Watch List: 7/2/09

At the end of this short week, here are the stocks that I have on my watch list.

The big change to this week list is the removal of H&R Block (HRB) which rose 9% after reporting their earning. H&R Block also will keep their dividend going steady into fiscal year 2010. H&R Block is now 23% off its low.
More companies were added than removed which tells me the market is turning bearish.

Let's take a look at the market.
The market closed the week lower by 2%. Upside momentum appears to be topping out and can't stay above RSI of 50. A head-and-shoulder pattern (bearish pattern) has formed and this week watch list confirms this bearish pattern. We'll have to see if I am right.


On May 18th, I wrote an article call "Quantitative Reasoning Behind Bear Market Rally" We may be in the resumption sell-off stage but we'll have to wait and see. For now, build up cash and begin research those companies on the above list. The market will give you an opportunity to acquire them near their low.

Art

Dow Theory & Coppock Curve

Today is the end of month and that means an update to the Coppock Curve. Last month, I wrote "Begin Accumulationg (With Caution): Coppock Curve" Noticed the word Caution! The market closed June slightly down or virtually flat from last month (8,500 > 8,447). While the Coppock triggered a buying signal, I wasn't too bullish because of the Dow Theory.

The recent non-confirmation in Dow Theory got me puzzled. The Transport was so close to confirming a bull market signal, but it failed. On May 6, the Transport closed at 3,404.11. The following June 11, it closed at 3,399.88. That is 0.12% off. How close can it get. The market also rallied in the face of bad news. Commodities prices appeared to have bottomed. Could the Dow Theory be wrong this time?

I got curious and began running the Coppock number on the Transport. I looked back since 1960 to see when is the best time to buy according to this indicator. Something very interesting appeared. We know that the Coppock Curve on the Industrial gave us a false alarm in 2001 and 2002 time frame. But cross checking the Coppock Curve of Industrial with Transport may reassure the buying signal. The table below shows the time a buying indicator was triggered. The green means it was time to buy and red was false alarm. Typical strong buy can be said when both averages gave a buying signal on the same month. One month lag occurred but proved to be the right signal. Two months lag occurred in 1975. A false signal happened during the tech bubble. According to this indicator, you would buy in April 2001 but the true signal didn't come until 2 years after. Using the Transport as a check, you would entered the market in January 2002. This goes to show that no indicator is perfect.



The below shows where we are. The Industrial gave us a buying signal at the end of May, but the Transport is still in the red zone. Buying signal is triggered when the curve become less negative than the previous month.



Summary
Since the end of May, the market went no where. The Coppock Curve for the Industrial remains bullish but the Transport is bearish. To be convinced that this isn't another false alarm, I will have to wait until the Coppock Curve for the Transport turn upward as well as a Dow Theory confirmation of the averages.

I remain neutral with 50% of my position in cash. The rest are in MO, HNZ, and CAH.
If you invest in index funds or mutual funds, be award of the market movement.

Art

Watch List: 6/24/09

Here are stocks that I have on my watch list.

One stock in particular I will look into is Matthews International. A quick glance shows a minimal downside risk with more potential for upside return. A detail research is needed prior to committing my hard earn money. It's best to start from this list of company approaching the 52 weeks low. Unlike Jim Cramer, the host of "Mad Money", who urged people to look for companies that is within 10% of 52 weeks high, I start with the low. There's nothing wrong with his approach except that it is best suited for trading and not investing. Believe me on this, I read all his books. I started out investing by following his teaching and it turned out to be much harder and less rewarding.

Thought on the Market

The market (Dow) seems be running out of steam. If the market cannot go up, it must go down. Money that flows out of the equity market often find its way into the bond market. In a typical pattern, bond price move up as stock retreat. But this is not occurring because our government is artificially propping up the market indirectly by issuing (selling) massive amount of bonds. As a result, investors are not going anywhere near the bond market because the risk-reward has changed. The charts below illustrates my point.

The Dow Jones Industrial Average collapsed in November 2008 and again in March 2009.

This is a chart of 30-Year US T-Bill. It is almost an inverse to the Dow Jones Industrial Average chart above. Noticed the spike in price as investor rushed in for safety.

We are at a strange point. Risk takers are afraid of jumping into the market after a 30% run. Those with profits in the market do not know where to place their money because the Government is selling the daylight out of their own bonds.

I don't try to get fancy in my investing anymore. I just focus on old school value investing. Start your research on companies from the list above. Those that are nearest to the bottom are great potentials.

Art

Market Checkup: Dow Theory Perspective

The market sold off heavily on Monday (6/22) and remain relatively flat on Tuesday (6/23). Regardless of what the headline news show, the market almost always discount the future.

The chart below shows the Dow Jones Industrial Average moving above its previous high. This is one part of the puzzle. Another part lies in the Transport Average. As long as both can move above its previous high, we are in the money.

The chart below is Dow Jones Transport Average. The Transport cannot move above its previous in May and thus leaving us with a non-confirmation of the bull market.

I expect the market to test the March low. Only time can tell if the market can hold that level. My personal opinion is that it will, but the market has proven me wrong many times. The strategy is then to build up as much cash as possible. When market approach the March level, be prepared to buy up quality name which I will provide on my site.

For those contributing to 401(k) and do not invest on your own, here is what I would advice. Lighten your contribution as the market move up (i.e. from 10% to 6%). Contribute more when market decline (i.e. from 6% to 10%). This is the most simple buy low sell high strategy.

Because the Dow Theory have proven to be the best market indicator that I know, failure to acknowledge this theory may be costly.

Charts and dividends are great. Unlike earnings, companies can't revise charts and dividend. Every minute that passed, a chart formation becomes historical and cannot be changed. Once are dividends are paid, a company cannot ask you to give back the money. On the opposite end, earning can be revise up or down. More often than not, they are revised down. This is why I favor charts and dividends.

Art

Time Tested Method: Value

If you read my recent posts, your impression may be that I am a short-term trader. Truth be told, I consider myself a value investor with long-term perspective. Lately, that "long-term" have been two to three weeks because the market allowed me to earn that rate of return in that time frame.

Although I can put on a speculative hat, I think it is not worth my time. Trading is not easy. I did everything from trading gold, miners, oil, financials, to options. The end result was a minimal return or big loss. Being a short-term trading is one of the most difficult occupations I know. I have an uncle who does day-trading in Hong Kong market. He said this to my dad last year "everyday is like a casino, your heart pounds faster than normal". That is not the mentality I want to live with.

But I began my investing life pursuing the "quick cash" and "fast money" which led me to trading, a method of buy and sell stocks in short period of time with disregard to their value. I learned to read charts and indicators. Along the way, I discovered the Dow Theory. Many of you may know it as technical analysis or simply charts reading. With detailed study, I found that Charles H. Dow, the founder of the Dow Theory, placed tremendous emphasis on value. Dow stated this back in 1901 "Stocks fluctuate together, but prices are controlled by values in the long run". Strange, isn't it.

Turns to current situation and we have a problem. Because the recent rally have been so big, I believed the market will move down. At the same time, I see companies that I believe to be undervalue, what do I do? I go out and buy them with a mental note that price may fall farther but their value will continue to grow, a positive divergence to those with money to withstand the downturn. To illustrate what I mean let's look at some charts.

Note: On the charts I wrote December, but it's actually November.

The first chart is the Dow Jones Industrial Average ($INDU). Noticed that we reached the November 2008 low at 7449. The market deteriorated in the following months and the Dow dipped to 6469 in March 2009.

Now turn your attention to the stock that I've been following closely over the past year. It is Carlisle (CSL). The stock reached a low point of 16.36 in November 2008. Something extraordinary happened after market continued to deteriorate. The stock reached a low point in March 2008 at 17.63. That is 7% higher than November.

Let's look at some stock we all know and can relate to, Intel (INTC). It is also a Dow Jones Industrial component so it is a great compare. Intel reached a November 2008 low of 11.84. In correlation to the Dow, the stock failed to move up and declined in February 2009. However, it reached a low of 11.95. Only 0.009% lower than in November.

Here is a chart of the All-American stock, General Electric (GE). The stock hit a low in November 2008 at 11.89. As economy deteriorated, no buyer stepped in to support the stock. It fell to 5.68 in March 2009. The most recent rally brought the stock back to the November low level only.

Summary

Value creates a floor in price. When price decline, smart money realized the value and they come in to buy the stock. Clear examples are in Carlisle and Intel. The opposite can be said about GE.

When you consider to purchase any type of investments, pay attention to the value not the price. In stock, you can look at price/earning, dividend yield, price/cash flow, and price/book. In real estate, it will be income ratio to mortgage, rental rate to mortgage, or cash flow projection.

Art

Portfolio Action

Yesterday, I wrote about Meridian Bioscience (VIVO) and said you can hold on to it. If you find an alternative to this stock, feel free to take the profit. After three months of holding, I took a net profit of 10% today. Don't get me wrong, I still love this stock but the risk-reward has changed.

I expect the stock to retrace some of the gain and provide me with an entry point.

Art

Technical Look (CSL, MO, VIVO, CAH)

Today, I took an initial position in Cardinal Health, Inc. (CAH) based on a recommendation from my friend at Dividend Inc. Please refer to his posting for some background on Cardinal Health.

Let's get into the technical look for several stocks that I've been following.

Carlisle Companies (CSL).

• 56.45% above 52wk low
• 2.5% yield
• 12.8 P/E
  

I've netted 20% in this position in about two months time frame. Because the stock possess a great technical pattern, it was easy for me to initiate a trade. Refer to my historical post here. The story is that Carlisle broke out of its $22 range, retested that level and never looked back. Today, the stock got as high as $26.29 but closed at $25.97. This action got me feeling bearish about this stock. Let's look at the one year chart below. I drew what's known as the Fibonacci retracement from the peak of $36.37 to the bottom of $16.36. The midpoint (50%) is $26.37, a key level. If Carlisle can break above this range, it will be very bullish for the stock. But for those who bought at breakout of $22.30, you are sitting on 16% gain excluding dividend.



Now, I've draw the same retracement line but from the bottom of $17 to the peak of $26.46. Something extraordinary is present here in the chart. The halfway (50%) is $21.77 ~ $22. This is where I'll be looking to get back if the stock retrace. If it doesn't, I already made 20% in two months.


If you long this stock, I suggest selling it.

Altria Group Inc (MO)

• 17.5% above 52wk low
• 7.4% yield
• 11.39 P/E

I wrote about the the "Ascending Triangle" on my last post. The stock could not hold the range and I am faced with tough decision to make, sell it or hold it. Another indication I use is the 200day moving average line. The stock is currently holding above that range. A hard judgment call has to be made and thus I will stick with what I believe to be a stronger indication, the 200day MA. If the stock break below it, I will sell all my holdings.


Meridian Bioscience Inc. (VIVO)

• 35.84% above 52wk low
• 3.6% yield
• 26.82 P/E
• !!!11.4 short ratio!!!

The stock had a tremendous run since I wrote about it on April 7th. The green arrow indicated my purchase. I didn't sell out of my position because I was comfortable enough to hold this stock through this downturn. Sure enough the stock turned and I am rewarded with some modest gain of 12%.
The stock is approaching its resistance point (blue line) so I'd be aware of that. The short ratio is big so this could be a short covering rally.


If you are long this stock, hold on to it. I am.

Cardinal Health, Inc. (CAH)

• 11.14% above 52wk low
• 2.3% yield
• 9.29 P/E

This analysis will be rather technical so stay with me. MACD is making a lower low while the stock made a double bottom (two blue arrows). I initiated a position today based on the fact that this company has a very strong fundamental, but was punished by the analyst after lowering their earning guidance. The green box shows an above normal selling and yet the stock did not test its previous low. Such strong price action plus amazing fundamental convinced me this is the next stock to own.

Here is some fundamental number behind Cardinal Health. The stock is currently trading at $30.84 or P/E of 9.29. Using the post split out figure from the company, Cardinal Health is trading at P/E of 12.76, below the P/E of 20.28 I have in my model. The dividend payment for 2009 is relatively safe because they are paying out 30% of their earning. My downsides risk is at $27 range.



The market sentiment and news headline may be bad, but stocks discount all future events. Today, we got a none confirmation of the Dow Theory. Yet, I took a position in Cardinal Health because as Charles Dow stated back in 1901 that "Stocks fluctuate together, but prices are controlled by values in the long run"

Art
Disclosure: Long CAH, VIVO, and MO. No position in CSL