BE CAUTIOUS!!

It is time to be cautious! As I expected in the past few weeks, I said the overall stock market should be doing well in the seasonally bullish April. Indeed up until now it has been doing reasonably well. While I think this 6 years uninterrupted bull market still has some time to go, I’m increasingly convinced that there is a severe correction looming and may start in May. Corrections in the stock market is natural and healthy as it can shake out weak hands and allow the market to get sufficient energy to move further up. Prior to 2011, the market usually experienced 1-2 corrections of 10% or more. But we haven’t seen such kind of severe corrections in the past 4 years. As you can see in the chart, S&P 500 has kept moving up non-stop with a rising-wedge formulation but accompanied by a negative momentum divergence in the past 2 years.

Another concerning negative indicator is the lagging performance of the financial sector in the past one month (see the comparison of S&P500 vs XLF for financials). Actually more worrisome is the fact that XLF seems breaking down through its 50 moving average, which, if continues, will become a bearish trend for the financial sector. Without the financials to join, the overall stock market usually lacks of power to move up further. The latest change of behaviors of the market seem to also tell us something worrisome: in the past few days, S&P often opened high and strong but gave up most towards the end of the day, especially during the last hour of trading. This by itself is rather bearish. And now we are moving into the seasonally bearish May.  Putting all together, I think we need to be very cautious now and it is not a good time to blindly buy stocks now. Watch for the support line of the wedge around 2070. If S&P breaks below this level, it is likely to test its last Oct’s low at about 1860. This is little bit over 10% correction. We have to see by then whether it can hold up that level and what is the sentiment. It could be a great buying opportunity or the market may go down further before turning around. Let’s don’t worry about that for now but worry for the more imminent correction first. So what to do for this likely correction? I’m not suggesting to sell everything at the moment but at least be careful with adding long exposure at this point. Also tighten up your stop loss for your existing positions. You may also consider to buy some VXX to hedge. This is especially important if S&P dose breaks down through 2070, a strong indicator that it will significantly plummet from there!

A strategy with one stone for two birds

In the stock market, there are basically two types of strategies: long-term value investment vs short-term trading strategy. While many people will only go with one of them,  I personally I think these two can be beautifully mixed and applied simultaneously. I have been doing this for a few years now and it is working really well for me. I call it a strategy as one stone for two birds. Take some recent examples. You may have heard me talking about several blue chip stocks with long-term track records of paying dividends but experienced some short-term problems that caused panic selling. I like this kind of moment and are really happy to buy when everyone dumping the stocks. For example, I bought TGT when it got killed to around $55 and now it is over $80; WBA around $60 and now over $80; ABBV around $55 and now close to $70; MCD around $90 and now close to $100. These are all the great dividend stocks that I will be salivating when they are cheap and I cannot help but buy as much as I can. So how do I hit two birds with one stone? Well, when I buy these stocks at very depressing prices, I don’t simply buy the amount for long-term holding; rather I buy them with more shares than I’m thinking to hold for long-term. Say if I’m thinking to hold 200 shares of TGT, I will buy 1000 shares instead. I will hold the 200 for long term with dividend reinvestment but at the same time I will do option trading for the other 800 shares. This option trading can bring me very rewarding short-term income that I can repeatedly do so until the shares are gone at some point of time during the trading. You see, I’m creating a situation where I’m not only enjoying the long-term value investment but also being rewarded with short-term income that will allow me to expand my cash pool for pursing more of such kind of long/short strategy for the same stocks. The key is of course to know what stocks are great for long-term and at what prices they are good enough. More importantly you got to be really of contrarian and have the nerve to buy when there is panic and blood in the streets. Honestly it is easy said than done and you need to practice. Sometimes you just need to pinch your nose, close your eyes and buy buy buy while you are sweating! It could be scary but often very much rewarding!!

Apple is poised for a big move

As I said many times, Apple is a great stock for long term. It is fundamentally strong and cheap with a huge upside potential in the long run. But Apple has been moving sideways for a few weeks and now it is poised for a big move, one way or the other. As you can see below, Apple has been consistently showing high lows and low highs lately and at the moment, it is right at the tip of the so-called descending triangle. It has to break out either to the upside or downside. Technically speaking, most often this pattern will lead to an upside breakout. When this happens, it will be a big move and may quickly challenge its all time high at $133. Of course there is no guarantee. If it breaks down, the next support will be around $120 and then $112. We will know very soon.

Be early in the super megatrend in healthcare: digital medicine

Not sure if anyone heard about digital medicine (DM), a new trend which is quickly shaping up that is not only strongly supported by the new wearable technologies but also becomes important for pharma and biotech companies to cope with the increasing challenge of exploding health care costs and budget cut from the governments and insurance companies around the world. Since it is super new, it is obviously premature to clearly define what it is and what it entails. But we are seeing some companies are starting to think about this and have plans to move into this burgeoning field. I bet those companies with such foresight will greatly benefit financially in the future as they will be the leading force and may likely the ones to define the future of this trend. IBM may be one of them, which is taking its Watson artificial-intelligence technology into health care in a big way with industry partners. The initial three industry partners are Apple, Johnson & Johnson and Medtronic. You can see the report in New York Times here. Apple is also a critical player for it. As described, “Apple is increasingly a major supplier of health sensors, from iPhone apps to the Apple Watch. Its recently introduced HealthKit and ResearchKit software make it easier for applications and researchers to harvest health information from millions of owners of Apple products, with their permission. That data can now be plugged into Watson. `We want to be the analytics brains behind HealthKit and ResearchKit,’ Mr. Kelly(from IBM) said.” Both IBM and Apple are very cheap valuation-wise and this is one of the main reasons that I’m very bullish for both companies for long-term.

Another company which is very active and has actively exploring this new field is the top pharma company, Novartis (NVS). Projects and products that Novartis are working on include pills and inhalers with sensors that tell on patients who miss a dose; clinical tests that rely on Microsoft’s Kinect, the motion-sensing technology used with Xboxes, to measure walking speed and balance in people with multiple sclerosis; and Google contact lenses that focus automatically and can deduce diabetics’ blood-sugar levels from their tears. Novartis is not really cheap at the current price around $100 but I’m not sure it will become really cheap again, barring any unexpected big problems, given its very healthy product portfolio, a strong business model focusing on pharma, eye-care and generic, as well as its futuristic foresight in actively pioneering and exploring this new megatrend for digital medicine. If it drops below $95, Novartis will be a great buy for me.

I may consider to get into Bitcoin

Bitcoin has gone through a wild roller-coaster in the past year, shooting up to over $1000 and crashing to $200 at the moment. So if there is any future for bitcoin, a cyber-virtual currency which has been used widely but not accepted officially in any sense? Well, its future may not be as dim as many people think. There is a chance that some US statement governments may legally accept bitcoin as one of the payment options, including NY. If this happens, I think it is just a matter of time that more governments within US and maybe around the world will slowly move towards the same direction.   http://moneymorning.com/2015/04/01/the-price-of-bitcoin-is-about-to-get-a-little-government-help/

 

Maybe this weight loss pill can make you rich

In the past 2 years, FDA has approved quite a few weight loss drugs, e.g. Belviq from Arena and Qsymia from Vivus. But none of them have done well post-approval. Honestly I have a lot of doubt about anti-obesity drugs based on the history. Not sure if anyone has heard a drug called Fen-Phen? It was once a huge successful diet pill marketed by Wyeth but later pulled out of the market due to its cardiovascular (CV) side effects that could cause death. The thing about diet pills is that they are targeting to a patient population, obese patients,  who are also associated with a high underlying cardiovascular problems. The most challenge issue for the marketing companies is not whether the drugs are working or not, but rather to demonstrate whether the drugs are safe, especially their cardiovascular safety. The problem is that there is no easy way to differentiate between whether the CV problems patients experience are due to their own physical problems or are caused by the ant-obesity drugs. This concern has significantly limited the company’s ability to convince physicians and patients to believe the drugs and therefore their sales and profits are far from satisfactory.

But now I see some light at the end of the tunnel for one company. Orexigen (OREX) got its weight loss drug, Contrave, approved last Sep. This is actually not a drug that was developed by themselves. Rather they were clever enough to reformulate 2 approved antipsychiatric drugs, bupropion (Wellbutrin), an antidepressant, and naltrexone, a drug used to treat addiction. While it was approved, the FDA was concerned about its CV safety as well as it seemed to cause high blood pressure and increase heart rate. So as part of approval, OREX was required to conduct a post-approval study to see whether there is any increased risk for heart disease in patients taking Contrave. Well a recent Interim results from the study actually showed some surprising results: the drug may reduce heart attacks by 30%, strokes by 37%, and heart-related deaths by 74%. Not only that, but the health improvements occurred independently of weight loss. This is really a huge positive surprise and such kind of clinical benefit have hardly been heard of even from any drugs for heart diseases. Think about it, if all these effects are proved to be actual when the study is completed, what will it mean for physicians and patients? I think they will go all for it and the demand will be phenomenal!  If the final data confirms the interim results, I think we will be looking at one of the biggest medical blockbusters of all time.

Of course there is no way to predict what will be the final results for OREX and the stock will remain very volatile until everything is clear. But I think this could be one of the exciting high risk high return trades that you can consider.

How to use Buy Write Strategy by a simple click

As I have said many times, I have a dual personality in investment. I hold a core portfolio with quality dividend paying stocks for long-term and I’m also very active in short-term trading, especially trading for income when opportunities arise. There are many different ways of doing short-term trading for income, but one approach is among the safest frequently used by traders. It is called covered calls or buy write strategy. Simply put, we use call options to agree to sell someone your underlying stocks at a higher price and in return you get paid upfront for the promise. Why it is so safe? Well, since you have already held the stocks and you are only agreeing to sell if the price goes up from the current level. If the share price does not go up in the predefined timeframe, you still keep your shares and also the money the other side has already paid you. And you can do this repeatedly as long as you still hold the stocks. Isn’t it great?! But I assume probably the majority of people don’t know much about options and won’t be able to do so. Don’t worry. Here is the good news that you can effectively apply this strategy by one simple click: you can buy the ETF, PBP, that tracks the S&P 500 BuyWrite IndexTM using this income strategy. Because it is an income trading strategy, it generates cash routinely and therefore you get paid with a higher dividend yield, currently around 5%! Now in terms of its safety, two records can demonstrate: its beta is only 0.54, which means its volatility level is 46% less than the S&P fluctuations. And if you compare the BuyWrite index with S&P for long-term since 1980s, it has substantially outperformed the market by a wide margin as shown below. In other words, buying this ETF will likely make you more money over time than simply buying stocks!

American Express will be struggling for a while

American Express (AXP) is a famous credit card brand in the world with its unique business model. In contrast to the other cards such as Visa or MasterCard which work to maximize transaction volume,  Amex employs a so-called “spend-centric” model by maximizing the purchase volume on its cards. In other words, the card members will get more reward if they spend more money with the card, which creates a virtuous cycle and royalty.  In decades Amex has been very successful and it is so successful with long lasting competitive advantage, AXP is one of the four biggest holdings in Buffett’s portfolio. So should you buy AXP now? I don’t think so!

As much as I like AXP as a business, it is technically struggling and presents a rather bearish pattern. It has broken down its short-term support line as well as its long term bullish trend line. It is also showing a bearish head and shoulders pattern. This technical setup also coincide with its recent setback that one of its major business partner, Costco, has ended their long time co-branded agreement with Amex. For those like me who use Amex as the credit card and store membership will not be able to continue with it starting in March 2016.   All in all, AXP will be going down almost for sure. How low will it go? I don’t know for sure but I think it may likely not be something minor. There is a good chance that it will test its strong support line around $65. If that happens, we are talking about a 15-20% correction. So as investors or traders, what should we do with AXP? Here are a few advices:

·         If you have already bought AXP for long-term, no need to worry about it as it is still a very sound business and will continue for decades. Just keep it and reinvest its dividends as usual. If you know how to do covered calls, this is a good time to think about it. A deep in the money covered call may help alleviate the pain from the short-term correction of AXP.

·         If you want to buy AXP now, I strongly advise that you hold up and wait for a while. I’m pretty sure you will be able to buy it at a much better price later.

·         For traders, you may even consider to short AXP for short-term income. Right now, its trend is going down and shorting AXP at any bouncing should be a low risk trade.

 

Ultimately I will take advantage to buy AXP at much lower prices for long term when there a good technical setup with uptrend restarted. It certainly will and it is just when, not if.