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

Behavioral Finance

"Buy on the Rumor:" Anticipatory Affect and Investor Behavior

 

I'm citing an interesting behavioral finance article here, "Buy on the Rumor".   

The traders’ aphorism “buy on the rumor and sell on the news” (BRSN) describes a strategy for exploiting a frequently observed financial market price pattern.  This pattern (BRSN) is characterized by security prices rising prior to and falling subsequent to positively anticipated events.  Security prices are, paradoxically, often observed to decline following an event outcome that is equal-to or better-than “expectations.”  We argue that investors’ expectations of rewarding event outcomes are inflated by a neuro-affective biasing process.  A disproportionate number of positively anticipated events will yield disappointing event outcomes.

Investors often gamble both on an event outcome and on the anticipated price appreciation as a result of that positive outcome.  Anticipation of reward generates a positive affect state.  Positive affect motivates both increased risk-taking and increased purchasing behaviors.  As the anticipated potential reward approaches in time, investors’ positive affect is increasingly aroused.  Following the delivery of an expected reward, investors’ affect regresses to neutral.  This post-event net decrease in positive affect leads to more risk-averse, protective investing behaviors such as selling (consummate with the new, less positive, affect-state).

Many naïve investors are not aware that a positive event outcome does not necessarily cause security price appreciation.  Naïve investors may be surprised by their high levels of risk exposure when the euphoric affect that guided the accumulation of their high-risk positions dissipates following the event.  Their diminished euphoria motivates increased caution (risk aversion) and investment re-positioning (selling) of high-risk positions.  In this market environment, a general increase in selling causes negative price pressure.  Price decline alone augments investors’ negative affect and increases risk aversion. 


Gold Makes Yearly Highs

Throughout the year I have been writing about the merits of having gold in your portfolio here Gold. Last week gold made a new high for the year as shown below by the gold fund (GLD).  Not only has gold made a new high for this year, it has outperformed stocks by a wide margin.  Below is a year-to-date chart of the gold fund GLD.

I still do not think it is too late to be holding gold in the portfolio.  As long as central banks worldwide are on a mission to debase their currencies gold should have an allocated position in portfolios as a hedge against inflation and currency weakness.  Thank you for reading.

 

Employment Report

This morning the BLS (Bureau of Labor Statistics) reported an increase of 431,000 jobs in May.  411,000 of those jobs were temporary workers for Census 2010. Headline unemployment fell .2% to 9.7%.  So only 20k jobs were created excluding the 411k census workers who will be let go over the next two months.  This job report really challenges the notion that we are in a recovery, and now we'll have to consider the potential for a double dip recession occurring in the future. The jobs report coupled with the news out of Hungary, the Prime Minister of Hungary says Hungarian economy is in a "very grave situation and talk of a default is not an exaggeration", was enough to send the S&P 500 down -3.44% on the day. I recently wrote that I am not in any hurry to be buying stocks with the risks present.  I believe we will test the yearly lows again, and break through that level in the coming days or weeks ahead.  
Below is where I think the market is heading in the near term, the 950 level for the S&P 500 which is 10.7% lower then today's close.  At those levels stocks will present a better risk / reward opportunity to hold for an extended period of time then they are today.  Thank you for reading.

 

Tested Support Successfully

I wrote about the S&P 500 February yearly low support level of 1044.  Today we tested that level and preceded to bounce off quite hard to finish at 1074.  Click chart to view.

Testing support levels and bouncing off of them can be seen as a bullish sign and higher prices to come in the days or weeks to follow.  I expect to see a short rally (few days to weeks) then a resumption of the downtrend and the possibility of taking out the year low of 1040, so I don't feel the urgency to be buying stocks just yet.  Thank you for reading.
 

Buying the Dips

Since the March 2009 low, there have been 3 market corrections, with the current correction being -13.43%, high to low from April 26th to May 21st.  Buying the dips has been a very profitable strategy so far during these corrections as the market has made new highs later.

As long as we do not breach the 2010 low on the S&P 500 of 1044 the upward trend could still be maintained.  We are currently 3.95% higher from that yearly low.

At this time, the market pullback has created some potential opportunities in beaten down stocks.  Any buying of stocks will have to be done with risk controls in place in case the selling continues. Overall, I do feel there could be more downside for stocks in the weeks to come.  Thank you for reading.