These Fibonacci retracements often occur at three levels: 38.2%, 50%, and 61.8%. Actually, the 50% level really does not have anything to do with Fibonacci, but traders use this level because of the tendency of stocks to reverse after retracing half of the previous move. So what do the fibs say about our stock market in the near term?  Below is a chart of the S&P 500 with Fibonacci levels drawn over the chart. 

As seen above, stocks have retraced down to the 50% level and bounced higher off that level. Stocks could also be putting in a higher low if that is indeed the pullback level before moving higher.  The week ahead is important with many earnings reports being announced.  AAPL on Tuesday, and INTC on Wednesday and MSFT will report on Thursday.
 

Bottom Line:  This week will determine the near term direction of the market.  If using just Fibonacci retracement levels then we have to give a move up for stocks the benefit of the doubt, as they hit the 50% retrace and moved higher. A break below that 50% line then the 61.8% level becomes the next area of support. 

Contact: 586-431-8000
 

Correcting Market

My opinion on market direction has not changed, I still believe lower prices are ahead of us. The markets are oversold and have been due for a short term bounce (still has not occurred yet).  The fundamentals of the economy both in the US and particularly in Europe continue to deteriorate on an intermediate term basis.  The Greece debt crisis and the potential default are an overhang on the markets, as well as slowing growth and inflationary pressures worldwide.  Below is a chart of the S&P 500, and where I believe we may be headed in the near term, which is prior support or at least a 200 day moving average test.

A break of the prior support in March would be a negative for the technical picture, and would change the intermediate term picture to down trending, from its current up trend. The longer term trend has not changed yet, and continues trending higher.  

Bottom Line:  Plenty of people have already called last weeks low the bottom for this correction.  I am neutral to that assumption on a technical basis and feel there are plenty of risks to creating new equity positions today.  As usual, it should be an interesting week ahead.  Thanks for stopping by.  

 

Contact: 586-431-8000

Friday Recap

Stronger US dollar = weaker stocks.  Today the US dollar gained against the Euro and stocks closed lower. I wrote about this relationship here Weaker Dollar = Higher Stocks.  But now the opposite is happening, which is a stronger dollar is having the effect of pushing stocks lower.  Below is a chart that shows this non-correlated relationship.

The S&P 500 has broken prior support and is heading down to the 200 day moving average.  That should be a good test for this market.  Also at the 200 dma is another support low for this year.  A break of that level with the markets as oversold as they are, would be a big negative for stocks.

Bottom Line:  The markets are down -6.9% from this years high, but still higher for the year +1.47%.  In the short term the S&P 500 is very oversold, but I think a test of the 200 dma is in the works.  We would not be putting any cash to work until there are signs of a successful test of prior support (or 200 dma) or a confirmed trend reversal. Thank you for reading.

 

Friday Market Wrap

Economic news caught up with stocks this week.  It was quite a volatile day and week, stocks are now short term oversold, so I am expecting some consolidation at these levels.  The S&P 500 is trading below both the 50 and 100 day moving averages and just above a prior support low (per chart below), volume is above average, but not extreme. Holding that prior level of support is technically important.  If a break of that low, then I would expect a move lower to the 200 day moving average, which is another -4.7% down from today's close.

Bottom Line:  The major concerns are slowing growth, euro zone debt issues and emerging market inflation. The markets are oversold and due for a bounce or at the very least some consolidation at present levels.  A break of prior support, then I would get even more conservative by placing tighter stops to manage risk.  Thanks for stopping by.

 

Contact: 586-431-8000

Dendreon Preview

Dendreon has sales potential with their FDA approved product Provenge and also a potential pipeline.  First let’s take a look at a timeline table of key events that the company has accomplished to date.

March 30, 2011

Provenge treatment for late stage metastatic prostate cancer will be covered by Medicare. 

February 3, 2011

Dendreon announces the closing of convertible senior notes and raises 607M.  With the 277M as of the end of 2010, bringing the total to approximately 884M cash on hand.

April 29, 2011

FDA approves Provenge for the treatment of men with advanced prostate cancer.

The company will announce results for the first quarter Monday May 2^nd, and give guidance for the second quarter and remainder of the year.  The street is looking for revenues of 28.86M and a loss of -.70 eps.  The company is expecting full year 2011 revenue in the range of 350M to 400M and predicts that the majority of revenue will occur in the fourth quarter as their Los Angeles and Atlanta facilities come online.

A more important near-term focus for us will be second-quarter Provenge sales estimates.  The current consensus is for $59 million.  The second quarter sales will provide the most accurate measure of real patient  demand to date, given the FDA’s recent approval for the manufacturing capacity expansion at Dendreon’s New Jersey plant. 

Also of importance is when Dendreon reaches the 2,000th prescription for Provenge, forecasted by the company to occur in July.  If patient No. 2000 occurs before July, I will be more confident that Provenge is on track to meet 2011 revenue targets.  If patient number 2,000 comes later than July then the company may be behind full year revenue targets.   
What I am expecting:

A)    First quarter results in-line or slightly exceed analyst estimates of 29M, and the loss of -.70 eps.

B)    Looking for guidance of 2^nd quarter results slightly exceeding analyst estimates of 59M.

C)    See if the company guides us if patient 2,000 is likely to occur in July as previously announced.

D)    Year end revenue target of 350-400M.  Assuming that L.A and Atlanta are scheduled to come online.
Technically DNDN is just below resistance at around $44.00, a close above this area would be bullish for the stock. Below is a chart of Dendreon.

                                                                               

Weak Dollar = Higher Stocks

What's driving our stock market higher in the face of a recent slowdown in the economy? I wrote about this relationship back in 2009 here U.S. Dollar Weakness and the Markets. It's been obvious that the Fed Bernanke prefers a weak dollar to fuel a higher stock market. A weak dollar should also have a positive impact on our exports, as they become more competitive in the global market.  The downside to a falling dollar is inflation, which we see in oil, gas and food commodities. Below is a chart showing the inverse relationship that the falling dollar has with a rising stock market (S&P 500).

 

Bottom Line:  As long as the dollar keeps falling against other currencies we should see higher stock prices.  Most would prefer an economy that is improving on it's own merits, with tame inflation.  I would view any sustained strength in the dollar as an end to a higher stock market.

  

Contact:  586-431-8000

Volatile Markets

The markets recovered from earlier losses today as fears of Japan's nuclear reactors core was exposed for some time.  The S&P 500 was down -2.70% at the open this morning and finished down just -1.12% on the day with heavy volume.  The US stock markets have been resilient in spite of Japan earthquakes, middle east tension, and emerging market inflation fears.  Below is a chart of the S&P 500 fund (SPY).  It currently trades above support but below the 50 day moving average.

Bottom Line:  I will be watching the Japanese Nikkei Index stock market for any signs of recovery after a -20% sell off in just two trading days.  A bounce in Japan could bode well for US stocks in the coming sessions. 

 

Contact:  586-431-8000

Tuesday Update

Today was all about oil and the transportation index selling off.  Oil tends to spike for several reasons such as geopolitical concerns, the US dollar, and speculation are prime drivers that can move the oil market.  The transportation sector is highly impacted by the moves in the oil market.  Below is a chart of the oil index on top and the transportation index below.  As oil has made a new multi year high the transportation index has sold off hard, approximately -8.49% in just a few weeks.

Bottom Line:  Oil has been on a tare, and the transportation index is leading the market lower.  I think the market will be under pressure until the oil market pulls back.  Thank you for reading. 

ACOM Results

ACOM (Ancestry.com) reported fourth quarter earnings and gave guidance after the close today.  The report was better than I expected on several fronts and the stock was higher in after hours.

• Sequential subscriber numbers are estimated to increased by 10.75% in the first quarter of 2011 vs. recent quarter.
• Churn rate was 3.9% vs. prior September quarter of 4.0%.
• First quarter guidance was above estimates 86M to 88M vs. analyst guidance of 81M.
• ACOM expects 2011 total revenue at 372M vs. analyst estimates of 357M.
• The company expects 2011 full year subscribers to total 1.7M by the end of 2011, an annual increase of 22 %.
• 2011 revenue growth of 23% and earnings growth of 40% are solid numbers.

On a subscriber model comparison basis, I have ACOM trading at a forward 2012 p/e ratio of 21.29 vs. NFLX at 35.61, so at present prices ACOM is a good value.  Below is a chart of ACOM which has good support at the 50 day moving average, green line.

Bottom Line:  ACOM had a good fourth quarter report and guided revenues higher for the first quarter of 2011 and entire year.

Contact:  586-431-8000