Random Rants and Market Ideas by Brandonf
- Thread starter Brandonf
- Start date
...increase your risk to reward levels....
should this not be the other way round or "improve your reward versus risk" ?
Thank you
Maria
The market is getting interesting here.
I think we are starting to see an intermediate term top being put in. Leadership has fallen, AAPL and GOOG for example.
To me the most important indicator in the market is my lists. Each night I scan and on the left side of piece of paper I put the longs down, and on the right side the shorts. When the market is healthy the left side of the paper is stacked with names of stocks that are breaking out, have the potential to breakout and pullbacks from uptrends. Unfortunatly that is not the case any more. The left side of the page is filling up with names that have downside potential, and those names are working out. This is how you let the market speak to you.
I am also not happy so far with the new guy at the Fed. You see he thinks things are different this time. That he can invert the yield curve, and nothing with happen. I think he is off to a rather auspicious start.
On the upside it is notable that the Oil Services put in a trap today, they might have a few days of upside in them now. DO and SLB are the strongest names over there. The only other name on the upside that is getting a lot of interest from me at this point is TRLG. It has been holding up very well and building a new base. A move above $23 will have me in it.
One of the biggest signs of weakness is when a stock comes out with "good news" and can not rally on it, or it gaps up strongly but sells off that gap all day. Home Depot has a sharp earnings reversal, and I would guess a top has been put in there. People have been waiting on news from MRK related to a lawsuit for some time now and that was resolved very favorably for the company. MRK gapped up nicely on that news, but then it sold off very sharply. Again it likely has more downside. IF a stock can not go up on good news, what do you think will happen when there is bad news?
The semi's are very weak and if it continues I suspect they will drag the Nasdaq down further. The Nasdaq 100 is very weak already. TXN, INTC, AMAT, and BBBY have nice short patterns.
I also think you want to keep an eye on banks, specifically savings and loan type regional banks. They have recently been very strong, but this will not continue with the inverted yeild curve. A major, important top could easily be put in there.
At the start of the year I was very bullish and did quit well with it. My early impression was that we were setup nicely to have strength through the course of the year. I am not so sure about that now as things are not coming together how they should. I do not want to "call" for a major top in the market here, long term prognostications are not my thing, I dont even know what I am having for breakfast in 20 minutes, but you should be on your toes here and playing defense.
Brandon
I think we are starting to see an intermediate term top being put in. Leadership has fallen, AAPL and GOOG for example.
To me the most important indicator in the market is my lists. Each night I scan and on the left side of piece of paper I put the longs down, and on the right side the shorts. When the market is healthy the left side of the paper is stacked with names of stocks that are breaking out, have the potential to breakout and pullbacks from uptrends. Unfortunatly that is not the case any more. The left side of the page is filling up with names that have downside potential, and those names are working out. This is how you let the market speak to you.
I am also not happy so far with the new guy at the Fed. You see he thinks things are different this time. That he can invert the yield curve, and nothing with happen. I think he is off to a rather auspicious start.
On the upside it is notable that the Oil Services put in a trap today, they might have a few days of upside in them now. DO and SLB are the strongest names over there. The only other name on the upside that is getting a lot of interest from me at this point is TRLG. It has been holding up very well and building a new base. A move above $23 will have me in it.
One of the biggest signs of weakness is when a stock comes out with "good news" and can not rally on it, or it gaps up strongly but sells off that gap all day. Home Depot has a sharp earnings reversal, and I would guess a top has been put in there. People have been waiting on news from MRK related to a lawsuit for some time now and that was resolved very favorably for the company. MRK gapped up nicely on that news, but then it sold off very sharply. Again it likely has more downside. IF a stock can not go up on good news, what do you think will happen when there is bad news?
The semi's are very weak and if it continues I suspect they will drag the Nasdaq down further. The Nasdaq 100 is very weak already. TXN, INTC, AMAT, and BBBY have nice short patterns.
I also think you want to keep an eye on banks, specifically savings and loan type regional banks. They have recently been very strong, but this will not continue with the inverted yeild curve. A major, important top could easily be put in there.
At the start of the year I was very bullish and did quit well with it. My early impression was that we were setup nicely to have strength through the course of the year. I am not so sure about that now as things are not coming together how they should. I do not want to "call" for a major top in the market here, long term prognostications are not my thing, I dont even know what I am having for breakfast in 20 minutes, but you should be on your toes here and playing defense.
Brandon
I am currently flat, however there are a few names standing out, suprisingly it is on the long side.
One name in particular I like right now is Garmin (GRMN). I am first a market technician, so I always start off looking at charts. This particular stock has a strong breakout on the weekly chart with todays gap up. I have found that large gaps have a strong tendancy to continue in the direction of the gap, so if the stock can hold up in the first several minutes of the day, resist the natural tendancy to fill in a gap, then you are often onto a winner. If GRMN can manage to hold its gap I will then look for intraday entries to get into my swing trade. The reason I do this is that it allows me to take a small amount of risk on the trade, but have a large potential payout. My risk occurs intraday, my potential for reward occurs on the longer term chart. That is a pretty nice position to find yourself in.
Once ID a name with strong technicals I then want to see that the stock has strong fundamentals. I think that both are important. Garmin has nice ratings. It has an EPS of 92, which means it has been growing its earnings at a better rate than 92% of all the companies on the exchanges. Last qtr ESP was up 52%, while sales increased by 30%. The qtr before that EPS was up 31% while sales increased by 39%. Seeing the sales and EPS numbers close together is something that is important to me. I am always suspect of a company that grows earnings 100% by increased revenues by 10%. It is not sustainable and so it is not worth paying a premium for in most cases. Garmin also has a reasonable PE ratio for its growth rate. Although many people insist that the PE is not something you should use, I find it to be a very good secondary type indicator. PE is a volatile gauge, but a low one provides you a good bit of leverage.
Let me give you an example of this. Lets say you have two companies that have EPS of $1.00 per share. Both are growing EPS at 30%, so next year they will each earn $1.30. ABC is a relatively well known company and has a growth PE of 28, while XYZ is a relatively unknown leader in the same group. Because it is unknown it has a PE of 12. ABC is then trading at $28.00 per share while XYZ is at $12. Lets assume that XYZ now gets an analyst to start watching it, or some large funds start to buy in. This will increase the PE in most cases. Next year ABC's PE is still stable, we will call it 28 again, while XYZ, because of the heavy interest it has had since it was "discovered" has seen its PE climb to 16. ABC will then be trading for about $36.40 next year, while XYZ will be trading for $20.80. In one case you gained 30% for a stock, in the other your stock was up over 73%. This occured with the same EPS and EPS growth, but the PE gave you leverage with XYZ.
Now this is obvisously a simplification..but hopefully you get the general idea.
Brandon Fredrickson
One name in particular I like right now is Garmin (GRMN). I am first a market technician, so I always start off looking at charts. This particular stock has a strong breakout on the weekly chart with todays gap up. I have found that large gaps have a strong tendancy to continue in the direction of the gap, so if the stock can hold up in the first several minutes of the day, resist the natural tendancy to fill in a gap, then you are often onto a winner. If GRMN can manage to hold its gap I will then look for intraday entries to get into my swing trade. The reason I do this is that it allows me to take a small amount of risk on the trade, but have a large potential payout. My risk occurs intraday, my potential for reward occurs on the longer term chart. That is a pretty nice position to find yourself in.
Once ID a name with strong technicals I then want to see that the stock has strong fundamentals. I think that both are important. Garmin has nice ratings. It has an EPS of 92, which means it has been growing its earnings at a better rate than 92% of all the companies on the exchanges. Last qtr ESP was up 52%, while sales increased by 30%. The qtr before that EPS was up 31% while sales increased by 39%. Seeing the sales and EPS numbers close together is something that is important to me. I am always suspect of a company that grows earnings 100% by increased revenues by 10%. It is not sustainable and so it is not worth paying a premium for in most cases. Garmin also has a reasonable PE ratio for its growth rate. Although many people insist that the PE is not something you should use, I find it to be a very good secondary type indicator. PE is a volatile gauge, but a low one provides you a good bit of leverage.
Let me give you an example of this. Lets say you have two companies that have EPS of $1.00 per share. Both are growing EPS at 30%, so next year they will each earn $1.30. ABC is a relatively well known company and has a growth PE of 28, while XYZ is a relatively unknown leader in the same group. Because it is unknown it has a PE of 12. ABC is then trading at $28.00 per share while XYZ is at $12. Lets assume that XYZ now gets an analyst to start watching it, or some large funds start to buy in. This will increase the PE in most cases. Next year ABC's PE is still stable, we will call it 28 again, while XYZ, because of the heavy interest it has had since it was "discovered" has seen its PE climb to 16. ABC will then be trading for about $36.40 next year, while XYZ will be trading for $20.80. In one case you gained 30% for a stock, in the other your stock was up over 73%. This occured with the same EPS and EPS growth, but the PE gave you leverage with XYZ.
Now this is obvisously a simplification..but hopefully you get the general idea.
Brandon Fredrickson
Brandon, just a short note to let you know I really enjoy your thinking and analysis. Great stuff.
I have no idea where you find the time to do all you do. Honestly. Its a mystery to me. Cheers.
ps hope your back is better
I have no idea where you find the time to do all you do. Honestly. Its a mystery to me. Cheers.
ps hope your back is better
True Religion Apparel Inc (Nasdaq: TRLG) designs and sells high end denim for men and woman (http://www.truereligionbrandjeans.com/Womens_Micky_Big_T__Medium_Miner/pd/p/90454943.html).
The process I use to find investment and trading ideas starts off with technical analysis. At the start of this year I was looking at stocks breaking to new highs and came across True Religion as it was breaking above $18.00 per share. The technicals, however, are only part of the equation, I want to be sure I am buying companies that have substance to back up the price movement. True Religion has substance.
The company has an EPS rating of 76 according to Investors Business Daily. Its earnings growth has been stratospheric, seeing growth of 560% in Sept 05, 800% in June 05, over 1000% in both March of 05 and December of 04. This growth has occured along side of solid sales growth, 376% in Sept of 05, 442% in June of 05 etc. Many times a company will experiance high EPS growth but unimpressive sales growth, this is always a red flag because you can only cut costs so much. Earnings growth that is fueled by rapidly accelerating sales though tends to lead to good things.
True Religion managment has a substantial position in the company. In fact 43% of the float is owned by insiders. This is, to me, a very favorable thing. I like to see that the managment of a company is substantially invested in the performance of that companies stock. Its much like my money managment business, my investors are happy to know that aside from my house my entire net worth is in my account. While managment owns a substantial portion of the float, the stock remains relatively unknown to major Wall Street players, with mutual funds owning only 15% of the float and banks owning 7%. This under ownership keeps the stock fairly cheap, with a price to earnings ratio of 28. The company just listed on the National Market, having been on the pink sheets until August, and sales are just under $100million. Both of these factors are currently keeping funds and banks at bay, but I do not suspect they will remain on the sidelines for too long.
The company has NO long term debt, and a return on equity of 100%. This is a very effecient, lean and mean type company. All of their clothing is manufactured in the United States and they have SUBSTANTIAL back orders. This means that the growth is piling up and likely to continue. I went to Willow, a local high end retailer in Sarasota that sells True Religion apparel and the sales manager there told me that when they get a shipment in it sells out very quickly, and then it takes some time to get a new one in because True Religion is getting so many orders.
Currently I am long TRLG from $18.15, $20.30 and $23.00. I plan to add more to the stock on fresh setups, and I currently plan to hold the stock for some time. Currently my trailing stops are under $20.00.
The process I use to find investment and trading ideas starts off with technical analysis. At the start of this year I was looking at stocks breaking to new highs and came across True Religion as it was breaking above $18.00 per share. The technicals, however, are only part of the equation, I want to be sure I am buying companies that have substance to back up the price movement. True Religion has substance.
The company has an EPS rating of 76 according to Investors Business Daily. Its earnings growth has been stratospheric, seeing growth of 560% in Sept 05, 800% in June 05, over 1000% in both March of 05 and December of 04. This growth has occured along side of solid sales growth, 376% in Sept of 05, 442% in June of 05 etc. Many times a company will experiance high EPS growth but unimpressive sales growth, this is always a red flag because you can only cut costs so much. Earnings growth that is fueled by rapidly accelerating sales though tends to lead to good things.
True Religion managment has a substantial position in the company. In fact 43% of the float is owned by insiders. This is, to me, a very favorable thing. I like to see that the managment of a company is substantially invested in the performance of that companies stock. Its much like my money managment business, my investors are happy to know that aside from my house my entire net worth is in my account. While managment owns a substantial portion of the float, the stock remains relatively unknown to major Wall Street players, with mutual funds owning only 15% of the float and banks owning 7%. This under ownership keeps the stock fairly cheap, with a price to earnings ratio of 28. The company just listed on the National Market, having been on the pink sheets until August, and sales are just under $100million. Both of these factors are currently keeping funds and banks at bay, but I do not suspect they will remain on the sidelines for too long.
The company has NO long term debt, and a return on equity of 100%. This is a very effecient, lean and mean type company. All of their clothing is manufactured in the United States and they have SUBSTANTIAL back orders. This means that the growth is piling up and likely to continue. I went to Willow, a local high end retailer in Sarasota that sells True Religion apparel and the sales manager there told me that when they get a shipment in it sells out very quickly, and then it takes some time to get a new one in because True Religion is getting so many orders.
Currently I am long TRLG from $18.15, $20.30 and $23.00. I plan to add more to the stock on fresh setups, and I currently plan to hold the stock for some time. Currently my trailing stops are under $20.00.
Thursday saw more selling, with the Dow Jones losing 68 points, the Nasdaq Composite losing 3.85 and the S&P500 lost 4.88 points. Our market leaders, the S&P400 Midcap Index and the S&P600 Small Cap index also pulled back slightly, the S&P600 lost 0.62 points, while the Midcap index lost 2.15 points. Volume decreased slightly on both exchanges, coming in at 2.15billion shares on the Big Board and 1.83 billion shares on the Nasdaq. Pullbacks on light volume tend to not be anything to worry about, however I have been seeing some slow deterioration "underneath the surface" of the stock market and am still playing things very cautiously.
We are starting to see more days with decliners leading advancers, fewer and fewer leading stocks are breaking out of sound bases and we are starting to see more failures of breakouts. Additionally we are starting to see more stocks react in a negative manner to "good news", two recent examples being HD and MRK. If stocks go down on good news, what do you suspect will happen when the news is not so bright and sun shiney? We are seeing a major divergance start to develop between the Nasdaq 100 and the Nasdaq Composite, we now have a series of lower lows and highs in the Nasdaq 100 and the Semi Conductors are being held down by names like TXN and INTC and that index is close to breaking key support. I have always subscribed to the notion that the Semi's are more important than most sectorsand it is a key group to watch in techsville. One of the only positives I see right now is that mutual fund inflows are at up to levels not seen since 1999/2000. The stock market is the biggest Ponzi scheme in the world, and if there are significantly more inflows than outflows things will hold up, but the market often makes the crowd wrong at key times, so don't let the inflows convince you to lay back on the beach with a drink.
Looking at buying opportunities I like Korea Fund (KF) and some Transports (LSTR for example) and Dress Barn (DBRN) here. As anyone who has followed me for some time is well aware I am very bullish on the developed Asian markets, specifically Japan. Korea, however, also has many of the same positive factors going for it as Japan and should not be ignored. Warren Buffet has recently been taking major positions in Korea, and that country stands to be a major benificiary as Asia industrealizes.
With out a doubt though my favorite potential trade is a short in the Beamer (IBM) if it breaks under $80. IBM has been putting out financial statements that I dont think Einstien could understand and there are a lot of rumors of aggressive accounting floating around as it relates to this stock. One thing that really stands out to me is that for the last 3 quarters in a row IBM has reported substantial inceases in earnings with declining revenues. Dec 05 saw EPS increase 26%, while sales declined 12%, Sept 05 saw a 22% gain in EPS along side an 8% decline in sales, and June of 05 saw sales decline 4% and EPS increase 11%. The last time IBM saw an increase in sales was a 3% gain posted in March of 05. Hardly the stuff of legend! What I really dont understand is how a company can continue to lose market share as seen by declining sales, but increase EPS. Just speaking for myself, I know that when TFMS loses a client (revenue) our profits shrink too, and I can not imagine that IBM has found a way to escape this basic reality of business. Technically (you know charts..vodoo, black magic) IBM will spring a trap by trading under $80 per share. If it breaks this level I will be short a good sized position. The Beamer has recently shown a lot of relative weakness, ie: when the market would rally IBM has not played with the crowd, and I would suspect that once this trap springs there is going to be good downside in IBM with limited risk.
A few other names to keep you occupied. On the long side continue to watch TRLG, its my favorite company and 3rd favorite stock right now, LSTR, IFN, KF and SEAB. Shorts are starting to look more attractive than longs overall, but I am still playing both sides of the market at this point. Aside from IBM a couple other stocks that stand out to me include AMZN, BBBY, YHOO, PD, MRK, KOMG, DELL and HD..
We are starting to see more days with decliners leading advancers, fewer and fewer leading stocks are breaking out of sound bases and we are starting to see more failures of breakouts. Additionally we are starting to see more stocks react in a negative manner to "good news", two recent examples being HD and MRK. If stocks go down on good news, what do you suspect will happen when the news is not so bright and sun shiney? We are seeing a major divergance start to develop between the Nasdaq 100 and the Nasdaq Composite, we now have a series of lower lows and highs in the Nasdaq 100 and the Semi Conductors are being held down by names like TXN and INTC and that index is close to breaking key support. I have always subscribed to the notion that the Semi's are more important than most sectorsand it is a key group to watch in techsville. One of the only positives I see right now is that mutual fund inflows are at up to levels not seen since 1999/2000. The stock market is the biggest Ponzi scheme in the world, and if there are significantly more inflows than outflows things will hold up, but the market often makes the crowd wrong at key times, so don't let the inflows convince you to lay back on the beach with a drink.
Looking at buying opportunities I like Korea Fund (KF) and some Transports (LSTR for example) and Dress Barn (DBRN) here. As anyone who has followed me for some time is well aware I am very bullish on the developed Asian markets, specifically Japan. Korea, however, also has many of the same positive factors going for it as Japan and should not be ignored. Warren Buffet has recently been taking major positions in Korea, and that country stands to be a major benificiary as Asia industrealizes.
With out a doubt though my favorite potential trade is a short in the Beamer (IBM) if it breaks under $80. IBM has been putting out financial statements that I dont think Einstien could understand and there are a lot of rumors of aggressive accounting floating around as it relates to this stock. One thing that really stands out to me is that for the last 3 quarters in a row IBM has reported substantial inceases in earnings with declining revenues. Dec 05 saw EPS increase 26%, while sales declined 12%, Sept 05 saw a 22% gain in EPS along side an 8% decline in sales, and June of 05 saw sales decline 4% and EPS increase 11%. The last time IBM saw an increase in sales was a 3% gain posted in March of 05. Hardly the stuff of legend! What I really dont understand is how a company can continue to lose market share as seen by declining sales, but increase EPS. Just speaking for myself, I know that when TFMS loses a client (revenue) our profits shrink too, and I can not imagine that IBM has found a way to escape this basic reality of business. Technically (you know charts..vodoo, black magic) IBM will spring a trap by trading under $80 per share. If it breaks this level I will be short a good sized position. The Beamer has recently shown a lot of relative weakness, ie: when the market would rally IBM has not played with the crowd, and I would suspect that once this trap springs there is going to be good downside in IBM with limited risk.
A few other names to keep you occupied. On the long side continue to watch TRLG, its my favorite company and 3rd favorite stock right now, LSTR, IFN, KF and SEAB. Shorts are starting to look more attractive than longs overall, but I am still playing both sides of the market at this point. Aside from IBM a couple other stocks that stand out to me include AMZN, BBBY, YHOO, PD, MRK, KOMG, DELL and HD..