A strong gain after Friday’s jobs report failed to reverse four days of losses, and stocks were unable to deliver their ninth consecutive weekly gain. A Pullback Continues to be Likely After eight weeks of consecutive gains, SPDR S&P 500 ETF (NYSE: SPY) closed down 0.03% last week. The only up day was Friday, when SPY gained 1.12% after unemployment fell.#-ad_banner-#​ Traders’ reaction to the good jobs report is a little puzzling. The Federal Reserve originally said it would start tapering when unemployment fell… Read More

A strong gain after Friday’s jobs report failed to reverse four days of losses, and stocks were unable to deliver their ninth consecutive weekly gain. A Pullback Continues to be Likely After eight weeks of consecutive gains, SPDR S&P 500 ETF (NYSE: SPY) closed down 0.03% last week. The only up day was Friday, when SPY gained 1.12% after unemployment fell.#-ad_banner-#​ Traders’ reaction to the good jobs report is a little puzzling. The Federal Reserve originally said it would start tapering when unemployment fell to 7%, the level reached in the latest report. In addition to the drop in the headline number, the economy created more jobs than expected. A strong employment report could allow the Fed to begin tapering soon, and traders have sold on concerns about potential tapering in the past. The unemployment report is confirming a number of other data series that point to a stronger economy. Average hourly earnings increased and are now up 2.03% when compared to a year ago, higher than the rate of inflation. The number of people in the labor force also rose in November. The… Read More

The recent stock market pullback has sparked a bearish fever in many traders.#-ad_banner-#​ All the major indices have slipped lower, prompting the bears to start their dance of doom. While in my view, the selling is clearly nothing but short-term profit taking and not a signal of anything ominous, it doesn’t prevent the bearish fearmongers from dominating the financial media with nebulous terms like “overextended” and “overvalued.” I love it when the stock market bears crawl out of their caves. The louder they get about an imminent market crash, the more confident I become that it’s not going… Read More

The recent stock market pullback has sparked a bearish fever in many traders.#-ad_banner-#​ All the major indices have slipped lower, prompting the bears to start their dance of doom. While in my view, the selling is clearly nothing but short-term profit taking and not a signal of anything ominous, it doesn’t prevent the bearish fearmongers from dominating the financial media with nebulous terms like “overextended” and “overvalued.” I love it when the stock market bears crawl out of their caves. The louder they get about an imminent market crash, the more confident I become that it’s not going to happen anytime soon. These bears cite the risk of recession, the end of the Federal Reserve’s quantitative easing measures, weak corporate earnings and even China’s slowdown as the potential catalysts that will send stocks into the next bear market. The funny thing is, the more bears there are, the lower the likelihood of a crash or sharp correction taking place. The opposite also holds true.  When everyone is super bullish, that’s when it’s time to expect a market correction. Even the bears have a name for this phenomenon: climbing the “wall of worry.” Stocks are said to be climbing… Read More

Let the jockeying begin. Strategists are predicting a major change in interest rates in 2014 and 2015, and have already begun to identify the fallout — positive and negative — on a wide range of stocks. As long as you follow the game plan, your portfolio is likely to benefit.#-ad_banner-#​ There are two extremely likely scenarios for 2014. First, the Federal Reserve is expected to keep the federal funds rate near zero, which will keep interest rates on shorter-term lending rates very low. Second, the Fed will ease off its massive stimulus program (known as quantitative easing, or… Read More

Let the jockeying begin. Strategists are predicting a major change in interest rates in 2014 and 2015, and have already begun to identify the fallout — positive and negative — on a wide range of stocks. As long as you follow the game plan, your portfolio is likely to benefit.#-ad_banner-#​ There are two extremely likely scenarios for 2014. First, the Federal Reserve is expected to keep the federal funds rate near zero, which will keep interest rates on shorter-term lending rates very low. Second, the Fed will ease off its massive stimulus program (known as quantitative easing, or QE), which is likely to allow long-term rates to rise to levels that truly reflect global economic activity. (The QE program has kept a lid on long-term rates.) I discussed this notion a few weeks ago in my look at the soon-to-change yield curve. Historical trends suggest that certain sectors are likely to benefit while other sectors are likely to lose some appeal with investors. And even within sectors, clear winners and losers will emerge. Not All Yield Plays Are The Same First, let’s get the obvious impacts out of the way. Any income-producing investments such as utilities, real estate… Read More

After eight consecutive weeks of gains, it is time to consider when strength becomes exhaustion in the stock market. Overbought Eventually Means Overbought SPDR S&P 500 (NYSE: SPY) closed up 0.11% in a holiday-shortened trading week. This was the eighth time in a row SPY posted a weekly gain. It was also the smallest weekly gain in the winning streak and the second week in a row the rate of change has declined.#-ad_banner-# The concept of overbought is a challenging one, and traders have spent countless hours trying to understand it. Many indicators, such as… Read More

After eight consecutive weeks of gains, it is time to consider when strength becomes exhaustion in the stock market. Overbought Eventually Means Overbought SPDR S&P 500 (NYSE: SPY) closed up 0.11% in a holiday-shortened trading week. This was the eighth time in a row SPY posted a weekly gain. It was also the smallest weekly gain in the winning streak and the second week in a row the rate of change has declined.#-ad_banner-# The concept of overbought is a challenging one, and traders have spent countless hours trying to understand it. Many indicators, such as stochastics and Relative Strength Index (RSI), are used to define an overbought market, but they all share a common flaw. At the beginning of a very strong up move, markets become overbought and stay overbought. The chart below demonstrates the challenge of defining when a market is overbought. SPY is shown with the stochastics indicator. The monthly chart is used to decrease the sensitivity of the indicator, but similar patterns can be seen on weekly and daily charts. Stochastics became overbought in 2003 and remained overbought until the end of 2007. 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… 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

The S&P 500 has now closed higher seven weeks in a row. We need to consider the possibility that we are at the start of another bull market.#-ad_banner-#​ Stocks Are Bullish, but Not Bubbly After gaining 0.42% last week, SPDR S&P 500 (NYSE: SPY) is now up seven weeks in a row. While that gain may seem small, it is actually more than three times larger than the typical one-week gain in SPY. Since January 2001, the ETF has delivered an average one-week gain of 0.12%. Seven consecutive weeks of… Read More

The S&P 500 has now closed higher seven weeks in a row. We need to consider the possibility that we are at the start of another bull market.#-ad_banner-#​ Stocks Are Bullish, but Not Bubbly After gaining 0.42% last week, SPDR S&P 500 (NYSE: SPY) is now up seven weeks in a row. While that gain may seem small, it is actually more than three times larger than the typical one-week gain in SPY. Since January 2001, the ETF has delivered an average one-week gain of 0.12%. Seven consecutive weeks of gains is an unusual price move for the broad stock market averages. It indicates that there is a great deal of demand for stocks and traders are buying. This is obviously an oversimplification, but in general terms, demand exceeding supply is the underlying cause of a price rise in any market. When stocks bottomed in March 2009, SPY moved up six weeks in a row. That is typical of the price action at market bottoms. We saw similar signs of strength in 2002, and in the Dow Jones Industrial Average at the beginning of the historic bull market in 1982. Read More

For many market strategists, the Federal Reserve’s multi-trillion-dollar stimulus program has had one huge drawback. The Fed’s massive quantitative easing (QE) programs have rendered what’s known as the yield curve utterly useless — and that’s left everyone in the dark as to just how healthy or weak the U.S. economy remains.#-ad_banner-# The good news: The Fed’s looming retrenchment from stimulus will let the yield curve take its natural shape again, helping investors to better navigate a confounding market environment. (Surging stocks and weak economic data do no typically go hand in hand.) You’ll be hearing a… Read More

For many market strategists, the Federal Reserve’s multi-trillion-dollar stimulus program has had one huge drawback. The Fed’s massive quantitative easing (QE) programs have rendered what’s known as the yield curve utterly useless — and that’s left everyone in the dark as to just how healthy or weak the U.S. economy remains.#-ad_banner-# The good news: The Fed’s looming retrenchment from stimulus will let the yield curve take its natural shape again, helping investors to better navigate a confounding market environment. (Surging stocks and weak economic data do no typically go hand in hand.) You’ll be hearing a lot about the yield curve in 2014, so to better understand its looming implications, let’s brush up on the concept now. What Kind Of Slope? Bond investors typically demand a higher interest rate for longer-term securities. After all, in an uncertain world, longer time horizons bring a greater chance that something can go wrong. (And if we’re talking about bonds, then we’re talking about the corrosive effects of inflation or an expectation of much higher bond issuance by Uncle Sam and others.) So a yield curve is simply the slope of interest rates on short- to mid- to long-term… Read More

$388.5 billion is a staggering figure. It’s more than the entire economy of Thailand, Denmark, Colombia or the United Arab Emirates. And it’s how much operating cash flow was generated by America’s top 12 companies in 2012. Source: Thomson Reuters Of course, the old adage “It takes money to make money” applies. Many of these companies need to spend billions of dollars in research, infrastructure and other areas to generate that cash flow, and their actual take-home pay is a lot less. Exxon Mobil (NYSE: XOM), for example, spent more than $34 billion on capital expenditures last… Read More

$388.5 billion is a staggering figure. It’s more than the entire economy of Thailand, Denmark, Colombia or the United Arab Emirates. And it’s how much operating cash flow was generated by America’s top 12 companies in 2012. Source: Thomson Reuters Of course, the old adage “It takes money to make money” applies. Many of these companies need to spend billions of dollars in research, infrastructure and other areas to generate that cash flow, and their actual take-home pay is a lot less. Exxon Mobil (NYSE: XOM), for example, spent more than $34 billion on capital expenditures last year, sapping a considerable chunk of its $56 billion in operating cash flow. As a bit of silver lining, these companies spend much of that on goods and services offered by other companies, creating a virtuous circle of corporate spending. Here are the top 12 capex spenders of 2013. Source: Thomson Reuters The number of oil and gas firms in this group explains why an energy services provider like Schlumberger (NYSE: SLB) sports a $120 billion market value, but is not truly a household name. The True Measure Unfortunately, even as many Wall Street analysts wisely… 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

When he buys a stock, Warren Buffett places more emphasis on one factor above almost any other. Since 1986 he has mentioned this single trait more than 20 times in his annual shareholder letters. He calls it “essential for sustained success.” However, you won’t find it listed on a company’s balance sheet. Its value doesn’t rise and fall with the market. And even if a company reports great earnings, the worth of this one advantage still can’t be calculated. #-ad_banner-# But that doesn’t keep it from being a company’s most valuable possession. Take the nasty bear market of 2008 and… Read More

When he buys a stock, Warren Buffett places more emphasis on one factor above almost any other. Since 1986 he has mentioned this single trait more than 20 times in his annual shareholder letters. He calls it “essential for sustained success.” However, you won’t find it listed on a company’s balance sheet. Its value doesn’t rise and fall with the market. And even if a company reports great earnings, the worth of this one advantage still can’t be calculated. #-ad_banner-# But that doesn’t keep it from being a company’s most valuable possession. Take the nasty bear market of 2008 and 2009. From its peak to trough, the S&P lost more than 55%. No investment completely avoided the downfall. Well, almost no investment. Of the 500 stocks in the S&P, only nine made money during that period. Of those nine stocks, six of them (two-thirds) had this advantage. But this advantage also helps these stocks beat the market in uptrends, too. After all, Buffett has made billions thanks to companies with this trait. So what single advantage can capture the attention of Warren Buffett… help a stock beat the market in an uptrend… and help it fall less in a downtrend?… Read More