The Santa Claus Rally is likely over

It was almost perfect timing that last Friday I posted my view to call for a year end rally to continue. That was the time when S&P was crashing hard in a few days to 2005 and most of people were pessimistic and some were even looking for an Aug-like 1000 points drop in the following Monday. As a contrarian trader, I figured that was likely a short-term bottom. With high VIX and oversold junk bonds, I argued that we could see a quick year end rally from there with declining VIX and even recovering HYG for high-yield bonds. Apparently we nailed it, as in the past 3 trading days, S&P jumped to 2065 with crashing VIX and also advancing HYG. What a difference could the short 3 trading days make!! Now it seems everyone is bullish and S&P has reached the pivotal 50 DMA with a 3% increase within days, which is quite overbought at the moment. VIX is back down to the 15 level. The question is whether this Santa Claus rally could continue. Well, anything is possible but I'm afraid the upside from here is quite limited, if any. The Santa Claus rally may have done its course and is likely ending. Tomorrow we may see another gap high day but that will probably the exhaustion of the final up move. If the market has a higher opening but lower closing tomorrow, it will be a clear signal that the rally is ended and next week will likely be a very choppy short trading week to close the year end of 2015.


In the past few months, S&P has largely been driven higher by very few high-tech stocks, most notably FANG stocks. But in the past couple of weeks, these FANG have very much lagging behind and have not really participated in the latest rally. This is another warning sign that S&P may face a very tough 2016. S&P may visit the 1800 level at some point in 2016 if it continues with its downtrend started in Aug. This may be consistent with the signal the junk bonds are sending. We will see as we move into 2016 soon.


Since I will be traveling in most of the final days in 2015, this will likely be my last blog for 2015. I sincerely wish all my friends a very

Merry Christmas and Happy New Year!

Junk bonds are sending an ominous warning

Junk bonds refer to those corporate bonds that are rated below investment grade. Its formal name is high-yield bond because it has to pay much higher yields due to being more risky with higher risk of default. That’s why people also call them junk bonds. In the past 6 years, junk bonds have been chased by fixed income investors as they cannot find better interest income from anywhere else in the zero interest environment. As such, it has almost become the Wall Street darling, a rather hot investment product for years. People simply forget about the risk associated with it; actually the risk is huge, especially when the interest starts to rise. In the last 2 weeks, junk bond investors got the first sense of what kind of risk they are facing: due to the plunge of junk bond prices within days, they got stuck when they wanted to sell as not like stocks, bonds are typically more difficult to sell. The situation was so severe, several junk bond funds, started with the largest fund Third Avenue, got blowup and could meeting investors’ request to sell. But believe me, this is just the beginning and actually junk bonds are sending some very ominous warning that go well beyond just the junk bond investors. It impacts the whole financial world.

 

According to last week’s Wall Street Journal, “Junk bonds are headed for their first annual loss since the credit crisis…..US corporate high-yield bonds are down 2% this year…”. According to Barclays, junk bond annual losses are rare and actually in the past 2 decades, there have been only 4 other instances with such losses. Two of them were followed by the recessions with market crashes, one in early 2000s due to Internet bubble and the other in 2008 financial crisis. In addition, more evidence for concerns also comes from the junk-bond default rate. For this year, the junk bond default rate is still less than 3% but it is estimated to jump to nearly 5% or more next year. Be aware, a rising junk-bond default rate has even stronger correlation with economy and more often signal a recession when the rate reaches a high point. As a matter of fact, in the past 3 decades, the junk-bond default only went above 4% three times and each time it preceded a recession that followed: 1991, 2001, and 2009.

 

So what does that mean for us? Well, if the history is any guide, we may be at an early stage of an economy situation that may lead to a recession later. Of course, it does not mean anything imminent and does not mean the stock market will crash straight from here. Actually the stock market may continue to be doing fine for a while before the recession finally hits us. I think this may happen in the next 12-24 months. Just keep this in mind with the understanding that risks in the stock market become increasingly higher moving forward. Accumulation of a good chunk of cash may be a good idea and do not bet too aggressively for speculation. Rather, buying good quality stocks at good valuation will be much better for your wealth! From now no, you may want to pay more attention to what the junk bonds are doing and easiest way to do this is via HYG.

Is the year end rally done already?

I have been expecting a year end rally in the last 2 weeks of the year. Starting from Monday and following the FOMC announcement on Wed for a rate hike as expected with dovish comments from the Fed Chairwoman (Yellen), the market went up crazy and had recouped all the losses occurred last week. S&P jumped 70+ points within days, hitting its 50 day MA. This is an action clearly too fast too soon. Reasonably we cannot expect the market simply going up straight without a pause. A pull back should be within the expectation. But last 2 days heavy selloff has been quite intensive and today, S&P dropped down to 2005, losing all its gain from early this week. What a crazy market!!  The question is if there is still a year end rally? It is anyone's guess but I personally still believe we will continue to see a rally in the last few days of the year due to 4 reasons:

• We are still in a seasonally bullish time period, which has been consistently so for many years
• Today's panic selloff has made the market quite oversold, which in almost all the cases will lead to a strong rebound, baring black swans emerging over the weekend or next week.
• Junk bonds have led the stock market for quite some time. The hard selloff of junk bonds in the past week or so is again preceding the current stock market selloff. But at the moment, junk bonds are quite oversold as well (see the HYG chart below). I will not be surprised to see a rebound for HYG towards its 50 DMA (red line). If so, it will again support the idea for a stock market rebound leading to a year end rally.
• Finally, we did not see a runaway of the volatility as VIX was much contained and did not shoot up to the moon during the rather intensive market selloff. And the call/put options for VIX in the next 2 weeks are relatively even. This suggests traders are not expecting a much higher VIX (which is often associated with lower stock prices) in the near future.

So if anyone who dares to buy today during the panic selling, they may likely be rewarded handsomely next week, unless something devastating occur unexpectedly.

JO is back to trade again

A few months ago, I talked about trading for the coffee ETN, JO. I recalled it was around $20 or so and was poised for a pop-up. It was a good timing as JO indeed went up almost immediately after that for a quick 10%+ gain in just a few days. Nimble traders could have made a good quick money by taking the profit promptly. Since then, JO has come down again and wobbling around $18-20 for months. But I think another tradable opportunity is coming again for JO now. In the past few weeks, JO has quietly set up a bullish inverse H&S. It is showing an uptrend with higher highs and higher lows, which is supported by a strong positive divergence in MACD. Friday's sever market decline has also brought down JO quite a bit but it is right sitting on its uptrend line. Technically if JO can keep above this level I think it is ready for a quick move to the upside. If we are lucky enough, it could be another 10%+ return in the next few days or weeks. But remember to take such quick profit off the table swiftly as this is not a trade for long-term. However, if JO breaks down from here and closes below 18.50 (below the last low), the idea for its immediate next leg up is wrong and it is better to exit.

The Santa Claus rally is just around the corner

For many years, it has been a consistent phenomenon that the year end usually comes with a general market rally. However, this is usually preceded by a severe market selloff in the first half of Dec, followed by a strong market bounce in the last 2 weeks of the year. Last year, this was exactly like that when the market sold off very hard with VIX jumping from 15 to 25 within the first 2 weeks. Then the market went high significantly starting in the mid Dec as if everyone suddenly turned from being very bearish to bullish at the same time.  While the history does not always repeat itself, it often follows the same pattern. I think we may likely witness the same Santa Claus rally this year, following the same SC rally pattern as last year. As I said to friends at the WeChat groups in the last few days that I was expecting S&P should drop hard to 2030 or lower before a perfect SC rally could finally start, we got the hard selloff today and S&P indeed broke down the 2030 level and went down as low as 2008. Today's VIX also jumped hard to 25, which was around 15 just a few days ago. Technically speaking, the market is quite oversold at the moment and is due for a good bounce. Of course, the wild card is the FOMC next Wed when Jen Yellen is expected to announce a rate hike, first in almost 10 years. While it is widely expected and should has already been priced in, the market is still very uneasy about it as it may be worried about some negative surprise in their announcement. But personally I would bet such a surprise, if any, would be more in favor of the market than negative to it. The US economy is still very fragile in its recovery and the world economy is in a total mess. I don't think the FED will be taking any risk to announce something that could be perceived as very negative to the market. Therefore, I'm betting that the 2015 SC rally will occur as well, maybe starting next week, barring any black swan shows off.

Of course, I cannot know if today's hard selloff will mark the bottom before this rally, as there is still a chance some further selloff may occur before the FOMC next Wed. Buying some today as long positions but be willing to buy more early next week if further selloffs indeed happen is my game plan to play with the Santa Claus rally!

Is the November bloodshed over?

First of all, my condolence to all the victims in the Paris terrorist attack yesterday. Let's all pray for them?

Here is what I warned my friends last Wed on Nov 11: "The market is poised for a big downside move in the near term. In the past week, the tone for it has apparently changed, often opening high but closing low, a quite bearish sign. Then the technical setup for VIX suggests it may likely go up sharply towards 20. The lagging small caps plus declining junk bonds only add more bearish indicators.  Buying some TZA or SDS is a good idea to trade the trend." Luckily the timing seems almost perfect as the market immediately started relentless decline for 2 days, pushing S&P into the negative territory again. So the obvious question is whether this bloodshed is over by now? Here is what I'm thinking for the next one and a half months for this year.

Currently the market is quite oversold and we are moving into the seasonal bullish time, the Thanksgiving. But due to the terrible Paris terrorist attack, early next week may be tough for the market and some further selloffs may be possible. However, I don't think it will last long and likely it will quickly recover and start a very short-term bounce back, given how oversold it is now. Having said that, it is premature to say that this round of correction is finally over. I think a new selloff may likely recur again towards the end of November. This may create some real panic moods, which could become the final blow to the market. This may push S&P below 2000, possibly even around 1950.  After that, a year end rally may finally start into the new year.

Of course, it is all speculation at the moment and the market rarely follows exactly what people think. Just keep in mind, there is still risk if you want to buy stocks now for longer term, unless you are a nimble trader.

Buy RGLD either as long term investment or short term trading

Royal Gold (RGLD) is a unique gold mining company that does not mine any gold. You may see details about RGLD here.  In the past 2 days, RGLD got killed by dropping about 30% due to a significant miss of its earnings expectation. But I think this is a huge mistake by selling that much of RGLD and way too much overreaction. RGLD has a large pile of trophy gold assets that generate gold for it at an average cost of $400/oz. In other words, it will continue to sell a lot of gold at much higher prices even in such a depression state for precious metals. Yes, I know RGLD's revenue and incomes will continue to suffer due to the low gold prices but it is still a very profitable company. So, if you still believe gold for its long-term prospects, buying RGLD at this depressed prices around $35 will be a great bargain for long-term investment. It is also paying you increasing dividends by waiting for the eventual recovery of the precious metals. Even if you do not believe gold at all, RGLD is technically very oversold and is due for a strong bounce near term. It is not unthinkable to see it quickly rebound to around $45 soon.

I like RGLD as always either as long-term investment or short-term trading for now.

This depressed stock may be poised for a big run

In the past few years, commodities in general have been decimated, including almost everything. Aluminium (alu) is certainly one of them. China is the largest country demanding aluminium but its economy has greatly slowed down in the past year. This alone has caused a drastic decline of the aluminium price. No need to say, alu producers have all suffered. Among them the largest alu manufacture, Alcoa (AA) has seen its price tanked by 40% in the past year and is at around all time low at the moment. While it is definitely scary to think about put money into AA right now, there may be some good opportunity to bet for AA's turnaround. Three major catalysts may serve as its tailwind to push it higher in the next few years:

• As mentioned, Chinese economy has significantly slowed down in the past year or so but I think the worst case scenario may have already been priced in for AA regarding the very depressed demand for alu from China. Any pickup of the Chinese economic activities will certainly increase the demand of resources including alu. There is another new trend which should also be quite positive for AA. China has just announced to abandon its one child policy and is moving to 2 children policy. This will mean tens of millions of additional babies will be added every year in China. One significant impact of this additional population will be an increase of its demand for all kinds of resources with alu among them. For sure the positive impact won't be imminent but will be felt and reflected by the AA's stock as well moving forward. 
• Alcoa is developing a new process to produce a new type of alu (micromill), which is called "Miracle Materials". Basically this new alu material will be much lighter and stronger. This new feature of alu is certainly great news for car and aircraft sectors as they may largely benefit from this critical miracle material to increase the safety and fuel economy of their products. No wonder AA has just announced a $1 billion contract from Airbus. More such deals will certainly come in the next few years.
• Last but not least is a catalyst that may make AA soaring more quickly than the above more macro factors. Alcoa has just announced a spin-off that will be done next year. Studies have shown that spin-off is usually very positive for the company and therefore greatly welcome by the Street. This is because the spin-off will generally make the company more focused and efficient and is also easier for the Street to analyse its business for the underlying values. The direct benefit for shareholders will be that they will get the shares of the spin-off company for free. Of course the initial value of both stocks will be largely equal to the value of the mother company prior to the spin-off. But over time their share prices may significantly increase as long as they manage their business well. I have had the first hand experience on this. I got free shares of Philip Morris (PM) in 2008 when it was split off from Altria (MO). Now after 7 years, not only PM's share price has almost doubled, MO has "recovered" as well, as its current share price is much higher than its adjusted price at the spin-off. More recent example is HP that has just closed the spin-off a few days ago. Its share price surged 13% on the day when the new stock started to be traded. I expect something similar to AA may also occur.

Of course, please do understand this is not a short-term trading idea but rather for a longer-term investment. Regardless how bright AA prospects look like in the next few years, it will be a quite volatile stock for sure as for any commodity stocks. But I think the potential reward outweighs the risk, especially if you have a good exit strategy in place, e.g. a stop loss to protect your capital. 

This dead money is reviving

For those who know me, it's no secret that I love Microsoft (MSFT) and I have started to accumulate its shares since prior to the financial crisis in 2008. Over these years,  I have regularly talked about MSFT (for example, here, here, and here), including early this year that I was pudding the table urging to buy MSFT. But I know my talking about MSFT usually goes into the dead ear as no one is interested in the dead money like MSFT. Most people are only interested in sexy high profiled stocks like AMZN, TSLA etc. But for me, long-term investing in the dead money like MSFT is one of the most unknown or misunderstood secrets of wealth building techniques, which can truly allow you to amass an enormous amount of money but with very little risks involved. Basically you can sleep soundly with money in stocks like MSFT as it is almost like saving your money in the bank but you can enjoy high-growth of dividends which can be compounded via DRIP. But today, I must say the dead money hat for MSFT should be tossed off. Under the leadership of the new CEO Nadella, MSFT has successfully transitioned from a PC business-focused company to the front lines of the mobile revolution. It now has 2 new smartphone models,the 950 and the 950X, and both run on the company’s new main operating system, Windows 10. More impressively, both phones carry advanced technology called Continuum, which will allow the phone to be easily connected to a PC monitor that essentially turns the phone to a PC. In addition, MSFT also rolls out a new laptop computer, the Surface Book on Windows 10. Therefore, Microsoft now offers smartphones, laptops and tablets that all run off Windows 10. This has virtually established its own  “ecosystem,” a core business moat for Apple's success. Moreover, MSFT's cloud business is also thriving and starts to add significantly to its bottom line. All in all, MSFT has been beautifully transformed, which is translated into a great earnings report that has surprised everyone. MSFT jumped 10% after the ER, reaching multiyear high close to $55. I'm sure it will very soon challenge its all time high around $58 reached at the dot.com bubble time 15 years ago.  Not long ago, I was thinking MSFT may soon become next Apple. This seems more and more a reality.

You may think I must be happy with a fast advancing of the stock prices for MSFT. Not really. As I said, I love MSFT for its stable multi-streams of income that allows it to pay increasing dividends over long period of time. I actually wish it could stay low that will allow me to accumulate as many shares as possible. This will eventually make me much richer than what its share price gain will bring. Looking at its increasing share prices will certainly make one happy at the moment, it actually hurts in the long run. But of course, I cannot stop MSFT from becoming a high growth stock again.

So is it a good time to buy MSFT now? Not really. While MSFT is still having a very good valuation even near the historical high due to its high stockpile of cash, very near term it is quite overbought after a 10% jump. I think MSFT may likely come down to test its support around $48, about 5-10% correction. When that happens, it will be a great buy to me for long-term.

A contrarian trade for natural gas

Recently, the National Oceanic and Atmospheric Administration was predicting a mild winter this year due to El Nino. This has led to a decline of the natural gas (NG) price as a warm winter would mean less demand for natural gas. A few days ago, the U.S. Energy Information Administration (EIA) was forecasting that household natural gas heating bills will fall by 10% this winter. This has really crashed NG and its price dropped like stone, briefly below $2. It has reached a historical low at the moment. This may set up a great contrarian trade with a few things to consider:

• The sentiment is extremely low as virtually no one is interested in NG at the moment. As I said before, when everyone is standing on one side of the boat, it will soon tip over.
• The current historical price has likely factored in the low demand of NG during this winter. However, we all know that how accurate the weather forecast is, especially for something in a few months. I have seen a different forecast from the meteorologists at WeatherBELL , which is a premium service based on their models that a major cold and snowy winter over the South and into the East will occur in the coming months. If this turns out to be true, it may surprise everyone and the mood for NG can turn around overnight.
• We all know in the past decade, US has produced too much NG due to the revolutionary fracking technique. So we have a lot of supplies for NG, causing a downtrend of its price. But the thing is, when it is cheap, the demand for it will increase. Actually more and more power companies are switching to NG from the traditional energy source of coal. On top of that, due to the very depressing situation for oil and gas companies at the moment, increasing number of rigs are stalled and the production is going to be substantially reduced moving forward. 

Therefore, if we suffer a bit more severe cold weather in the coming months, I'm sure the NG price will shoot up greatly. One way to trade this idea is via the major NG producing company, Range Resources (RRC). As with NG, RRC is also in a bust mood with very depressed sentiment towards it. But if NG goes up due to any surprise, a jump of 15-20% of RRC is not out of reach. Of course, this is a risky contrarian trade and don't bet with the money you cannot lose. And better to place a tight stop loss, e.g. 5% from the current level. 

A new EFT for cancer immunotherapy

If you know a bit about the biopharma sector, you must know that right now the hottest area is nothing but cancer immunotherapy. BMS is the leading and first company to market the immunotherapy for melanoma, ipilimumab, which has been very successful and profitable. This is really a breakthrough, opening a totally new era for cancer treatment and has brought up the true hope that some day, cancers will not be a fatal disease but rather a chronic one and potentially curable.  Needless to say, a lot of money will be made in this area and this is just a beginning at the moment. I have been hoping for a ETF so that one can have a focused investment with good diversification to minimize the risk. Now we have got one. A brand new EFT, the Loncar Cancer Immunotherapy ETF (CNCR) has just been lunched for about a week. Here is some information for CNCR. It currently includes 35 companies involved in developing various immunotherapies at different stages. It covers both big biopharmas as well as mid-size biotechs. Below is some key portfolio information for CNCR. Given many of the underlying companies are greatly loved by the Street, valuation-wise, CNCR is not cheap. But since this is really one of the hottest areas at the moment, I'm not sure you can expect it to be cheap in the foreseeable future. Using dollar cost averaging may be the best approach to put some money into it. I personally have a high hope for it long-term.

Is Walmart a good buy now?

In the last earning report about 2 weeks ago, Walmart (WMT) posted rather grave earnings with a dire projection of decreasing profit growth in the next 3 years. We all know what happened to WMT: a one-day 10% plunge which has not happened in decades. Needless to say, investors were scared and all rushed to the exit by dumping the stock at the same time. I must say, I have been wrong for some time about WMT as I was expecting it would have done much better by now in transforming its business. So is WMT still a good buy now? Well, this is not an easy question. But fortunately I have seen a friend's (Chaoran) analysis about WMT, which is rather thoughtful about its valuation and possible prospects in the next few years. He has graciously agreed to allow me to quote his analysis here:

By Chaoran 

 

I meant to write about WMT on its 10% drop earlier in the week, but threw it away since I really had no great insight on WMT. In the short term I could see it go either way: there could be a short term snap back with traders trying to make a quick 5-10%; or it could go down further due to disappointment and people throwing up hands with tepid projections from the company for the next 3-4 years. So I really have no idea if your intention is to have a short term play for the next 12 months or so. If instead you want to have a relatively long term assessment of WMT as an investment for the next 3-5 years or longer, I would offer a few of my personal views: 1. There is limited downside at the current valuation level: WMT is trading around 12-13 times of earnings. 2. The upside depends a lot on executions for the next 2-4 years. There are big uncertainties in management's ability to execute their plans to transform the company. They may or may not succeed. 3. Even if they succeed, you are looking at flattish earnings for the next 3-4 years, taking their projections at face value. It would require a lot of patience. Sure, you're getting paid a 3% dividend while waiting. But if their plan doesn't pan out as a decent success, would you be satisfied with something like 5% a year for the next 3-5 years? Now if it succeeds, what kind of return can you expect for the next 5 years? Let's assume its earnings stay flat for the next 3 years and its PE multiple also stays flat at 12.5. So you only collect 3% a year in dividends for the next 3 years. After 3 years, assuming WMT gets back to higher growth. But how high? WMT has averaged EPS growth about 7.5% a year for the last 10 years, but virtually no growth for the last 3-4 years. Realistically, I don't think WMT could be expected to grow more than 7-8% a year on a normalized basis, given its size and a host of other issues (e.g., higher compensation costs going forward, limited ability to expand domestically, less profitability internationally), even if they turn around successfully. Let's assume WMT does get back to 7.5% growth in EPS after 3 years. What kind of PE multiple does it deserve? Well, it should be higher, perhaps 15-17. Let's say it's 16. Right there you get a markup of about 28%. So that's about 28%/3=9% a year. Adding the 3% a year in dividends, you get 12% a year for the first 3 years. Not bad! But that's only if they succeed. A big if, though. Let's say that's the case. After the next 3 years, you will just get something like 7.5%+2.5%=10% a year. I'm assuming a more normalized dividend of 2.5%, since at higher PE multiple the dividend yield will be lower. All in all, it appears the best scenario is to earn you 10-12% a year if you hold it for the next 5+ years. If WMT fails to execute its transformation plans, your return will be quite unsatisfying. Could WMT get back to faster growth like 10+% a year? Not impossible, but not something I want to bet on.

 

I like this rather comprehensive analysis and also very much agree with the conclusion that WMT is not likely to get back to fast growth in the foreseeable future. Having said that, I'd like to offer some ideas about trading and investing in WMT from a different perspective.

 

With respect to trading for short-term, I do believe WMT is likely at or near its bottom at least for now. The sentiment for WMT is understandably extremely poor and almost no one wants to touch it anymore. This is the time when a bottom, not the top,  is near or reached. Technically WMT is quite oversold and offers a good opportunity for a quick rebound. Having said that, it is still a falling knife and the overall market is quite risky for a severe decline any day. To minimizing the risk of catching a falling knife, it is better to wait and see some evidence that WMT may have bottomed.  One good indicator is that, when the market falls off the cliff,  WMT  refuses to go down much or even goes up. That's the time to make a bet for its rebound.

So how about the long-term investment? Well it also depends how you would like to put money into it. While I do agree with the above analysis that it is likely that, even if the management has executed the transformation plan well, WMT may still likely stay at a slow growth rate. So if you are looking for an annual return 15% or more, you may not want to invest in WMT at all. However, there is another way to invest for long-term, good for this kind of slow growth companies with good dividends. If you are very patient and not looking for immediate return but for very long-term investment aiming for the ultimate values, then Dividend-Re-Investment (DRIP) is a good way to invest in WMT. I have written DRIP quite often in the past and here is the one which can mathematically prove that you don't need high growth stocks to become rich, as long as you have a very long investment horizon with patience. I think WMT is worth for long-term DRIP investment at this level. There are a few things to consider:

• As discussed in the analysis cited above, WMT is very cheap valuation-wise. After such a historical bloodshed, I don't think WMT will go down much further from here. The extreme dismal sentiment towards its long-term prospects has likely been priced in its price. Short-term it may still fluctuate a lot due to the overall market uncertainty; longer term however, I'd feel more comfortable to establish a position at this level, if you are willing to stay with it with DRIP in place.
• WMT is still generating a lot of cash from its retail business, given its size and presence world-wide. Per the company, it will generate $80 Billion free cash flow in the next 3 years.
• It has decades of track record to pay increasing dividends, a feature important for DRIP. Although it may very likely slow down or even stop increasing dividends in the next few years, given the current rather challenging financial situation, the chance of a dividend cut is highly unlikely since it continues to generate tons of money and its dividend payout ratio is quite low (< 50%). Therefore I think it is quite safe to invest in WMT with DRIP. The aim here is not for immediate return but rather to automatically accumulate its shares as much and fast as possible for long-term. Eventually this will allow you to hit a jackpot with exponential increase of the position value.  As such, a low share price is not a bad thing but even beneficial as long as the company is still generating enough cash to pay dividends.

The million dollar question is obviously whether the management can execute the transformation plan well in the next few years. Well, personally I still have good faith in it, given it has gone through numerous challenges since its birth decades ago and this one is certainly not the only one and the last one. I think it will find its way to revive and thrive again. This reminds me of MCD and MSFT few years back till recently when both had been considered dad money for years due to failure to timely responding to the changing environment and trends. But both have finally found their way out. I think we will see the same story for WMT eventually. However, this is only my personal opinion and no one knows for sure what will happen in the future. In case WMT turns out to continue to deteriorate substantially, the DRIP investment for it will not work well. We need a clear exit plan how to handle this unlikely scenario. Here is what I will suggest: don't go crazy to put a lot of money into it but have a reasonable position size. For DRIP the idea is not to bet for one stock with a lot of money but rather aim to create values via DRIP long-term with a relatively small position for each one. With that, use a trailing stop loss that you are comfortable with, e.g. 15-20% so that if WMT is indeed going down to the hell, you can get out without losing too much.

Thrive in a cashless world

This is a fast changing world with mind-boggling innovations brought up everyday. There are many new trends which are going to dominate our life in the future. One of them is a cashless world. For many years, cash has become less and less used in our daily life due to ever increasing usage of credit cards, debit cards and other traditional electronic banking. Now with lightening speed of expansion of the mobile world, the new ways of electronic payment like ApplePay, AliPay, Google Wallet just accelerate the death of cash. Maybe in the foreseeable future, cash will indeed become obsolete and disappear from people's wallet. There are certainly many company which will thrive in this cashless world. But one company is showing its particular strength. I'm talking about Global Payment Inc (GPN).

Global Payments provides payment solutions for credit cards, debit cards, electronic payments, and check-related services. It operates in two segments, North America Merchant Services and International Merchant Services. It processes billions of checks, payment cards, and e-commerce transactions annually for more than 1.5 million merchant locations around the world. Apparently GPN is not in competition with but rather work with various card-issuing and electronic payment companies by providing innovative software-supporting and processing solutions. Now with the mobile life dominating the world, GPN is not simply sitting and watching but is also actively participating in this mega trend. Below are just the 2 examples as described by GPN:  

Mobile Payment and Back-Office ManagementWith Global Payments' mobile solutions, you can turn your mobile device into a powerful payment system from point-of-sale to inventory management. Accept cash or credit. Scan barcodes. Manage inventory. Email receipts. And have real-time reporting – wherever you are.

Apple Pay
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Its healthy and growing business has certainly been reflected in its financial data, mainly revenue growth higher than the industry average of 21.5% with strong earnings growth of 37.5%. Its recent reported net income growth came in significantly exceeded that of the S&P 500 and the IT Services industry (by 26.6% one year same quarter comparison). As such, its net operating cash flow has sharply increased by 165%. Its strong business can also be demonstrated in its long-term stock price trend. Below is its 5 year share price chart. As you may notice, it had been in sideways for years prior to 2013 and its share price has strongly moved up since 2013, roughly coincident with the start of the major change in our shopping behaviors by using more and more mobile payments. The long-term stock trend can hardly cheat people. If its business model were obsolete and could not be integrated into the most powerful trend of the cashless mobile world, you cannot expect its share prices could have consistently moved up over time. That's the main reason why I really think this is a stock that has a great future as long as it can continue with its momentum. The key question is whether it is a good buy now? I don't think so. Actually I think it is quite overbought at the moment at about $130 and there is a great chance it will correct by 5-10% near term. I'm targeting it to correct to around $120 to find its base for the next leg up. If you want to ride the cashless world, then GPN is one of the stocks you may bet on.

You will never be insolvent by being cautious

Following my bearish view posted yesterday expecting a sharp market turndown, I got a comment "As much as I like your crystal ball, I am also mindful of the wisdom that says "Market can be insane longer than you can remain solvent".  This market is insane, and it may last a little too long." This is a very good point and I'd like to post some further thoughts on my opinion.

I definitely have no crystal ball and as much as I'd like to be correct to see a sharp market plunge starting next week, I really don't know whether this will happen or not exactly per my timing. However, the key message of mine is not about the timing but rather "BE CAUTIOUS"! Why is it so important about this cautionary message?  Because this is the time when herd investors will start to chase the market by being aggressive to buy. You see, we start to see all the talking heads on TVs beginning to be quite bullish and talk about year end rally. We are also seeing Wall Street analysts giving advices that it's the great time to buy as the correction is over and we have seen the bottom now. When this kind of euphoric sentiment floating around while the technical indicators all pointing towards a rather overbought market, it is the most dangerous time to put your money to work. However, this is exactly the time most herd investors cannot hold up and they are very anxious to get in because they generally fear they will miss the boat if they don't buy now. That's why I'd like to be contrarian and caution anyone who care my view about the market status. Of course, I could be wrong but I can say you will never be insolvent by being cautious. We may miss some opportunity if I'm wrong but it's much better than to be caught up in a sharp market crash. If the market indeed turns out to start a powerful bull run, it will never be too late for us to join even if we miss the initial few points of increases.  With respect to the idea of shorting some stocks, let me be very clear: I'm not blindly advocating everyone to short anything. It is not suitable for the majority of investors/traders. It should only be considered for those who are experienced in shorting and know how to control their risk. Otherwise, there is indeed a risk of be insolvent when you are aggressively shorting but the market keeps going against you!! DON'T DO IT UNLESS YOU KNOW WHAT YOU ARE DOING AND ONLY PLAY WITH THE MONEY YOU CAN LOSE.

A final word about value stocks for long-term investment. I personally have quite a lot of such stocks that I have no intention to sell for long time. I do not suggest anyone to sell them as well simply because I'm expecting another market correction. As long as they are still good in valuation, simply keeping them will not go wrong. Personally I have virtually placed a short hedge for each of them because I'd like to be compensated for some paper loss if the crash indeed occurs. I also hold a sizable cash load and will only aggressively buy when I feel the final bottom is indeed in place.

This oil company could be a good hedge for declining market

Tetra Technology (TTI) is an oil service company. As we all know, oil companies in general are facing significant headwinds in the past year and many of them are on the verge of crash or bankruptcy. TTI may be one of them, if it continues to bleed with fast burning of the capital. Let's first look at its key financial data why TTI is in a dangerous situation (you may find all these data in Yahoo Financial): TTI has a negative EPS at -1.9 with negative free cash flow in the past year at -$34.30 million. This means TTI income is substantially below its expenses. As such, its return on equity is: -22.02%; profit margins: -12.59%. It has $936.11 million in debt with only $41.94 million in cash. So its Debt/Equity is 123.98%. Of course, if the oil market can quickly recover to allow TTI to swiftly make more money, TTI may avoid this dire financial abyss. But unfortunately it is not likely to happen in the near future. Yes, the oil market has been on fire in the past week or so but I don't think it can last for too long, at least not for now. Similar to the overall market, the oil sector is a bit too hot for now and I believe it will take a breath as well. If both the oil sector and the overall market come down as I expect, it won't be good for TTI. But what makes me more interested is its technical setup. As you can see below, for the most part of the year, TTI is roughly fluctuating in the range between $4.5 to $8. Now it's approaching the top end of the range. A more bearish sign lies in its H&S formation when it is approaching the overbought condition. I think TTI is a tradable short candidate as part of hedge in your portfolio in a declining market. Of course, shorting always has inherent risks. Don't try if you don't know how to do it and always have a clear exit strategy in case the trend is against you. To me, if TTI breaks out it recent high above $7.7 at closing, I think the idea is wrong and a stop loss should be triggered.

 

Be prepared for a retest of the Aug low now

It's really amazing how people in the market can change their mood so fast. When I said I was very bullish just a little bit over a week ago, hardly anyone was happy and joyful about the stock market. Honestly, I did not expect this kind swift change almost like overnight from depression to euphoria. That's why this mood change appears more like a schizophrenic behavior. It is purely beyond my expectation. I thought it would probably take at least 2 weeks or so with a few times of back and forth to move the S&P above 2000. But it has just happened like a snap of fingers and S&P shot up non-stop for 5-6 days, going directly above 2000 and reaching almost 2020. I initially targeted 2030 as its turning point but I'm not sure this will need to happen anymore.

You see, now the situation is just a mirror image of what it was a week ago: now all the people in the market are happy and fearless, all stepping on the euphoric side of the boat (as opposed to the depressing side a week ago). As I said, when this happens, the boat tends to tip over. The market is clearly rather overbought. S&P is at its upper end of the Bollinger Bands and the Stochastic Oscillator (SO) index (at the bottom) is approaching the highest level at 97.2. Mathematically SO cannot go over beyond 100! You may check the SO over the past year when it was at that level and what happened next. It almost always preceded a sharp decline of S&P. VIX, the fear index, is below its BB lower end, indicating it will soon move up (which usually means a declining stock market). The call option prices for VIX are also much more expensive than the put options, suggest higher VIX in the next few weeks. The junk bond prices are starting to turn down as well, which often the leading indicator for the stock markets. There are simply too many technical indicators that suggest this dead cat bounce is close to its end, if not yet ended. I bet starting from next week, S&P may resume its next leg down, and likely will go down to test its Aug low or even lower.

Remember what I said 9 days ago: I think its final plummet may only start when it is over 2000 and when most of the people start to think this correction is over and starts to be quite bullish for longer term into the year end rally. This is likely the time when the market will start to punish as many investors/traders as possible. I believe the time is ripe and the market will show its mighty power to punish as many as possible. BE CAUTIOUS!!

Enjoy a sweetie year end

Believe or not, the commercially busiest season of the year is quickly approaching and Santa Claus has already started to greet you in many malls. So what is a good gift loved by most of people? Many but chocolate is definitely one of them. Just go to Costco or Walmart or any grocery store, chocolate is certainly one of the those gifts placed at the busy traffic lines. Given the brutal stock plunging in the past couple of months, I think you may consider to buy some chocolate stocks as your own year end gift.

The stock I love most is Hershey (HSY). This company has over a century history, which means it has gone through all kinds of tough economic or political turmoil, such as great depression in 1929, oil crisis in 1973, black Monday stock market crash in 1987, dot.com tech stock crash in 2000 and latest financial crisis in 2008. Regardless how challenging the world economy is, people will still buy and eat chocolate and Hershey, the most famous US chocolate brand has only become stronger and stronger fundamentally. The thing many people don't realize is its efficiency of business investment.  Do you think HSY requires a lot of capital investment for new technology for its products? Hardly anything meaningful relatively speaking, since for centuries, the processing and manufacturing of chocolate remains largely similar but of course some good improvement has certainly been made. However, proportionally against its revenue, such new capital investment required for improving manufacturing could virtually be ignored. Largely due to this reason, HSY is generating a lot of free cash, which has been used to reward investors for decades via increasing dividends and stock share buy-back. Hershey is a stock you can own and probably forget about it for life as long as you buy it at good prices and reinvest its dividends. Right now, it is probably a good time to pick up few shares of HSY. It is not super cheap but it has "crashed" almost 20% lately thanks to the market turmoil. Not only that, if you look at its price curve for the last 5 years, you may notice that HSY typically starts to move up quite handsomely during the last quarter and into the new year period. This is consistently with its best business seasons for Halloween and Christmas.  So even from the trading perspective, buying HSY now is likely a good idea.

I'm very bullish

Very erratic and busy schedule has kept me mostly quiet in the last couple of months and I will probably keep this way for some time. Just a quick note about what I'm thinking about the market now. You may think I'm out of touch and mind by saying I'm very bullish now. Indeed, the overall sentiment is extremely depressed and almost every talking head at CNBC is discussing how the market may fall apart from here. The market trend is clearly descending and may likely continue. So why am I saying I'm very bullish? Well, it is all about the timeframe. While I'm also very bearish for the longer term, I think the near term trend will be quite bullish. You see, the market has its own mind and it rarely rewards the majority opinion. When everyone steps on the same side of the boat, it will tip over. I think we are at this time point right now. So let me make a bold prediction as a trader: I think in the next few weeks, the overall trend will be going up and S&P may likely go beyond 2000 or even close to 2030 before the short-term bull run is over.

But don't get me wrong. I don't think the market has touched its bottom yet and it may likely plunge again to test the Aug low before this correction is finally over. I think its final plummet may only start when it is over 2000 and when most of the people start to think this correction is over and starts to be quite bullish for longer term into the year end rally. This is likely the time when the market will start to punish as many investors/traders as possible.

At the moment, the market is rather oversold, which has brought down many great stocks with it. For trading purpose, buying some good but beaten down stocks may likely reward you in the short term. Actually the whole healthcare sector has been brutally beaten up so much that I think at least a short-term strong rally is very likely.

The final precautionary word: this is a very fluid and moody market at the moment and it is even very difficult for experienced traders to manage. For most of people, staying at the sidelines may be is the best advice I can give until a stable uptrend is established. You may start to pick up a few shares of good value stocks for long-term but there is a good chance you may find better prices for them in weeks ahead.

One day opportunity for a potential quick gain with gold

There is a good opportunity emerging but it will be gone after tomorrow.
For anyone who are interested to buy some gold at this price, you may do so tomorrow and your position may potentially quickly gain by 6% due to a corporate action.

I'm talking about Central GoldTrust (GTU), which is a Canadian-based closed-end gold trust fund, one of the largest in the world. This is a fund you can trust as it is truly backed up by physical gold. But as a closed-end fund, it can be traded at discount or premium depending on the market mood. So far GTU is at a 5.6% discount to its net asset value (NAV). If you like gold at the current price, this is a good deal since when people start to love gold again some time later, the discount will disappear and likely it will be traded at premium.

Now even a better deal is emerging. The Canadian billionaire, Eric Sprott, is famous for his successful investment in precious metals and according to him, his personal assets are at least 80% tied to precious metals. That shows how strongly he is confident in gold and silver. Sprott has set up an ETF, Sprott Physical Gold Trust (PHYS), which is not only backed up by physical gold but it can also deliver physical gold to investors for their fund units, if they decide to do so. In other words, it is almost like you buy physical gold and save it with PHYS. Because of that, PHYS is always traded at its NAV, equivalent to the spot gold price. Because of that, Sprott think GTU is not a good option for gold investment and is seeking GTU shareholders to vote whether they would like to merge with PHYS or stay as it is. This vote will come at 5 pm tomorrow Eastern. If PHYS is voted for, then the discount on GTU shares will immediately disappear. In other words, GTU share price will suddenly increase by about 6%.

Of course no one knows for sure what will be the vote result but I think the chance is high. Even the worst case when GTU stays as it is, you can still buy it at a discount. I cannot say gold is certainly at the exact bottom but I think it is damn close, if not yet there. Starting to accumulate some gold shares is not a bad idea at all in any case. After all, it is a financial insurance everyone should have.

Where to park your money now?

Everyone knows that the stock market is extremely volatile at the moment and this may continue for a while. I still believe the current correction is not done yet and more downside is still ahead of us. In this situation, the market is controlled by extreme emotional swings more than anything else. It is definitely not a market for most investors and traders I suppose. Yes, it is a traders market but even for experienced traders, it is not as easy as at usual times. There are simply too many "emotional black swans" that can easily derail any technical trending. So for most people, holding cash is a better option until the market starts to stabilize. The million dollar question is where to park your money safely now?

Well, simply keeping cash is definitely the safest option that no one else can beat it. But of course you are virtually paid for nothing. If you can tolerate a little bit risk, preferred stocks (PS) may be a good alternative for you. If you are not familiar with PS, see my previous blog about its concept. While you can pick individual PS if you are savvy about it, there is an easy way to buy an ETF, PFF (iShares US Preferred Stock), which has done the ground work for you with a group of PS shares. As you can see below, PFF (blue) is quite stable compared with S&P index (red), especially during market turmoils like the mini-crash we saw recently. The purpose to buy PFF is of course not for capital gain (similar to if you are saving your money in the bank) but rather to earn its nice dividends (6%) while still keeping your money relatively safe regardless how the market goes. Now is a good time to buy some preferred stocks as part of your cash management, I think.

Update on SBUX and BIDU

I talked about SBUX and BIDU before with bearish view and they did faltered quite a bit even before the market crash. I happened to take a look at both charts today and thought to share with you what I'm thinking about their near term trend.

Of course, right now the market is more controlled by extreme emotions than anything else. As such, technicals are not always as reliable as used to be at usual time. Some little black swan can easily turn things around either way. Then, next week FED’s move is a big unknown and it can cause huge swings either way. So take my technicals with a grain of salt.

Unless FED is totally a negative for the market, in the near future the market may be quite bullish for a couple of weeks before getting another crash to test its Aug low below 1900. In this context, SBUX is shown technical strength and there is a good chance it may first challenge $58 and then $59. If my technical is correct, it may likely not go beyond $59, but will come down again with the overall market.

Regarding BIDU, it may likely fluctuate around current level $144. But pay attention to $152 as it is showing some technical strength as well now. If it can definitely break out above this level, then it will easily go up to $160 and then to around $170 if the overall market is supportive. But again, chances are it may not likely go too much before $170 in the near term.

Has coal bottomed by now?

Anyone is interested in coal? Likely not! I bet no one wants to even talk about it. But believe or not, coal will not disappear in our life time and it is still one of the major energy sources around the world. Even in the US when the use of coal has consistently decreased over years due to cheap natural gas produced, half of our electricity generation is still relying on coal. Don't even mention in other countries where natural gas is several times more expensive. In short, coal will still be demanded in the foreseeable future. In the past several years, however, the coal supply has relentlessly decreased due to bankruptcy of many coal mining companies and shutdown of increasing numbers of coal mining projects because of depressed demands. At some point, demands will outpace supplies and when this happens, it may create a shortage of coal supplies since it usually takes years to restore a dead coal mine to its full production capacity. The million dollar question is whether the coal sector has bottomed? The recent move of BTU may make people think so.

If anyone is watching Peabody (BTU), the world largest coal mining company, you can certainly understand that brutality may still not be a strong enough word for BTU, as in the past 4 years it has experienced an epic crash from its peak of over $70 to below $2 recently. The trend is absolutely downwards. But in the past week or so, BTU is popping up and breaking out this 4 years downtrend. It jumped from $1.5 to $2.5, a huge move (+65%) not seen for years. Importantly, this move has made it go beyond the downward trend line, a bullish break-out. Does this mean a bull trend is starting now?  I'm not so sure yet. This huge move seems to be related to the rumors that BTU is hiring a bank for restructuring its debt in order to avoid bankruptcy. Due to heave short interest that most people were shorting BTU, this news may likely trigger a short squeeze to propel the moonshot for BTU.

Watch BTU closely to see if it can hold up its support line around $1.9. If it can and start to move up again without further unexpected positive news, then a trend change may indeed be considered for the coal sector. Buying at that time will be much safer if you want to catch up the early train. After all, it is still too early to say the bottom for coal is in until we see a clear sign.

You will regret if you don't buy some Chevron now

About 3-4 months ago, I made 2 bold predictions: the stock market was heading for a severe correction in the magnitude of 10-15% and the 10 year treasury rate could come down to 2%. Well, it took some time to materialize but both did occur as expected. But to be honest, the speedy crash within 2 days time was somewhat unexpected as I thought it would take quite some time with back and forth volatile fluctuations to finish the whole correction. But the market has its own mind and it wanted to complete it fast and decisively. So will the market simply recover from here and shoot up immediately? It is possible but I think the significant technical damage has been done and it will more likely take time to repair. In other words, the violent rebound in the past 2 sessions could be short lived and we may see S&P go down again toward low 1900s soon.  If it can hold above 1900, it is bullish and could mean it wants to move higher soon.

With this kind of panic selling, many great stocks lost quite a bit of their values, but I think CVX is especially at a great value. People are worried about its ability to pay dividends but it has a 27 years of track record of paying increasing dividends. You can bet during this 27 years period it has experienced many challenging times like today, including the financial crisis in 2008-2009 but nothing has materially damaged its business in a sustainable fashion. It will survive and come back again. Its CFO recently has specifically addressed the concern of its dividends and clearly indicated that they are doing anything they can to keep the track record intact. Another good sign is that many insiders are buying at the prices of $100, $90s, to $80s. Historically, CVX dividend yields have ranged between 2.5% to 4.5%. You rarely found the time when its yield jumped to 5-6%, suggesting its share price was quite depressed. Now is the time that CVX dividend yield is around 6%. I don't think it will stay there for long. Yes, the crude oil may still go down further and CVX could still fluctuate in price. But to me, it will be insane to not buy some CVX shares at this low price for long-term investment, especially if you keep dividends reinvested. For long-term investment with great stocks undervalued, its price fluctuations really do not mean too much. Buy some CVX now!

Now what: Baidu

As predicted, Baidu did follow my instruction and came down to the $150 level. At this level, Baidu is not particularly expensive but certainly is not cheap as well. So what will Baidu do moving forward?

While Baidu did continue its downtrend as I expected, I didn't expect it would have completed this correction so fast. Apparently the fast downward move was largely associated with the gigantic plummet of the Chinese market as well as the recent panic sell-off in the US market. Unless this kind of brutal sell-off continues relentless without a stop, I don't expect Baidu will easily give up its next strong support at $150. It will likely stand up on it but the million dollar question is if you can safely buy now. It depends on whether you want to trade or invest for long term. If you can act nimbly for trading, now is likely a good time to buy, aiming for a bouncing back. But be aware that its overhead resistance of $175 is not an easy target to break out. More likely it will be moving sideways for a while between 150-175 until some good news comes in to elevate it. Even after it successfully breaks out through 175, it is still within a much bigger downward channel. If it truly starts to show new life and begins a uptrend, it has to first break out decisively through the upper trend line of the descending channel. Only then, it will be safe to buy for long-term.

In a nutshell, Baidu may be a good buy for trading but it's too early to decide whether it is a safe buy for long-term. If you really like it and want to own some, buy a small portion first and watch for its high highs and high lows to establish an uptrend.

Where will the market go from here

In a nutshell, in the next 1-2 weeks, S&P will likely go up to meet its 50 day MA (red line) around 2100 but then it will resume its downtrend again and test various support lines. The most likely scenario for me is that S&P will be bottoming around 1990-1950. But if the situation becomes really ugly, then it is also possible S&P may go down towards the bottom of the last Oct correction below 1900. We may likely not see this but we need to keep this in mind as well.

This is what I predicted early July when I got quite a few responses saying I was too pessimistic as all the data looked quite positive at that time. You may wanted to check the pathway I paved for S&P then. It almost exactly followed my script (the yellow line below). Now with the brutal crashes in the past couple of days, there was enough panic in the market and we do smell capitulation. This is not what you will see at the top but more so at the bottom, even in a short-term. Actually all the technical indicators show an extremely oversold condition, which often precede a rebound. With this kind of panic runaway, I'd think a rebound could be quite strong and fierce that may start Monday. I think virtually you can buy any stocks and you may likely make some quick money. Of course I'm not suggesting to blindly buy. So where the market may go in the next few weeks? S&P has broken two major support lines, one around 2050 and the other 2000 (green lines). Naturally when the elastic band snaps back after stretched too much, it won't be a slight move. It will first try to break out 2000 but more likely it will try to kiss 2050 if the momentum is strong enough. However, keep in mind S&P has been technically damaged significantly and it will take time to repair. There is still a chance it will resume its downtrend to test the next support around 1860. But first we have to see if it can hold up at the current important support at 1970.

Baidu is on its way to $150

Here is what I said a couple of weeks ago in my playbook for Baidu: The recent missed earnings may further push it down to a lower level. It has broken out its support around 175. Given being a little bit oversold, it may bounce back to 175, a resistance now. I doubt it can break this out. If I'm right, look for more downsides for BIDU. Its next strong support will be around 150.

Amazingly BIDU has followed exactly the path that I have paved for it: it did bounce back to $175 and then turned around to plummet again to $164 as I'm writing. Unless some unexpected positive news pops up, BIDU is almost for sure will go down to test its next support around $150. Any attempt to rebound will likely fail before it finishes its downtrend.

You can love its services and functions but don't fall in love with its stock, at least for now.

The weakest link

If anyone asks you what is the worst sector at the moment, I'm pretty sure most people would think about oil industry. Indeed crude oil has got haircut over 50% in the past year and it dose not look like the pain is over. The blood will continue to flow in the streets for a while. In this kind of situation, it is fairly hard to trade. Yes, from time to time you can pinpoint to certain oversold condition for a quick trade for rebound but this requires really good technical skills and courage. But traders can also think about short to make money. What to short? Well, obviously you want to short those weakest link that has a high likelihood to fall. What companies are qualified for that? Think about it, if a company is under a high burden of debt with insufficient cash flow and they cannot even make money when oil is over $90, what will be their destine when oil is at low $40 and may go down further? Bankruptcy will be their fate! Oil will only bottom when you see more and more oil companies go belly up. See what happens to PVA (Penn Virginia), a once rather promising oil exploration and service company paying good dividends. Unfortunately during the booming time, PVA expanded too much with too much debt in the book and now it is on the verge of bankruptcy.

 

I know another 2 companies that are in the same situation and there is a good chance they will go down to zero. One is Cobalt Energy (CIE) and the other is Erin Energy (ERN). Unless oil suddenly jumps to over $100, these two companies may likely not be able to survive long, given high debt ratio with no free cash flow. Adding them as short positions may provide some hedge for your portfolio.  

Don't ignore this bullish signal

People may want to vomit if you start to mention oil or gold. Hardly anyone is interested in them, letting along putting money into them. This is kind of sentiment you usually see at the bottom, not at the top. But let me be clear, I don't think the ultimate bottom for both has necessarily been touched. More pain may still continue for a while, but we are damn close to the pivotal point, if not yet there!
But today's price action for both gold and oil mining companies is really bullish at least for short term. See the two charts below. For gold miners (GDX), it opened very low but closed high while gold was not doing that great. For oil stocks (XLE), it was more impressive: opened very low but recovered from all the loss and closed high, in the context of crashing oil prices. This usually suggests a short-term bottom is in and the sectors want to go up from here. I bet 10-20% increase is possible. Of course, no guarantee and it is still risky for them as any black swan type of news could easily turn them upside down. Trade accordingly and be ready to lose.

More downside is likely for Baidu

Baidu (BIDU) is the Google in China and has a monoply position given Google has been driven out from the market. It is certainly a great business but even a good business may also face some hicups. Technically BIDU is presenting a rather dire prospect at least for near future. As you can see below, since late last year when BIDU peaked at $250, it has entered a very well defined downtrend. The recent missed earnings may further push it down to a lower level. It has broken out its support around 175. Given being a little bit oversold, it may bounce back to 175, a resistance now. I doubt it can break this out. If I'm right, look for more downsides for BIDU. Its next strong support will be around 150.

This Wall Street darling may likely falter badly

As I have warned for couple of months, the overall market has presented plenty of warning signals that suggest there is a high likelihood that more pain for stocks will be coming. Of course, with 6 years relentless uptrend without any significant corrections, people are used to seeing stocks keeping going up. So even if a severe correction is underway, it won’t be a straight downturn. There are sufficient people out there who just want to buy at any weakness. But when the market finally cracks, those weak hands will be the first ones to run and shaken out. If you do want to buy, always think about what’s your exist strategy and better, to add some protection. One way of doing so is to short those stocks with ridiculously high valuation that cannot be supported by the fundamentals. Quite often, you can find such candidates from recent IPOs. These days, IPOs are generally greatly loved and their IPO prices are often bided up to the moon.  But eventually the reality will settle in and as soon as people find out that their stock prices at the perfection level cannot be supported by their business, they will dump them and hard! We have seen what happened to TWTR, which has been cut half since IPO and also SHAK, another 50% haircut. I find another good candidate to consider.

The company I’m talking about is Zoe’s Kitchen (ZOES). This is a pizza fast food company, which is called the Chipotle of its industry. It can prepare delicious pizza within minutes. Apparently it is very much loved by its customers and it deserves to have a rich valuation for its stock price. But can it in any way to justify a PE of 1200? In other words, investors have to wait for 1200 years to get back their money from its earnings. I bet no one can wait for that long!!! But regardless what I’m thinking, there are abundant people who simply love this stock and want to buy anyway. It has recently shot up to all time high around $45. However, this recent move did show some technical weakness. It is certainly overbought by any means and the upward moment has no momentum to support. It dropped to 40 recently but it is attempting to bounce back.  If it goes further up to $45, it becomes a bearish double top formation. I bet, if the overall market starts to falter, this kind of hype-stock will follow closely and likely more to the downside. I think it’s worthwhile to short ZOES around $45 as part of hedge to protect your portfolio.

Gold long-term bull run is far from over

After I posted my last blog, expecting for a short term rebound of gold, there are some discussions about whether or not gold (same for precious metals in general) can still move up during the current deflationary situation. With respect to the factors that may impact on the prices of gold, I talked about them 5 years ago, which are still relevant. But these are more of those which may have short-term impact on gold. The real reasons that will support gold to resume its super bull run are the following two, in my opinion:

Currency war: each country is aiming to debasing their own currency, the cheaper the better. Although the US$ is in a short-term significantly strengthening against other currencies, which has a very negative impact on the gold price, however, long term US$ will still lose its value. But regardless, due to the next reason below, gold can still fly high during the time US$ is relatively strong. History has proved that if you know the historical gold bull runs in the past.

Negative real interests: I talked about this for Euro zone before but this is really a general phenomenon prevailing everywhere in the world that interest incomes people can earn from their saved the money are virtually less than actual inflation rates.  Of course, I’m not talking about the CPI that the governments want you to believe, but the actual purchasing power of your money. Do you really feel that your purchasing power has increased over years even when the governmental CPI has been kept very low? I guess the vast majority, if not all, would agree with me to say that overall the cost of living has been substantially increasing year after year. Some time ago, a friend sent me something interesting about the declining dollar purchasing power, a situation in CA, which is of course not limited to one state, but everywhere in the US and around the world:  " While the dollar's purchasing power has decreased over the past 16 years by 70%, gold has maintained its purchasing power. In 1999, it took 0.00667 ounces of gold to buy a dozen eggs. Today, despite the new regulations, you can buy a dozen eggs for just 0.00583 ounces of gold. If you look at the purchasing power of gold in terms of gasoline, bacon, filet mignon, or real estate, you'll find the same thing. An ounce of gold buys at least the same amount of everything as it did in 1999”. You see, governments can't print gold. It has been used as money for thousands of years. While we may feel more of the risk of deflation at the moment, the gigantic amount of paper money the governments around the world have created from the thin air will sooner or later find its way into the circulation  and when it happens, watch for the super-hyperinflation, which will be super bullish for gold and other precious metals. I touched upon this topic earlier here.

So why gold has declined so much in the past 3-4 years? Well, we have to understand gold had a gigantic bull run for 12 years, year over year non-stop. Can you tell me any other assets that have this kind of run for so many years? Definitely not as it has only occurred to gold. So with this kind of uninterrupted uptrend for so many years, one has to expect at some point there should be a rest period with correction. That’s exactly what is happening to gold. What we are seeing now is just a natural correction that will occur to any asset during their bull trend. It is just a rest for gold and it is healthy for the bull run. As long as the fundamental reasons remain intact, there is no chance gold will really turn to a bearish trend. I'm still super bullish for gold and will remain so for long long time in the future.  We just need some patience to let the natural market force go through its power and I think we are very close to seeing a truly phenomenal turn-around for gold. I cannot tell you exactly when but I’m sure it is very close. Be ready!

 

One relatively new ETF that trades gold in Japanese Yen and will be largely benefiting from the declining Yen is GYEN. You may consider to put some money here as part of hedge against of declining gold prices due to strengtheing US$.  I like the idea but due to its short life, I don't know if it can work out as it is supposed to be. Presumably, as long as the declining of gold price in US$ is less than the weakening of Yen against the dollar, this fund should be doing well.

 

Watch for a short-term bounce of gold mining

Is there anyone out there to be interested in gold today? Quite a few, if not none. It has been almost like a dead blow to gold in the past week or so when it has been dropping off the cliff just within a few days. Yes, it is very painful for those who hold gold, especially gold mining stocks. From a long-term perspective, I think gold is very close to its bottom and when it starts to rise, it could be a fantastic run in the next few years. But in the short term, the severe damage has been done too much to the sector and we cannot expect it will simply recover in a sustainable fashion with one or two attempts. However, it anyone wants to catch up a “dead cat” bounce, you may get a chance next week. Gold has been way too oversold at the moment and is due for a significant bounce for at least a very short period of time. If so, the mining stocks will lead. Today’s intra-day reversal of gold price was a strong indicator that this short-term bounce may start now. If I’m right, mining stocks will be doing better than gold itself, given how oversold they are in general. Buying some GDX is one way to go.

Of course, let me be very clear, gold may likely be not yet at the exact bottom and any bounce may likely be temporary and will come down again to test its recent low. Same for mining. So this has to be a very quick trade for anyone who is able to execute fast. You should be willing to take profits quickly, probably just within a couple of days,  if you are lucky enough to have some good profits. It could be substantial but the risk is of course also big. Trade accordingly.

Is Micron Tech a next acquisition target?

News has broken out that Tsinghua Unigroup, a microchip company owned by the Chinese government has made an offer to buy Micron Tech (MU) for $23 Billion.

MU is the world 4th largest semiconductor maker by sales. The deal would only price MU at $21/share, way down from its peak around $36 just a few months ago. So will this deal ever go through? It is almost certainly not! Not only the offer price is way too low, there is more just than the price that will make this acquisition very unlikely.

MU operates in four segments: Compute and Networking Business Unit, Mobile Business Unit, Storage Business Unit, and Embedded Business Unit. The company offers DRAM products for data storage and retrieval as well as flash memory products, which are widely used in consumer electronics, industrial, wired and wireless communications, computing, and automotive applications. In other words, MU’s business is of the critical sectors that have strategic and security importance for the US. We have seen several attempts by the Chinese companies in the past few years that they wanted buy some US companies but failed as the US government simply blocked the way due to security concerns. This time is likely no difference. Having said that, I think there is a good chance that MU may become a solid target for M&A. MU is a great chip company with important products critically needed in the semiconductor industry in general and in the mobile communication sector in particular. Yes, its share price has been haircut by half but its business continues as usual. We have seen many recent examples that when great companies have short-term challenges with sharp declines of stock prices, they become great M&A targets. In addition, some lucrative deals may also easily pop up their prices. I think MU may be in this kind of situation. Of course this is purely a speculation as I have no insight knowledge whatsoever and don’t know for sure if this will happen, and even if yes, when this will happen. But buying some MU shares now is not a bad idea anyway and potentially a great one if some sort of deal comes true.

Why does the technical analysis work for stocks?

After I posted my short- vs intermediate-term prediction on S&P 500, I got an interest question what would be the catalysts for a rallied market to go down again. I'm sure many people may have the similar question.

The short answer is I don't know. To really understand this, we need to first understand why the technical analysis works since all my prediction was based on the technical setup. It won't be surprised for me to know that a lot of people have significant doubt on the technical analysis to guide for trading. I was one of them as I also very much doubted the technical patterns based on the past price actions could really foretell what is going to happen. However, after many years in the market with learning and practicing, I've finally changed my mind and am rather convinced now that the technical analysis indeeds works for trading. Why so? Well, in a nutshell, the price actions in stock charting are actually a collective reflection of the traders' behaviors or their psychology and mindset. Over years, people have identified certain patterns and trending lines that often indicate some extreme conditions that may trigger a turnaround soon. For example, when the market is overbought to some extreme extent, it means traders are very complacent and are thinking the world is in a perfect situation. But we all know, the world is not perfect and it is almost a 100% certainty that there will be something devastating to happen somewhere in the world. I don't need to know what is going to happen but I know something will happen to trigger some nervous reactions to bring down the market. Conversely, if the market is extremely oversold, it means people out there are very nervous, expecting the sky is falling. But we all know the sky has a habit of not falling. In this situation, just a little bit good news could trigger a great relief among traders to start to buy aggressively. Of course, nowadays the high frequency trading by institutions based on the predefined technical patterns has further enhanced the predictability of the market movements based on technical analysis. If you pay attention to my calling for the support or resistance, you may have realized that the markets indeed often move around within the limit of those lines in the short term. Before I finish, let me remind you of the 2 recent examples about the macro-trends that I accurately predicted:

• I was long for the Chinese market probably a year ago and made some good money for its initial moving up. But starting from about 2 months ago, I got really worried about the Chinese market. Technically it was extremely overbought and I called it a gigantic bubble to be burst. I even went so far to say that this bubble would end up with deadly tragedies. I was a bit too early but eventually we all know what has happening to the Chinese stocks. We have seen a lot of theories about what were the causes of this epic stock crisis. I'm certainly not smart enough to know exactly what has happened. But I try to keep a simple mind for myself. I still believe the historical bull market for China is far from over and will resume sooner or later. But technically it was way ahead of itself a couple of months ago that for sure would lead to a crash. While the Chinese market is rallying at the moment, I don't believe the correction is over and the bottom is necessarily formed. Purely from the technical perspective, there is a good chance that the Shanghai index will test its recent low again in the next few weeks and a lower low may finally allow the formation of a solid bottom. Of course, this is a very simplistic technical analysis and a lot of things can change its course.
• I have been calling for a downtrend for the US stock market for about a couple of months as well. Did I know the Greek crisis would trigger the 300 points decline for Dow Jones just a few days ago? Of course I didn't. But the technically I knew traders were too much complacent and were too bullish for the near future. So even though I didn't know what could bring down the market, I knew something problematic would happen to trigger the downturn.

Finally, the technical analysis also applies to individual stocks with the same principles. I have talked a lot about individual stocks in the past few months based on the technical setup and hope you agree with me that the vast majority of them did follow my calls. I made a bunch either long or short and hope you also benefit from my calls.