Stock Exchange: Sizzling Summer Picks in Discretionary Spending

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • Highlight several technical trading methods – including current ideas;
  • Feature advice from top traders and writers; and,
  • Provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some earnings season ideas, please join in!

Review

Our last Stock Exchange took a deep dive into the earnings season. If you missed it, a glance at your news will show that the key points remain relevant.

 

This Week — Consumer Discretionary Spending Heats Up

Our experts are picking up on this week’s theme in a big way. From luxurious cruises to hip new threads, our technical indicators suggest there’s something driving levels on consumer discretionary spending. Derek Benedet of seeitmarket.com had an interesting take. Let’s review some traditional causes behind increased spending:

While these points are accurate, Benedet goes on to note that the patterns of spending are very different. Traditional retailers may find difficulty attracting discretionary spending in a way that Tesla or Urban Outfitters may not. Let’s ask the experts:

Expert Picks from the Models

We’re joined again by one of our favorite guest experts on the stock exchange: Blue Harbinger (also known as Mark Hines). Blue Harbinger specializes in independent investment research, and we’re glad to have his thoughts this week. Let’s get down to it.

This week’s picks happen to center around luxury goods and discretionary spending.

Oscar

Oscar: This week, I bought into my custom Leisure, Lodge, and Cruise sector. PEJ is a close approximation. Stocks in the sector have been hanging around the same level since December, but there’s been enough volatility that I can see an upside. Check the 200-day moving average on the chart below.

Despite the up and down movement, the 200-day moving average has continued the steady rise past the compensation for November’s pop. Beyond the trend, a popup near the $43 mark in the next two to four weeks would provide a solid exit point for me.

Blue Harbinger: Unless you are aware of some short-term exploitable market-mispricing anomaly, I do NOT like this ETF. The PowerShares Dynamic Leisure & Entertainment ETF (PEJ) charges a fairly high fee, it has a high turnover ratio, its price can trade at unpredictable premiums and discounts to its net asset value.

O: A grim assessment, but I’ve got my own stocks in the same sector. Is that inherently wrong?

BH: Well this is based on a goofy, undiversified and concentrated index that seems to have been developed as a marketing ploy to get retail investors to invest in something that lines the pockets of the PowerShares people.

For starters, it only holds 30 stocks, and they’re concentrated in the Consumer Discretionary sector (79%) with the remaining holdings (21%) in Industrials. According to the PowerShares website, the index is described as follows.

The Intellidex Index is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value. The Underlying Intellidex Index is comprised of common stocks of 30 US leisure and entertainment companies. These are companies that are principally engaged in the design, production or distribution of goods or services in the leisure and entertainment industries.

In my assessment, this index is likely based on some rickety quantitative screen, that is heavy on sounding good to the marketing people, and light on empirical evidence.

O: Understood. I can’t spill too many secrets – all I can say is I’m confident that I’ve managed to strike a better balance on my own.

Athena

Athena: I’ve got a hot one today: Tesla (TSLA). As many people know, I like to buy stocks when they’re in the midst of an upswing. Usually they’re lesser-known names, although I’m happy to make an exception in this case. Let’s check the chart:

This stock is prone to significant upswings, and is currently recovering from a correction earlier this month. Considering the rapid pace at which this went up to $375, I have no qualms at all about buying in at $328.

Blue Harbinger: Athena, I love Tesla’s vehicles. They’re high quality, attractive-looking, very efficient, and they’re environmentally friendly. I also like what Elon Musk is doing with batteries and solar power. However, as an investment opportunity, Tesla is not attractive. Aside from no net income, Tesla trades at a price to sales valuation multiple that is far above other automakers, as shown in the following chart.

Tesla’s high price to sales multiple is a reflection of the market’s very high expectations for the company. However, any slip-up (for example production delays) could send Tesla’s price much lower. Also, competition in the electric vehicle space continues to grow as Tesla’s peers continue to work on new electric vehicles as well as new batteries too.

A: What do I care about price to sales multiples? The market loves the cars as much as you do. Is it so inconceivable that a bit of good news might lead to exuberance?

BH: I don’t know if the market is heading in that direction. It’s worth noting that Tesla’s short-interest is very high, as shown in the following chart.

For a company with a relatively small amount of sales, negative net income, and growing competition, its $55 billion market capitalization is simply too rich and too risky.

A: That all sounds very compelling, but I just don’t invest on that basis. I’m sticking with this one for another two weeks, and looking for another 10% pop.

Holmes

Holmes: I’m getting into Coscto (COST) this week. What a deal! This stock has been trading below $155 this month, but it’s spent the vast majority of the past year well above that same mark. See for yourself:

That 50 day moving average – despite its strong resemblance to a roller coaster – tells me this stock is undervalued. The stretch from January to June alone should be enough to convince anyone of the same.

Blue Harbinger: Costco isn’t a horrible investment, but its best days of growth are in the past, and the company will be challenged to keep customers as excited as they have historically been. Costco’s physical locations as well as its shopping club concept are not new, and they will face challenges going forward. For example, the recently announced interest by Amazon to purchase of Whole Foods drove Costco’s price lower last month, and it may actually mark the beginning of an industry shift where shoppers (and investors) are no longer as excited about Costco as they once were.

H: Well, that would explain the recent drop. Anything else I should know about?

BH: Yes. Costco’s already significant market penetration will make it challenging for new Costco locations to open because the most attractive demographic locations have already been targeted, and new locations could lead to some attrition at existing locations.

For some perspective, according to data from StockRover, the per annum EPS growth rate estimate for Costco over the next 5-year is 5.6%. Not an extremely high rate, but one that will likely be challenging to achieve. Further still, even after the recent price decline, Costco’s price-to-earnings ratio isn’t all that attractive relative to its historical valuation, as shown in the following chart.

I’m not suggesting Costco is at risk of an imminent collapse, but it’s certainly not the great growth opportunity it once was.

H: That makes a lot of sense for long term investors. Regular readers know my timeframe is much shorter. Hey, maybe the market will decide this Amazon deal wasn’t the death knell for all other retailers after all.

Felix

Felix: Urban Outfitters (URBN) looks extremely uncool right now, and to me that’s the coolest thing about it. The month and a half long lull is signalling a bottom to me. As a longer-term investor, that’s a very important factor. Have a look at this chart of the past 12 months:

I’ll admit this does not read as a success story, though I still think it provides a useful entry point. I could easily see some recovery back up to the $22 mark, especially with my extended timeframe.

Blue Harbinger: Urban Outfitters is a well-run business with very limited growth opportunities and no competitive advantage. The company’s premium brands (Urban Outfitters, Anthropologie, BHLDN, Terrain and Vetri) will face challenges in staying relevant, and this is a stock I’m are not interested in owning.

At first glance, the stock might appear attractive because of all the share buybacks, zero long-term debt, and very low price-to-earnings ratio.

However, the average five-year EPS growth estimate according to StockRover is negative 1.6%, and management expects the number of stores and square footage to grow very little.

F: You’ve been pretty rough on all our picks this week. Maybe we should start calling you the Harbinger of Doom.

BH: Alright, alright. Here’s something positive. The company does expect to grow through its direct-to-consumer channel and wholesale (Free People) business, but these currently make up a small portion of sales, and their viability depends, to a large extent, on the brand’s ability to stay relevant.

I don’t believe the brands will become irrelevant overnight, and because the business is well-run, I don’t expect Urban Outfitters to completely disappear anytime soon. However, I do believe margins will continue to be pressured, the brand value will erode over time, and despite the recent price declines and low valuation multiples, this is not a stock I am interested in owning.

F: Okay, that’s fair. I can’t say much other than I like current prices as an entry point, and that I would be looking for a long-term holding. If the mullet can make a comeback, then surely we could see new growth out of Urban Outfitters…

Conclusion

Favorable conditions for discretionary spending are bringing consumers around to household names that have been en vogue as of late. In fact, this may be the first week where our models have gravitated to these kinds of trendy companies.

Thankfully, we have Blue Harbinger here to talk us down from the hype. Each of these selections might give the human investor pause. It’s the model’s job to follow its technical indicators carefully, and to remain consistentStock Exchange Character Guide

 

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum One month Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

Weighing the Week Ahead: Have You “Missed” the Rally?

There was something of a change in tone last week. There is more recognition of improving conditions. With a tailwind from improving earnings, more will be wondering:

What if you have missed the rally?

Last Week Recap

Last week began with stories about revised targets for the market and ended with Fed speculation. The market took the international stories and news about President Trump in stride.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market price moves. The Wednesday pre-market release of Chair Yellen’s Congressional testimony was the most notable feature. The market gained 1.4%, reaching a new all-time high.


 

Personal Note

I am on vacation starting Friday and through the next week. This means that I will probably miss two installments of WTWA. Since readers requested and appreciate the “limited editions” we have produced when I have been away, we’ll do that again. We will include indicator updates, a few observations on news and worries, and perhaps some “timeless” advice that has special relevance right now.

Since I cannot ever get completely away, I’ll be in touch with events and my office. Is something important is happening, I’ll get involved. The last time I went to Toronto my vacation was spoiled by the debt limit crisis. I hope to avoid a repeat of that!

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news last week was mixed, but tilting positive.

The Good

  • Industrial production for June was up 0.4%, slightly beating expectations and much better than last month’s 0.1%.
  • JOLTS showed a high quit rate. Those voluntarily leaving jobs represent a sign of strength. The analysis of overall labor market conditions (the Beveridge curve) is also important. Anyone focusing on “job openings” or “job growth” is not using the best data and is also on the wrong theme. Bespoke has it right.


  • Inflation remained low. I understand that many treat this as “bad news” because it is not hitting the Fed target. This makes no sense. If we could get good economic growth without inflation, that would be wonderful. We should not be cheering for more inflation unless it reflects an improving global economy.
  • Earnings reports are strong. It is still early in the season, but reports are beating expectations at a higher rate than in the past five years. Same for revenue, and the size of the beat. (FactSet has more details and charts). Avondale monitors conference calls, providing useful color. Their news is also encouraging. Check it out for yourself.
  • The first gene therapy was endorsed by an FDA advisory committee. We are still some distance from widespread use, but my guess is that ten years from now, this will be the most important news from this week. The Washington Post has a nice account.
  • Fed news satisfied the markets. That is one test, but it does not change the favorite sport of Fed-bashing.
    • Jason Cawley (who brings strong analytical skill and experience to the problem) takes a refreshing perspective in his article, Grading the Fed. He analyzes the Fed in terms of their own stated objectives – not those of critics. Those interested – and you should be – must read the entire article and the grades for each objective. Here is an example chart.


He concludes as follows:

I submit that most of those criticizing recent Fed policy from various points of view seldom apply their proposals with the rigor shown above, or explain why they believe their alternative proposed measures of Fed policy success would be superior to its published methods, or where and when their different proposed measures would grade recent Fed performance poorly. I invite them to do so in the comments section below, or in their own articles.

  • The NY Fed has a great explanation of how the balance sheet is adjusted. If you understand this, it provides an antidote to some of the daily misinformation. (Economicintersect.com highlighted this story, as it does with so many useful articles). There is a great chart sequence (clear, but too long to reproduce here) that shows the effect of Fed actions. If everyone spouting an opinion had to pass a short quiz on the basics, the world would be a quieter place!

The Bad

  • Rail traffic declined. Steven Hansen (GEI) analyzes the data with an important adjustment for coal and grain.

  • Small business optimism dropped from the recent peak. The NFIB attributes the decline to a stalled Trump agenda.

 

The Ugly Humorous

There is always some “ugly” news in the world. I was planning to go with this story about 44 million people needing side jobs. I instead choose to share a few good laughs with an important lesson – no one really knows what business ideas might work! Too make sure that my humor is on track, I consulted Mrs. OldProf, who approved this message!

http://fortune.com/2015/02/09/shark-tank-the-lost-pitches/

I hope you enjoy it as much as we did.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

It is a more normal economic calendar. As always, I am especially interested in the housing starts and building permits. While they are lower on my priority list, many are fans of the leading indicators and the Philly Fed.

The big stories will be about earnings. Senate action on the ObamaCare replacement bill is supposed to include a vote this week. Investors are interested not only in the specific health-care effects, but the implications for other items on the Trump agenda, most notably tax cuts.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.


Next Week’s Theme

Despite the busier calendar, earnings stories will command attention. There is evidence of a changing mood. After months of focus on negative news, the move to new stock market highs is creating new questions. Many will be asking:

Have you missed the rally? And if so, what next?

Here is the background.


  • The big and “smart money” has also been fighting the rally all of the way. Do a search on “missing the stock market rally” and you will see annual articles, including reports on major investors.
  • Those waiting for a correction have seen few chances, usually quite small.

Doug Short and Jill Mislinski have a chart that is quite helpful for long-term perspective. It shows the frequency and size of drawdowns.


  • When there is a correction, those allegedly waiting do not buy. The same sources and reasoning that made them cautious convince them that this is the “big one.”
  • Those in the market are called names, the gentlest of which is “dumb money.” They are supposedly “ignoring warnings” from indicators like gold and bonds.
  • Despite the allegations of market “complacency” the low volatility results from a cautious balance of bullish and bearish attitude. Ian Bezek sees Too Much Bearishness.

 

As usual, I’ll have more in my Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot


 

The Featured Sources:

 

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Georg Vrba: Business cycle indicator and market timing tools.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Doug Short: Regular updating of an array of indicators. Great charts and analysis.

Many readers share my interest analyzing data. The new interactive tool from the Council on Foreign Relations lets you analyze the breakeven price point for oil exporting countries. There are multiple approaches and features. I cannot do justice to it in a static chart, but here is an example.


 

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Seeking Alpha Editor Eli Hoffman’s interesting question, What If Warren Buffett Was A Macro Trader?
Citing Bloomberg strategist Cameron Crise, he considers the impact of an annual 12% stop loss on Berkshire Hathaway. Many who think of themselves as long-term investors also subscribe to techniques that traders swear by. The all endorse stop losses. What do you think the result was?

It turns out that Buffett would have been stopped out in 18 of the 30 years for which Bloomberg has data for the BRK share price. In fact, between 1997 and 2005, a risk-managed BRK would have delivered zero return versus the 8.5% annual gains that Buffett actually produced. Had he been trading macro, there’s little doubt he would have been fired.

Volatility would have been lower, but the overall gain only half as much.

[Jeff]: Investing has no miracle answers, no matter how confidently they are stated by proponents.

 

Stock Ideas

It was an active week for ideas from an array of great sources. There are plenty of stocks worth your consideration.

Eddy Elfenbein does a mid-year review of his buy list, with a special look at recent earnings. The easiest way to join in Eddy’s success is to buy his innovative ETF, CWS. If you look at the list, you will also see a few laggards – probably good candidates. Smuckers? (SJM).

Chuck Carnevale illustrates this week’s theme perfectly. He advises reduced worry about overall market valuation, and more attention to individual stocks.

Peter F. Way’s innovative selection method is not enthusiastic about auto stocks. Check out the specific ratings and charts. Also see his analysis of the best 20 communications stocks.

Brian Gilmartin does an exhaustive, earnings-based analysis of Schwab (SCHW). His consistently excellent, specific-company analyses are a great source of ideas.

Energy? Barron’s (subscription required) follows up last week’s emphasis on energy with a cover story this week.

Dividends?


Simply Safe Dividends analyzes a company that has not missed a dividend in 122 years. That is only the starting point for his thorough analysis of Colgate Palmolive (CL).

Marc Gerstein uses his Portfolio 123 platform for a careful and contrarian analysis of GAP (GPS). He finds the dividend reward/risk to be attractive, despite the current consensus against brick-and-mortar retail.

Personal Finance

 

Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. This week I especially enjoyed his commentary on the national debt. As usual, he highlights the analysis of one of our colleagues, while providing some counterpoint. This week it was Charlie Bilello, who generally assuages concerns – at least for investors. This is a great topic – and on my future calendar.

Gil also has interesting links. In this edition, my favorite is David Merkel’s analysis of the difficulty in determining risk tolerance. This is an important topic, and David has nailed it.

Watch out for….

Tesla. Paulo Santos analyzes the effect of a (likely) upcoming cut in revenue.

Blue Harbinger explains why an attractive yield might well be a warning – Omega Health Investors (OHI). Blue Harbinger will be our guest expert on this week’s stock exchange, so check in for more of his thoughts.

Emerging markets? Watch the debt levels.

Final Thoughts

 

Last week I described the elements of a strong investment process. If you missed that, it will be helpful to take a look back.

Here are the main reasons some people have missed the rally in stocks:

Assertion

Reality

Stocks are expensive in terms of history.

Stocks are attractive when measured as “yield above expected inflation.”

Stocks are behaving like they did in 2000.

In general, using YAEI, stocks are cheaper than bonds and bond substitutes. Some stock sectors are very cheap.

Stocks are due for a correction.

Corrections do not come with a set schedule, and cannot be reliably predicted.

The bull market is too old.

There is no expiration date on bull markets.

There are big geo-political threats.

As usual.

Market risks are high.

Measured objectively, risk is at a low point.

The moment I invest, the market will tank.

This is a common worry, so you are not alone. It is a psychological matter, not an unemotional investment strategy.

It is too late to invest. I missed the rally.

No one knows how long the stock rally will last, or how far it will go.

I have almost all cash, and need to be careful.

Get back in gradually – but with a specific plan.

 

If you would like more detail than the summary above, request my short paper, Getting Back in the Market. This has more specific suggestions about attractive stock sectors and good tactics. The Top Twelve Investor Pitfalls will help with your plan. Understanding Risk might also be of interest. All are free at your request from info at newarc dot com.

Investors might also appreciate our Stock Exchange’s advice to traders on Trading the Earnings Season. If you check out the post you will see that it is a difficult problem for traders, but might well be an opportunity for investors with a plan.

 

What worries me…

  • The upcoming debt limit issue. No signs of progress so far.
  • Senator McCain’s recovery from surgery. He is a national hero, and his absence demonstrates the fragility of potential coalitions. I am sure that readers join me in wishing him a speedy recovery.

…and what doesn’t

  • The Fed. That includes both rate increases at a reasonable pace and the planned balance sheet reduction.
  • Stock market valuation. Stocks overall seem mildly attractive if you consider expected earnings and interest rates. More importantly, some are significantly overvalued and others are attractive. Stock and sector picking are more important than market valuation.

 

 

 

 

Stock Exchange: Trading the Earnings Season

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • Highlight several technical trading methods – including current ideas;
  • Feature advice from top traders and writers; and,
  • Provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some earnings season ideas, please join in!

Review

Our last Stock Exchange discussed the challenges of trading geopolitical risks. If you missed it, a glance at your news will show that the key points remain relevant.

Preview

Next week Blue Harbinger (AKA Mark Hines) returns as our guest expert. He consistently generates interesting and successful ideas. I cite his work regularly, and he was first-rate when we had him last. Readers will enjoy his unique contributions.

This Week—Can You Profit from Trading the Earnings Season?

Four times a year there is a confluence of corporate earnings reports. It can create turbulence for the overall market as well as the individual stocks. Is there anything we can do to take advantage of this avalanche of breaking news? We have advice from several experts, and some special resources.

Trading Tips for Earnings Season

These are all helpful, but overlapping tips. Organizing by strategy, we get the following:

  • Directional – stock or options.
  • Volatility – option plays.
  • Follow the initial reaction – hoping the “dumb money” is slower.

As always, I’ll share my own observations in the conclusion, along with the top resources I use.

Expert Picks from the Models

This week’s choices include several market sectors.

Holmes: This week, I picked up Anheuser- Busch InBev SA/NV (BUD), the Belgium-based brewing company. Leading into last October, the stock was inching up just above the $132-level. Then, within a one-month period from October into November, it had three huge declines down to around $102. For the next six to seven-month period, the stock has been making very small and steady attempts to pick itself up again. In May, on its recovery phase, the stock prices touched decent levels up and around $ 117.50. In June and July, the stock saw some declines in combination with short upsides. I figure that the stock has still more to gain on its recovery and as always, I buy on the dip. The 50-day average cutting above the 200-day average in a “Golden Cross” also shows more upward support for the stock price.


Jeff: I am still struggling with the “Belgium-based.” Isn’t this the company of Clydesdales and Christmas Cards?

H: Those emotional factors are not part of my analysis. Look at the chart.

J: Do you know when the earnings will be released?

H: I don’t know, and I don’t care.

J: For those who do care, Nasdaq.com reports:

Anheuser-Busch Inbev SA is expected* to report earnings on 07/27/2017 before market open. The report will be for the fiscal Quarter ending Jun 2017. According to Zacks Investment Research, based on 1 analysts’ forecasts, the consensus EPS forecast for the quarter is $1.14. The reported EPS for the same quarter last year was $1.06.

H: I hope that humans are happy with the announcement. I see limited downside, and plenty of potential.

Athena: My featured stock this week is Restoration Hardware (RH), in the home furnishings market. Talking of the “Golden Cross”, well, my stock saw it too in mid-March and followed with an upward spike. Looking at the chart history. The start of the year was weak, with a fall from just around 40 to the 30’s mark in late December. The further decline from Jan-March included a touch 25. The stock’s late-March recovery saw it gain around 50% to come close to the 60’s mark in mid-May. Then, the stock had a correction in May, followed again by its upward march in June-July. I expect the rally to continue.

J: Didn’t we try this stock a couple of months ago – a Road Runner pick?

A: I pay no attention to that noisy bird.

J: I think we caught the decline, and sold too soon. The earnings report was on 6/1.

A: Whatever happened before, it is attractive right now. I suppose you are about to invoke the guru of the fundamentals, Chuck Carnevale.

J: An excellent guess! I believe I warned the Road Runner about this as well.

Oscar: This week’s pick feels appropriate for these hot, hot summer days. I’m getting into the solar energy sector, shown here as the Guggenheim ETF TAN. I have to say, stocks in this sector are climbing like the late afternoon heat. Let’s take a closer look:


The last twelve months were not especially kind. Beginning in mid-October, the solar stocks took a big nosedive. They seem to have bottomed out at the end of 2016, and they’ve been on the road to recovery for this calendar year. This ETF is trading above its 200 and 50 day moving averages, which suggests to me the gains are real. As usual, I’m looking to hold onto stocks in this area for a 2-4 weeks.


J: This is an interesting choice. Are you monitoring President Trump’s energy policy decisions?

O: My focus on DC is mostly on the Nationals.

J: That is what I thought. With the liberalization of pipelines, there might be a threat to alternative energy.

O: It is all about the numbers. Take a look at today’s Racing Form and I will explain.

J: Forget that. Let’s talk about your readers. Do you have updated rankings for them?

O: Yes. Here they are. If they send more ideas, I will rank them.

 

 

 

 

Felix: DDR Corporation (DDR) may seem riskier than my usual pick, but I have my reasons. I admit the trailing 12-month decline is not pretty. At the same time, I think this one bottomed out midway through May. Focus on the last couple months of this chart.

A little variation around that price range is attractive to me for a couple reasons. First things first, the flattening curve on the 50-day moving average suggests to me that we’re past the point of another big drop.

Second, I’m in it for the long haul. I don’t mind a few weeks middling around the $9/share range if the 3-4-month upside is as much as 25%.

J: Do you understand that this is a REIT? The value depends upon many factors, including cash flow, payout ratio, interest rates, and the market for the underlying real estate. I am just getting started.

F: Those factors might be interesting for income investors. I just consider the chart – which looks very appealing. I expect this to be a long-term hold.

J: How about your individual stock ratings?

F: I have reported those. I need my fans to keep the requests coming!

 

 

 

 

 

 

 

 

 

 

 

 

Conclusion

 

Trading the earnings season has special risks, but also special rewards. There are many important factors to consider. Here are some special resources:

  1. Expectations and the whisper number
    1. Analyst summary – Nasdaq citing Zacks.
    2. Whisper number, the unstated expectations that differ from the official analyst calls – whisper.com.
    3. Detailed preview, only available from top sources. Check out Brian Gilmartin’s take on MSFT.
  2. Revenue. In the current environment companies are expected to show revenue growth, beating expectations.
  3. Outlook. A good number this quarter is not enough if the outlook is poor.
  4. Quality of earnings. Even when everything seems fine, many will complain that earnings growth is somehow contrived. It is more than just numbers. What is the “organic growth?” Or the sales in a key product line?
  5. Conference call. Usually this is scripted, but stocks can react dramatically during the call.

Stocks can make big moves on any of these things. There may be a pattern like this:

Trading algorithms –à Human traders –à Individual investors

This is a sequence where algos and traders do not need to be right on the fundamentals. They are profitable just by getting the initial reaction right. After-hours trading is often wildly deviant from what we see the next day. Analysts participate in the conference call and file their reports. This is especially significant for large institutional investors.

How can an individual have an edge?

I have traded earnings for decades. It is tougher now than ever before. You cannot outrace the algos, nor can you digest all relevant factors that quickly. The option volatility is normally a good reflection of potential moves. If you have an edge, it must come from better information – how much the stock can move, a good sense of a positive or negative surprise, or excellent fundamental background.

Prepare well, and make sure that the size of your play reflects your actual edge!

Here is a summary of the cast of our characters. Find your own favorite!

Stock Exchange Character Guide

Character

Universe

Style

Average Holding Period

Exit Method

Risk Control

Felix

NewArc Stocks

Momentum

66 weeks

Price target

Macro and stops

Oscar

“Empirical” Sectors

Momentum

Six weeks

Rotation

Stops

Athena

NewArc Stocks

Momentum

One month

Price target

Stops

Holmes

NewArc Stocks

Dip-buying Mean reversion

Six weeks

Price target

Macro and stops

RoadRunner

NewArc Stocks

Stocks at bottom of rising range

Four weeks

Time

Time

Jeff

Everything

Value

Long term

Risk signals

Recession risk, financial stress, Macro

 

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!