The head-and-shoulders (H&S) top is one of the best-known patterns in technical analysis. This pattern was first written about in 1930 by a financial editor at Forbes magazine who described how the H&S forms and how it can be traded. Many readers are familiar with the H&S pattern. On a price chart, there will be three peaks in price at the end of the uptrend, with the center peak (the head) being higher than the other two. The peaks on the sides (the shoulders) should be about equal in height. Connecting the bottom of the peaks gives us… Read More

The head-and-shoulders (H&S) top is one of the best-known patterns in technical analysis. This pattern was first written about in 1930 by a financial editor at Forbes magazine who described how the H&S forms and how it can be traded. Many readers are familiar with the H&S pattern. On a price chart, there will be three peaks in price at the end of the uptrend, with the center peak (the head) being higher than the other two. The peaks on the sides (the shoulders) should be about equal in height. Connecting the bottom of the peaks gives us the neckline, and breaking the neckline is the sell signal. Real H&S patterns rarely resemble the precise line diagrams seen in books, and the chart below shows one that occurred in real market conditions. The shoulders are nearly, but not quite, the same height. The problem with charts is that their interpretation is subjective. Many traders find an H&S in almost every chart they look at because some traders tend to see whatever they want to see. Because traders see what they want to see, results vary. Some may find success looking at charts while others will suffer… Read More

For 41 weeks in a row, the options trades I’ve recommended to my Income Trader readers have been profitable. And on average, my readers are collecting 7.5% in “Instant Income” every 48 days. So far, we’re 32 for 32 when it comes to closed trades. How am I doing it? It’s actually pretty simple… but it requires some investors to leave their comfort zone. Options are one of the most misunderstood corners of the financial world. Many investors steer clear of options because they have a reputation for being risky, but that’s not always the case…… Read More

For 41 weeks in a row, the options trades I’ve recommended to my Income Trader readers have been profitable. And on average, my readers are collecting 7.5% in “Instant Income” every 48 days. So far, we’re 32 for 32 when it comes to closed trades. How am I doing it? It’s actually pretty simple… but it requires some investors to leave their comfort zone. Options are one of the most misunderstood corners of the financial world. Many investors steer clear of options because they have a reputation for being risky, but that’s not always the case… My strategy involves selling options on undervalued stocks. And as I’ve mentioned here, here and here, selling “put” options is one of the most effective income strategies in the world. #-ad_banner-# But today, I want to tell you about a different strategy — selling covered calls. A covered call strategy involves selling call options on stocks that you own. This allows you to generate income from selling options while benefitting from the potential upside by owning the stock. The downside risk is partly reduced by the income generated from selling options, which offsets potential losses in the stock. If you’re… Read More

While prices are rising, investors need to maximize their gains. When prices turn down, investors need to minimize their losses. The problem many investors face is worrying about a bear market during the bull market. Worries can be stopped by switching to cash, but then investors miss gains, and failing to take advantage of market gains destroys potential wealth. We do believe that it is OK to worry about the state of the market. However, we don’t believe it is OK to act on those worries without a plan. Investment actions should be based on plans that react to the… Read More

While prices are rising, investors need to maximize their gains. When prices turn down, investors need to minimize their losses. The problem many investors face is worrying about a bear market during the bull market. Worries can be stopped by switching to cash, but then investors miss gains, and failing to take advantage of market gains destroys potential wealth. We do believe that it is OK to worry about the state of the market. However, we don’t believe it is OK to act on those worries without a plan. Investment actions should be based on plans that react to the market, and the 10-month moving average (MA) is the simplest way we know to do this. Before we explain why, this chart of the SPDR S&P 500 ETF (NYSE: SPY) can help highlight the importance of this indicator. The 10-month MA is widely followed. Some investors dismiss the idea as simple, but we have found that simple strategies often work well in the markets. Rather than focusing on difficulty or simplicity, investors should develop a plan and follow that plan with discipline.#-ad_banner-# One problem with the 10-month MA can be seen in 2009. The buy signal came late. Read More

If you missed the news last week, U.S. GDP rose a reported 2.8% in the third quarter instead of the 2% economists expected. This was framed as bad news in many news stories because the jump resulted from businesses holding larger-than-expected inventories. Just over a week earlier, the U.S. Census Bureau released a report on the inventory-to-sales ratio showing inventories weren’t really a problem. When a business sees sales rising, it will often increase its inventory to meet the higher demand. The relationship between inventory and sales can be summarized in a ratio that shows how many days’ worth of… Read More

If you missed the news last week, U.S. GDP rose a reported 2.8% in the third quarter instead of the 2% economists expected. This was framed as bad news in many news stories because the jump resulted from businesses holding larger-than-expected inventories. Just over a week earlier, the U.S. Census Bureau released a report on the inventory-to-sales ratio showing inventories weren’t really a problem. When a business sees sales rising, it will often increase its inventory to meet the higher demand. The relationship between inventory and sales can be summarized in a ratio that shows how many days’ worth of inventory is available based on the amount of sales recorded in a day. The inventory-to-sales ratio was 1.29 in the most recent report, which used data from August, down from 1.3 a year ago. Inventories rose 3.1% from a year ago, while sales increased 4.2% over that time. We would expect to see inventories increase if sales are rising, and the decline in the ratio shows that sales are rising faster than inventories. News reports seem to reflect the mood of the market, and that is the basis for the “magazine cover indicator.” According to this indicator, when the media… Read More

Income investors often set a minimum dividend yield as a requirement for their buy decisions. That eliminates a number of stocks from consideration. This requirement could also increase market risk since it tends to limit investments to just a few sectors. A diversified portfolio should hold more than large drug companies and big-name tech stocks that are no longer growing rapidly but are paying large dividends. Covered calls can increase the number of stocks that income investors can select from and help them diversify their portfolio without sacrificing income. A covered-call strategy involves selling… Read More

Income investors often set a minimum dividend yield as a requirement for their buy decisions. That eliminates a number of stocks from consideration. This requirement could also increase market risk since it tends to limit investments to just a few sectors. A diversified portfolio should hold more than large drug companies and big-name tech stocks that are no longer growing rapidly but are paying large dividends. Covered calls can increase the number of stocks that income investors can select from and help them diversify their portfolio without sacrificing income. A covered-call strategy involves selling call options on a stock you own. Selling calls generates instant income known as a premium. A covered call allows you to participate in the upside of the stock, while the income will help offset any downside. This is an excellent strategy for income investors to consider, and I want to use an example of a trade I like right now to illustrate the amount of income that is possible. Arkansas Best (Nasdaq: ABFS) is a trucking company that has been around since 1935. It operates about 3,700 tractors and 20,000 trailers in long-haul and local pickup… Read More

Muddy Waters Research is an investment research firm that specializes in uncovering companies whose financial statements are inflated by questionable accounting practices. The firm was in the news again when it initiated coverage on NQ Mobile (NYSE: NQ), a company that provides software and services for mobile device users. Although NQ claims to have customers all around the world, the company is headquartered in China, and most of its revenue is generated in that country.#-ad_banner-# NQ was one of the biggest gainers a week before the negative research report, but the stock price fell by more than 50% within hours… Read More

Muddy Waters Research is an investment research firm that specializes in uncovering companies whose financial statements are inflated by questionable accounting practices. The firm was in the news again when it initiated coverage on NQ Mobile (NYSE: NQ), a company that provides software and services for mobile device users. Although NQ claims to have customers all around the world, the company is headquartered in China, and most of its revenue is generated in that country.#-ad_banner-# NQ was one of the biggest gainers a week before the negative research report, but the stock price fell by more than 50% within hours of the release. According to Muddy Waters’ analysts, NQ’s financial statements are completely fictitious. Their analysis indicates that the company’s sales and assets are overstated. They claim at least 72% of the company’s security revenue from China is fabricated, and the revenue generated in other countries is even “less real.” This means the profits are also overstated. If Muddy Waters is correct, there is no way to determine what NQ actually earns. Creating false financials seems like it should be impossible, but if the allegations are true, NQ fooled at least four Wall Street brokerage firms that rate the stock… Read More

Derivatives are simply investments that trade based on the price of something else. In other words, the price of a derivative is “derived” from something else. #-ad_banner-# Often that something else is an index, a stock or an exchange-traded fund (ETF). While derivatives can be customized and complex, there are also “plain vanilla” derivatives, and this variety includes ordinary call options and put options on stocks and ETFs. An option is a derivative because the price of the option is based on the price of the underlying stock or ETF. Options give… Read More

Derivatives are simply investments that trade based on the price of something else. In other words, the price of a derivative is “derived” from something else. #-ad_banner-# Often that something else is an index, a stock or an exchange-traded fund (ETF). While derivatives can be customized and complex, there are also “plain vanilla” derivatives, and this variety includes ordinary call options and put options on stocks and ETFs. An option is a derivative because the price of the option is based on the price of the underlying stock or ETF. Options give buyers the right to buy (in the case of a call option) or sell (with puts) a stock or ETF at a predetermined price (the strike price) before the option expires. Options are typically used to leverage a move in an underlying stock or ETF, and they can potentially be used to provide portfolio insurance for individual investors. In order to understand the costs and potential benefits of portfolio insurance, we will use an example. Imagine an investor with an account worth $10,000 invested entirely in the stock market. If the investor believes that stocks are… Read More

Over the long term, value stocks tend to be winners. There are a number of ways to define value.  My preferred approach is to use the PEG ratio, which compares the price-to-earnings (P/E) ratio with the earnings growth rate. A PEG ratio of 1 indicates the P/E ratio is equal to the earnings growth rate and the stock is fairly valued. Value stocks have PEG ratios less than 1. Value investors generally need patience to succeed. It can take time for the stock to deliver gains for a variety of reasons, but within a few years, value investing usually delivers… Read More

Over the long term, value stocks tend to be winners. There are a number of ways to define value.  My preferred approach is to use the PEG ratio, which compares the price-to-earnings (P/E) ratio with the earnings growth rate. A PEG ratio of 1 indicates the P/E ratio is equal to the earnings growth rate and the stock is fairly valued. Value stocks have PEG ratios less than 1. Value investors generally need patience to succeed. It can take time for the stock to deliver gains for a variety of reasons, but within a few years, value investing usually delivers results. Options are usually thought of as short-term trading tools, but there are some options that expire in years rather than weeks or months. These options are called LEAPS, which stands for Long-Term Equity Anticipation Securities. Currently, there are now LEAPS available that will expire in January 2015 and January 2016. Although they are long-term investments, LEAPS are the same as traditional options in every other way. Buying LEAPS allows you to participate in market gains with limited risk. A call option gives the buyer the right to buy 100 shares of stock at a predetermined… Read More

Eugene Fama was a name many investors never heard before the University of Chicago professor won this year’s Nobel Prize in economics. Yet Fama has had a tremendous impact on the investment community over the past 50 years.#-ad_banner-#​ Fama’s research has shown that value stocks outperform growth stocks in the long run. He has demonstrated that small-cap stocks offer greater returns than large-cap stocks over time, and that the market leaders of the recent past are likely to continue leading the market in the future. Articles explaining these concepts are found in academic journals and include math that could challenge… Read More

Eugene Fama was a name many investors never heard before the University of Chicago professor won this year’s Nobel Prize in economics. Yet Fama has had a tremendous impact on the investment community over the past 50 years.#-ad_banner-#​ Fama’s research has shown that value stocks outperform growth stocks in the long run. He has demonstrated that small-cap stocks offer greater returns than large-cap stocks over time, and that the market leaders of the recent past are likely to continue leading the market in the future. Articles explaining these concepts are found in academic journals and include math that could challenge the understanding of many college graduates. Yet, these ideas are easily applied by individual investors. Like many great thinkers, Fama has made difficult ideas simple to understand. Value investing can be applied with a number of tools. Price-to-earnings (P/E), price-to-book (P/B) and price-to-sales (P/S) ratios are popular, and all work well if applied with discipline. Small-cap stocks can be rewarding in the long run. While there are a number of opportunities among small caps, most traders will find there are just as many opportunities among large-cap stocks. Market leaders are defined with relative strength (RS), a… Read More

Value investors tend to be conservative, while emerging-market investors are often thought of as aggressive. Many investors place these limits on themselves. Value investors might only consider dividend-paying large-cap stocks, for example. In doing so, they could be severely limiting their profits. When looking at emerging markets recently, we noticed… Read More