Friday, July 21, 2017

Market update: biotechs surge to new highs

Biotechnology stocks ($DJUSBT) are among the best performing stocks since the beginning of June with an approximate 16% gain over the past seven weeks. It's not unusual for biotechs to remain on a tear for an extended period of time so pullbacks should be considered for entry. The rising 20 day EMA is one such level to consider after a bout of selling as the weakness from late June into early July demonstrated.

 The group is in breakout mode again with signs pointing to higher prices ahead. However, the DJUSBT is overbought once again so consider an upcoming pullback to test the rising 20 day EMA, currently at 1876, to be a solid entry level. Price support near 1910 should also encourage buyers.

Friday, March 31, 2017

Market update (31 March 2017)

The major indices are doing extremely well.

Now let's discuss the five areas where we had warnings in 2007:

1. The weekly MACD could not be any stronger.  It has been rising with each price breakout, suggesting that momentum is accelerating, not weakening as it was in 2007.

2. There clearly have been no price violations.  If anything, the S&P 500 consolidated from 2014 to mid-2016, before breaking out in a big way post-Brexit, then again after the November U.S. presidential election.

3. The XLY:XLP ratio has been climbing nicely over the past year - much different than what we saw in 2007 - but we haven't cleared the 2015 relative high.  A breakout above that level would be extremely bullish.

4. Transports vs. utilities have also increased significantly since November, a good sign, but we haven't seen this ratio clear its early 2015 high and the ratio has been falling in 2017 thus far.

5. The RUT:SPX ratio has been declining since 2014, but it's very strong for the past year.

The absolute price action on major indices is very strong and relative price action continues to support a higher S&P 500 in 2017.  Breakouts on the above key relative ratios would add confirmation to this belief while deterioration in these ratios going forward would be warning flags to be confirmed by price breakdowns.

Wednesday, March 15, 2017

Market update: Federal Reserve hikes short-term rates by 0.25% (15 March 2017)

  • The Federal Reserve followed through on its well-telegraphed intention to raise interest rates on Wednesday, hiking short-term rates by 0.25%, or 25 basis points. The new target for the fed funds rate is 0.75% to 1%.
  • The policy statement cited the strengthening labor market and improving economy as reasons for the hike. But it noted the pace of expansion is just “moderate.”

More notably, the Fed still believes that three rate hikes are appropriate for 2017, relieving investors' fears that the central bank could begin setting the groundwork for a fourth hike. The major averages started the day in the green thanks to a bullish sentiment in the crude oil market and climbed to new session highs in the afternoon following the FOMC decision.

Sunday, March 5, 2017

Happy Birthday S&P 500!

The world's biggest stock index turned 60 on Saturday with almost $2.4T indexed to it. It's widely regarded as the most accurate gauge of large-cap American equities since it's weighted by market capitalization, as opposed to the Dow, which is weighted by price, or other indexes, which have an equal weighting.

Best chart patterns : Cup with handle

(source: IBD: 1/05/2017)  The cup-with-handle chart pattern is to serious investors what the single is to a baseball fan. It's the starting point for scoring runs and winning the investing game.

Among the eight principal base patterns — including the flat base, double bottom, saucer, base on base, ascending base, IPO base, and high, tight flag — the cup with handle remains to this day one of the most successful.

Why? Simple. Over the centuries, human nature hasn't changed. Greed, fear, hope, despair and other emotions drive stock prices. So do the laws of supply and demand.

This is why sifting through the charts of the market's greatest winners is time well worth spent.

As you'll see, the general shape of the cup with handle and other critical chart patterns appear over and over again. That's why they give the prepared investor an edge in the stock market. (You can sift through more than a century of history among the greatest stock market winners by going to the fourth edition of William O'Neil's classic, "How To Make Money In Stocks," and studying Chapter 1.)

So let's dissect this base. This is something you should know inside out. You need to know if that cup with handle is as it should be, or if it has flaws.

Basic Characteristics

The stock needs to show a 30% uptrend from any price point, but it must be before the base's construction. Or, the stock must show a minimum 20% increase from a prior breakout.

The cup with handle must be at least seven weeks long. If there is no handle, then the cup itself must stretch a minimum six weeks.

The handle alone needs at least five days to form, but it could go on for weeks. Make sure it doesn't exceed the cup portion in time or size of decline. A good cup with handle should truly look like the silhouette of a nicely formed tea cup. The handle always shows a smaller decline from high to low; it represents a final shakeout of uncommitted holders, sending those shares into sturdier hands in the market.

In most cases, the decline from high to low should not exceed 8% to 12%. During bear markets, some good cup with handle bases show a large, double-digit decline within the handle. But again, it should not exceed the drop within the cup.

The handle usually begins with a down day in price. Be aware that the handle itself, which must stretch for a minimum five trading sessions, can morph into a base of its own in certain cases. That's not a problem; it's often a stock's way of offering a buy point that's clearer or lower than that suggested by the larger pattern.

Must Be High Enough

The handle should form in the upper part of the entire pattern. If it's too low, it's flawed.

One way to check if that handle is proper: use the simple midpoint test. Add the highest price and lowest price within the handle and divide by 2. That number should be greater than the midpoint of the actual base itself.

Let's take the cup with handle fashioned by Baidu (BIDU) (see the chart below) in 2007. In the cup base, the high was 134.10 and the low was 92.80. Add the two prices together and divide by 2 and you get a base midpoint of 113.45. The handle showed a high of 132.80 and a low of 120.25, and its midpoint of 126.53 easily exceeded the cup's midpoint.

The handle should also show a downward slope along at least a portion of its price lows, not an upward one.

An upward-sloping handle is flawed; it represents weak demand as new buyers move into the stock at a trickling pace. During the stock's actual breakout, you want to see a new wave of buyers coming in at a torrid pace, not a trickling one.

Also, a steep, high-volume decline should put you on alert. You don't want to buy a stock that institutional investors couldn't wait to unload at any price.

The cup should form smoothly, without major price declines on the left side. Sharp gains on the right side aren't necessarily good, either. You might think that the opposite of a panic-driven exit would be a good thing. Likely not.

Avoid Deep Bases

Try to limit your picks to cups that are no more than 30% or 33% deep, except for those built during a bear market. In that case, an exceptional growth stock can fall 40%, 50% or more and still make a successful breakout.

Still, shallower is better. It shows that the big hands are catching the stock.

Look for volume to dry up along the lows of the base. Volume should be light in the handle, too.

Tighter price action is better. This is true of almost all bases. A loose, choppy base shows the stock needs to go far for price discovery. If institutions are holding on to the stock, it won't fall too far.

The Buy Point

This, of course, is where all the above parameters lead if they appear correctly. The buy point from a cup-with-handle base appears at the highest point of the handle, plus 10 cents.

In the case of former big winner Baidu, the proper buy point during its May 14, 2007, breakout was 132.90, a dime above the handle's intraday high of 132.80.

Less than six months later, the leading Chinese web search engine rocketed to 428, up 222%.

Volume On The Breakout

Even if all other parameters come together, you should avoid stocks that break out below their 10-week moving average.

Also, when the stock is breaking out, you should generally see a rush in turnover. Volume should ideally rise at least 40% above its 50-day average. For small and midcap stocks, expect breakout volume to double or triple.

The daily and weekly charts at both and MarketSmith make heavy turnover easy to spot. Simply compare the day or week's volume with the moving average line drawn across the volume bars. An chart will also tell you in real time how volume is running in comparison with typical level at that time of the trading session.

For the weekly chart, the moving-average line traces 10 weeks' worth of turnover.

What should you do if volume on breakout day is much lighter than usual? Sometimes volume will pick up in the next few sessions. Light volume in the market in general may also be a factor. Also consider that the breakout may have started later in the day.

O'Neil has often said at past IBD seminars that after a stock breaks out, he wants to see weekly volume rise vs. the prior week. This signifies a sudden shift in demand for shares that could continue to build up.

Are quarterly results coming up? If so, traders often hesitate before the news. But if the stock fails to make much headway in price, the relative strength line is fading, and the market itself is not showing positive action then something may be wrong with the timing of the breakout.

At that point, it makes sense to exit the stock, even if the 7%-8% loss-cutting sell rule has not yet been triggered.

(Editor's Note: A shorter version of this column originally published in the July 9, 2010, edition of IBD.)

Friday, March 3, 2017

Electric cars

Only 6% of U.S. drivers own an alternate fuel vehicle, but surveys found that 53% are potentially interested in purchasing one. Millennials — generally the population born between the early 1980s and early 2000s — have a relatively high level of interest in electric vehicles (EVs).

An all-electric car is powered only by an electric motor that receives electricity by plugging into the grid. These cars consume no gasoline and produce no tailpipe emissions. However, the level of overall emissions depends on the amount of coal used to make electricity.

While high-end Tesla Motors (TSLA) is selling all the plug-in Model S sedans it can make, expected to be more than 35,000 this year worldwide, General Motors (GM) and Nissan (NSANY) have had to discount sale prices and leases to move the Chevy Volt plug-in hybrid and Nissan Leaf plug-in EV. In the U.S., GM sold only 3,606 Volts in Q1 2014, while Nissan sold just 5,184, though that was a 46% jump for the Leaf from the year-earlier quarter.

Electric vehicle sales have largely failed to meet manufacturers' sales expectations because their capabilities and features fall short of customer expectations, but the outlook for the EV market is improving.

High prices and long recharge times are 2 good reasons why electric vehicle sales haven't taken off, aside from Tesla sales.

Consumers prefer a driving range on a single charge of more than 250 miles, but EVs available today typically have a range of 100 to 200 miles. (Regulators give the Tesla Model S with an 85 kWh battery a range of 265 miles.) And the average battery recharge time considered acceptable by consumers is 2.74 hours, but today it typically takes three to 20 hours to recharge an EV, the study notes.

Price is still an issue with most of consumers expecting to pay less than $20,000.

After a federal tax credit, the Tesla Model S costs at least $63,570 to buy. Nissan advertises its Leaf as starting at $21,480 after the credit and GM advertises the Volt for as low as $26,685 after the tax credit. It also now sells the tiny Chevy Spark EV for $19,185 after the tax credit.

Among other plug-ins on the market, Ford (F) sells the C-Max Energi Plug-In Hybrid for $32,920 and the Fusion Energi SE for $34,700, while Toyota (TM) offers the Prius Plugin for $29,990.

Survey found gas-electric hybrids to be the most popular choice among people interested in possibly buying alternate-fuel vehicles for their next auto purchase. Natural gas vehicles were of interest to 22% of drivers, followed by plug-in hybrids at 19% and diesels at 18%.

BMW's new Mini electric concept car drives, parks, and charges itself

  • July 2017:  Toyota (NYSE:TM) is working on an electric car with improved driving range and a fast-charging battery. The Japanese automaker is expected to build the new EV on a new platform and use solid-state batteries that can be recharged in minutes. The new model could arrive as early as 2022.  Other automakers such as BMW are also working on developing all-solid-state batteries, eyeing mass production in the next 10 years.
  • March 2015:  Mercedes is launching its first plug-in hybrid-electric midsize sedan, the C350e, in U.S. dealerships in September 2015, according to reports. Chatter on the street suggests that the German auto-making powerhouse plans to deeply undercut Tesla stickers, with a price around $42,000 before $5,250 worth of federal and state incentives. The 85 kWh Tesla starts at twice that level. And the brash young automaker will not have a competitive product until at least 2017. Mercedes can undercut the pricing because it has a lot more experience at mass production and sourcing; will make the car in low-cost Alabama instead of high-cost California; and it can subsidize the vehicle with its other vehicles, just to gain market share. The market for electrics is growing dramatically; this is just the start.
2016 Mercedes-Benz C350e