A chart you should be scared about

I wrote about junk bonds late Dec last year, entitled Junk Bonds Are Sending an Ominous Warning. While this was not a short-term warning, the junk bond EFT HYG tanked almost immediately after that call from about 81 to 75 within a few weeks. However, since mid Feb, junk bonds have mounted an impressive rebound along with the overall market. HYG is trading hands around 84. But I think junk bonds’ bouncing may likely be coming to the end. Actually its chart looks really scary and poised to plunge again. You see, HYG is hitting against not only one but two resistences (the 2 red lines), one longer term dowtrend line and also a short-term overhead resistence. In addition, while HYG is moving higher, its momentumn indicator, MACD, is showing a negative divergence (see the 2 green arrows pointing to opposite dierctions). Putting these together, I think there is good chance that HYG will start its next leg down soon, if not yet already. When junk bonds decline, the overall market will follow as well. This is what we saw in the first 2 months of the year and we are going to see it again soon.

A short-term trade from an earning diaster

Twitter (TWTR) used to be a darling of the Street. But since its IPO a little more than 2 years ago, its share price has been haircut for about 80%. Although it has called back its founder as the current CEO in trying to revive itself, it is still struggling to survive. While Twitter has been widely used on a daily basis, unfortunately it just cannot monetize its application. Yesterday, TWTR announced another huge miss in earnings. Again, its stock witnessed a free fall today, declining by 16%. But this crash is actually creating a technical trading opportunity. As shown below, TWTR is basically testing its Feb low, dipping below the lower BB and becomes oversold. This plunge creates a strong positive momentum divergence in MACD. This suggests today's decline may likely be short-lived and a change of the trend may follow soon. If I'm right, TWTR should start to move up soon and this should be a good short-term opportunity to bet for the long side for TWTR. Of course, let's be very clear, I still don't think Twitter has turned around as a business and more downside is very likely in the long run. This is just a speculative short-term trading for a couple of weeks at most.

Stay with the trend

The overall stock market is unbelievably resilient and strong at the moment and it seems there is nothing that can stop it from challenging its all time high for the S&P around $2135. Will S&P breaks out this time soon? Anything is possible but I highly doubt! Since last May when S&P came off its all time high, it has tried more than 10 times to break out but all failed. In a few times, a 5-10% drop followed. I think a big decline will follow soon as well this time. You see, the stock market is a discounting machine that should ultimately follow the footsteps of the companies’ earnings. However, since the end of 2014, earnings have been in a steady decline, which eventually led the market to turn to the downside (see the chart below, curtsey of Casey Research). When the earnings decline but the stock prices increase, what will happen? The P/E ratio goes up, meaning the stocks become more expensive.  Per Casey Research,  “Measured by the CAPE ratio, stocks are now 58% more expensive than their historic average. They’ve only been more expensive three times in history: before the Great Depression, during the dot-com bubble, and leading up to the 2008 financial crisis.”  I’m convinced it is really a very dangerous time to be long at the moment and a flash crash could also happen without notice in this kind of environment. Again, I’d advise “BE CAUTIOUS” as I have done a few times in the past month.

 

Having said that, the biotech is probably the only sector that has a great risk reward ratio for the time being. As I said a week ago, this is the only sector that I feel comfortable to buy and I did just that. I bought TROV about 2 weeks ago when it was tanking due to the management shake-up. A great timing I must say. It has shot up 50% already since I got in. Then I bought AMAG just a week ago but it has gone up almost 8% already. My options are several times better than the underlying stocks in terms of the short-term paper gains. But I think more gains are ahead for them if the whole sector continues to outperform the overall market, which is what I expect to see. Stay in the course with this trend for the biotech sector!

Buy Microsoft at dip

For those who have read my blogs for some time, they must know how much I love Microsoft (MSFT) as a long term investment. I have talked about MSFT numerous times, advising buying at its dips whenever it got hit hard due to some short-term hiccups (see here which contains many links). I think we are getting another great opportunity now when MSFT crashed by 8% due to disappointed earnings today. Yes, MSFT seems not really very cheap at this level based on P/E but considering how profitable it is with over $50 Billion cash sitting in its treasury and over 20 years of track records of increasing its dividend by double digits, you won’t be doing badly by holding MSFT for long-term with dividend reinvested. This is a stock that you can sleep well on it by knowing that it will make you rich simply by holding it without doing anything else. See here how you can do that!

 

At today’s level around $51, it is just sitting on its one-year trend line, a good point for entry. If it ever dips below $50, which I don’t expect it will do, it will offer an even much greater entry opportunity. Don’t miss it if you are a long-term investor!!

The only sector I’m willing to buy now

The biotech sector has its own mind and often not go sync with the overall market. After a few years of gigantic upward move, biotech is undergoing a burst. It has also been an impressive decline in the past few months. While it is difficult to say the whole sector has reached its bottom, at least the risks for picking up some biotech stocks have been substantially reduced. This will be especially true for some solid biotech companies with a good technical set up. Given how extremely the overall market is overbought at the moment, I’m definitely not among the herd to chase the highs. Having said that, the biotech sector is probably the only one that is showing some glittering gems.  AMAG Pharmaceuticals (AMAG) could be one of them. This is a specialty pharmaceutical company,  focusing on the development and commercialization of drugs related to maternal health, anemia and cancer supportive care. AMAG’s acquisitions of Makena and Cord Blood Registry have proven to be a huge positive for the company. It is also actively expanding its maternal health portfolio that is very much welcome by the Street. AMAG had enjoyed a great run in the recent past, reaching its all time high of over $70. But it has really been heartbroken for its shareholders in the past 2 months to see its price being cut by 75%. It is now trading around $25. At this price, AMAG, a profitable company, is ridiculously cheap with a forward 2017 PE of only 4. It is also below its book value at the moment. Technically it appears its 9 DMA is crossing the 50 DMA, a bullish move. The most recent selloff pushed it down towards $22 but with a clear positive MACD, suggesting it is ready to move up. So I think AMAG is a good long term speculation based on its fundamentals but also likely a good short-term trading opportunity for a quick bullish move. For the short term trading, of course do watch for your downside, which could be minimized by a tight stop loss just below its recent low of $22. But I’m willing to bet for its long-term uptrend!

Panic buying is ongoing

The Bollinger Bands define the most likely trading range for any stock or index. Trading outside BB indicates extremes and a reversal is usually followed. When a stock goes below the lower BB, it often suggests an intermediate term bottom and vice versa if above its upper BB, it is topping at least for the near term.  For individual stocks you often see this kind of extremes either way.   While you may often see panic selling for S&P, pushing it down outside its lower BB, you rarely see S&P go beyond its upper BB. We saw it on Wed’s strong rally. In other words, we are now seeing a very rare event for S&P suggesting kind of panic buying at the moment. While the music may continue for a while, it is an extremely dangerous sign that the music may stop any time from here.  I really believe the market is playing out the exact same script as last Oct when S&P was flirting around its all time high of 2130 before crashing. See what I said at that time here.

Following the footsteps of Kodak or BlackBerry

The stock market is doing extremely well currently and seems poised to challenge its all time high. People are happy and the sentiment is very euphoric.  With the volatility at the low end, complacent is the tone of the market. This is usually the time a black swine may hit out of blue, causing significant panic. BE CAUTIOUS! In this kind of situation, having some short positions is very wise and prudent to hedge against the potential sudden panic selling, which may come any time now. One short candidate could be GameStop (GME). 

 

GME is a US video game, wireless services and consumer electronics retailer with more than 4,000 locations across the United States. While you may think gaming is a great nowadays, especially for young people who are generally insatiable to games, the key is how the business is managed by the retailers. GameStop had some great years in the past, with a big edge over other video game retailers due to its unique  omnichannel program. This program gives video gamers the option of buying games online then rushing to the store to pick up their purchases in person rather than having to wait three days for shipping. It may not sound a big deal, for gamers this is traditionally a huge advantage as they often cannot wait and want to have immediate access to the games. This was a great business model until recently when digital downloading becomes more and more available, a trend only going much stronger, which will not look back again.  “Buy it now get it now” is a new norm in the gaming business. Recent stats have shown that sales of digital games have surpassed video games, which will for sure continue with the momentum. In a few years from now, video games may just be a word in history. Obviously game retailers are either adapting to the new trend or die soon. Unfortunately GME appears to still very much stick to its obsolete business model relying on physical delivery of games as its main selling approach. This can be seen In the company’s Q4/2015 report, in which the emphasis was still focused on the company’s expansion of physical locations instead of riding the digital revolution. This was consistent with their lukewarm digital sales that increased just 9.7% year-over-year. In contrast, global digital sales for games jumped 11% last October alone.

 

Of course the management of GME may drastically change their mindset to go with the trend but even this were the case, GME might not have sufficient cash to do so as their debt load is substantially higher than their cash on the book, not mentioning that there is little sign that their CEO and management have really the gut to totally change and adapt. This certainly reminds me of what happened to Kodak about a decade ago when it could not adapt to the new trend of digital camera and photo and has been wiped out completely in its existence. Similarly what is still going on with BlackBerry, once a dominating company for the smart phone but has failed to swiftly adapted to the new trend in the smart phone sector initiated by Apple. Unless magic occurs, I think BlackBerry is on its way to death soon.

 

I bet this is likely the path GME is taking based on what we can see at the moment. Shorting GME may likely be quite profitable in the months ahead!

I'm sure I will be laughed at....

 The US market has mounted an amazingly impressive bounce in the past month. We probably have never seen this kind of fast 14% jump within a month time period. But I think the party may likely be over by now. As impressive as it has been, the market is still in a decisive downtrend. It has tried several times to break out the downward trend line but failed. Now we are seeing less and less energy and momentum to support its attempting going further higher: while it has tried to move higher and higher, its momentum indicator MACD is drafting down, creating a negative divergence. This is often an early sign of a changing trend direction. Together with virtually all of the technical indicators pointing to an extreme overbought condition for the market, I think the chance is very high that stocks may start soon, if not yet already started, a multi weeks of down drafting. In the last few sessions, we are starting to see a low highs low lows downward trend in developing. Watch your downside now!

In contrary to the bearish US market, I think one bright spot emerging is....(are you sitting tight to hear what is coming?): the Chinese stocks! I'm sure you almost fall when hearing me saying this. But don't be too fast to laugh at me. I know it is probably the most hated market right now and people may want to vomit to even think about buying Chinese stocks. But as a contrarian trader, this is the right setup for things to turn around. Of course sentiment alone is not sufficient for me to be interested in it but the technical indicators are all lining up for a bullish case for China. As you can see below in the SSEC chart (Shanghai stock index), it is just breaking out its downtrend with the 9 DMA cross above the 50 DMA, a golden cross. It hit its bottom end of Jan and then by end of Feb it retested its bottom but with a positive divergence in its momentum MACD. If I'm right, I think SSEC may move up toward 3500 area in the next few weeks. Of course there is no guarantee and the Chinese market is notoriously unpredictable. But as a speculation idea, this one may be a good bet at the moment.