Site Update!

My blog has been added to the News Feed which means you will start seeing some of my material/articles posted on their site. Their site allows users to create portfolios and track and compare results to other investors and institutions. It is definitely a fun site to search for investment ideas and the best part– it’s free!

Hewison: Gold Going Higher?

Below is a guest article from Adam Hewison of analyzing gold along with a free video with visual aids and charts (no registration required):

Gold has had some dramatic moves in the last eighteen months and we expect it will have some equally dramatic moves in the future, but not right now.

Watch the 4 minute Video Here

While I recognize that gold is one of the few commodity markets that people are really passionate about; the purpose of this article is not to take sides either with the gold bugs or those who reject the argument that gold is forever.  Rather, I want to discuss my interpretation of the markets cycle.
After spot gold made an all-time high against the dollar on December 2 at $1,226.37, gold has been in retreat mode. For the for the past several months gold has been in a broad trading range, seemingly unable to move one way or another. This process has created frustration from bulls and bears alike.
Here is the dirty little secret about the gold market. It can be a horrible investment and here’s why:
Gold first started trading in the 80s while I was on the floor of the Chicago Mercantile Exchange in Chicago as a member of the International Monetary Market, (IMM) which was at that time a division of the CME now the CME Group.  When gold opened up the public clamored to buy into the gold futures market and guess who sold it to them? Thats right it was the pros- the guys who made their living trading. As a result, gold hit an all-time high of around $850 an ounce back then and it took almost 25 years for gold to move over that level, at least in dollar terms. I dont know what your timeline is, but 25 to 30 years is an awful long time to get even again.
So what is really happening in this market?
Everyone is aware of the problems in Europe with Greece, Portugal and a host of yet to be named countries. We all know that the huge amount of money being printed, coupled with the bank failures abroad contribute to the dollars declining value. These events, in conjunction with the American governments actions, also contribute to the devaluation of the dollar. The government claims that this is beneficial to exports, but the bottom line is that the purchasing power of the American dollar continues to erode in world markets.
Based on the declining value of world currency against gold you might ask- why isnt gold trading at $2,000 or even $3,000 an ounce? What is wrong with this market? This is because a great deal of what goes into the gold market is psychological and reacts to cyclic trends driven by both psychological and economic factors.
So what does all this have to do with the price of gold now? It has everything to do with gold and nothing to do with gold.
Here is what I’ve been able to observe in the last several years in gold and seems to be holding true.  It is something that you should pay attention to if you’re interested in the next big move in the gold market.
Before gold can move higher it needs to create what I call an “energy field”.  The most recent energy fields in gold were between May 12, 2006 and September 20, 2007. This 17 month energy field saw gold prices oscillate between a broad trading range bound by $730.08 (upside) and $541.80 (downside).  That energy field produced enough power to propel gold to the new high of $1,012.40 on March 17, 2008. This marked the first time gold exceeded, in dollar terms, the highs set in the early 80s mentioned earlier.
The energy fields I have observed for gold are taking somewhere between 17 and 18 months to complete. If the energy field holds, then the December 3rd 2009 high of $1,226.37 should remain in place for quite some time. If the same cycle remains true then the recent lows that we witnessed, at $1,050, should also remain intact as they represent the 15 to 16 month cycle low.
With the lows in place the next question becomes when is the next cyclical high in gold? Based on the existing cycle, we can expect the next major gold high in 2011.
To summarize: I expect gold to be locked in a broad trading range for the next 12 months bounded by the December 09 highs of 1,226.37 and the lows of $1,050.00. If the gold cycle holds true, we expect that gold tops the $1,226.37 marker by April or May of 2011.
On the on the upside we will also be looking for gold to make a nature cyclic high in October or November of 2011. It’s impossible to predict the future with any degree of accuracy; however when we look at the cycles in gold this reads as a pretty good bet.
No matter what happens we expect gold will offer some great trading opportunities that investors and traders should be able to take advantage of.
As I always discuss- in trading one should approach gold or any other market with a game plan and proper money management stops. The key to success in this decade will be an investors willingness to move in and out of asset classes such as gold and be well diversified into more than one asset class. That way you wont be left holding the bag for the next 25 years. Our World Commodity Portfolio is a good example of this approach and one I believe will serve investors well in the coming years.

 Adam Hewison
Co-creator, MarketClub

Fibonacci Techniques for Math Geeks — and Everyone Else, Too

I frequently use Fibonacci techniques in my charting along with a few other basic tools.  If you have no idea what Fibonacci means, here’s an introduction from Elliot Wave International.  Register for their (free) to get the full 6 page tutorial:

The word Fibonacci (pronounced fib-oh-notch-ee) can draw either blank stares or an enthusiastic response. There’s hardly any in-between ground. But for those who ask how an esoteric mathematical relationship can apply to price charts and trading, here’s a quick lesson. Everyone who uses Elliott wave analysis will sooner or later want to try using Fibo techniques, and Elliott Wave International’s Jeff Kennedy has written about five of them in a Trader’s Classroom column. For an example of why people are so fascinated by Fibonacci, read part of Kennedy’s article here:

* * * * *
How to Apply Fibonacci Math to Real-World Trading
Have you ever given an expensive toy to a small child and watched while the child had less fun playing with the toy than with the box that it came in? In fact, I can remember some of the boxes I played with as a child that became spaceships, time machines or vehicles to use on dinosaur safaris.
In many ways, Fibonacci math is just like the box kids enjoy playing with imaginatively for hours on end. It’s hard to imagine a wrong way to apply Fibonacci ratios or multiples to financial markets, and new ways are being tested every day. Let’s look at just some of the ways I apply Fibonacci math in my own analysis.
Fibonacci Retracements
Financial markets demonstrate an uncanny propensity to reverse at certain Fibonacci levels. The most common Fibonacci ratios I use to forecast retracements are .382, .500 and .618. On occasion, I find .236 and .786 useful, but I prefer to stick with the big three. You can imagine how helpful these can be: Knowing where a corrective move is likely to end often identifies high-probability trade setups (Figures 7-1 and 7-2).
figure 7-1
figure 7-2
Kennedy then goes on to explain Fibonacci extensions, circles, fans and time, using 11 charts to show what he means. Whether or not you are a math geek, you can learn a lot from this six-page introduction to Fibonacci math.

Read more about the 6-page report here.

More on this topic (What's this?) Read more on Fibonacci, HK EL Holdings at Wikinvest

10 Stocks Under $10

Below is a list of 10 stocks under $10 trading near 240 day highs as of Friday’s close.  While well more than 10 stocks under $10 traded at a 240 day high on Friday, this list was chosen based on their quality/value/growth rating from stockscreen123.  Additional criteria were a) over-the-counter stocks were excluded, b) share price was higher than $.50, c) average share volume the past 20 days was over 25,000 shares, and d) no one position would constitute more than 10% of the portfolio’s value when rebalancing.  This is a useful criteria for preventing one or two stocks to dominate the portfolio and skew results when less than 10 stocks met the criteria.

This strategy is highly speculative and volatile.  One option would be to hedge the strategy by shorting the Russell 2000, using bearish option strategies, or only using the strategy when the Russell 2000 is above a long term moving average.  It would also be prudent to use money management or stop loss techniques or more in-depth trading strategies such as one I detailed here.  However, an unhedged investment in this strategy dating to March 2001, rebalancing every 4 weeks, and allowing for .5% slippage results in 1500%+ return versus just over 50% return in the Russell 2000. Dividends and commissions are excluded in both return results.  The 3 year returns are 41%+ versus a loss of approximately 15% on the Russell 2000 (second image).

Below is the current list of qualifying stocks as well as a return chart for this strategy:

Ticker Name Trend Analysis Last
MDF Metropolitan Health Networks, Here 2.98
MPAA Motorcar Parts of America, In Here 6.56
BGCP BGC Partners, Inc. Here 6.36
ISSI Integrated Silicon Solution, Here 9.67
OMN OMNOVA Solutions Inc. Here 8.01
SBH Sally Beauty Holdings, Inc. Here 8.95
SMOD SMART Modular Technologies (W Here 8.14
SCI Service Corporation Internati Here 9.08
FSS Federal Signal Corporation Here 9.15
ZQK Quiksilver, Inc. Here 4.58

No Positions in stocks mentioned

Elliott Wave International’s Understanding the Fed eBook is now available

Our friends at Elliott Wave International have just released a free 34-page eBook, Understanding the Fed.

This eye-opening free report, which represents more than 10 years of research by Robert Prechter, goes beyond the Fed’s history and government mandate; it digs into the Fed’s real motivations for being the United States’ “lender of last resort.” In this 34-page report, you’ll discover how the Fed’s actions, combined with public outrage, may ultimately lead to its demise, plus much more about its secret activities and how it affects your money.

Download Your Free Report Here

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Weekend Reads

Rocking-Horse Winner – Bill Gross

Swap Tango: A Derivatives Regulation Dance, Part 2 –  Satyajit Das

Wall Street Dead? No, Just Moving – Jim Jubak

China’s Red Flags (free registration required for GMO’s website in order to view article) – Edward Chancellor

Volcker and Bernanke: So Close and Yet So Far – Simon Johnson

Top Stocks Based on PEG/Momentum

I have begun conducting the following screen on a monthly basis.  Early results have been positive, especially in a bullish environment like the current one.  February’s list is here and January’s here.  The screen looks for the following:

  1. earnings growers still reasonably priced as judged by the PEG ratio
  2. low debt
  3. a history of high return on equity and investment, and
  4. price momentum as gauged by the percentage the stock is trading to its 250 day high.

January’s list returned 1.39% vs .57% for SPY.  February’s list returned a solid 11.78% vs. 6.77% for SPY.  The top stock for February’s list was Techwell (TWLL), which returned over 49% in one month.  For the full list of stocks and results, please see the right hand side of Scott’s Investments.

With the US equity markets near an 18 month high, this list will be more expansive than in other, less bullish periods since it looks for stocks near 250 day highs. It has tested well historically in bullish periods.  Strategies an investor could use to avoid drawdowns would be to either a) abandon this type of strategy entirely when the S&P 500 or another major index is below a long term moving average, or b) hedge positions with a short option strategy on an equity index or ETF like SPY.

Two possible tools an investor could use to conduct this screen on his/her own are stockscreen123 or Finviz.  This screen was conducted using stockscreen123.

No positions in stocks mentioned

Ticker Name Trend Analysis
MDF Metropolitan Health Networks, Here
FCFS First Cash Financial Services Here
TSCO Tractor Supply Company Here
FOSL Fossil, Inc. Here
JOSB Jos. A. Bank Clothiers, Inc. Here
DECK Deckers Outdoor Corporation Here
PTI Patni Computer Systems Limite Here
MANT ManTech International Corpora Here
ARO Aeropostale, Inc. Here
MD Mednax Inc. Here
AFAM Almost Family, Inc. Here
TRLG True Religion Apparel, Inc. Here
AAON AAON, Inc. Here
LHCG LHC Group, Inc. Here
VLCM Volcom, Inc. Here
OMPI Obagi Medical Products, Inc. Here
AEO American Eagle Outfitters Here
CHSI Catalyst Health Solutions, In Here
CTRN Citi Trends, Inc. Here
URBN Urban Outfitters, Inc. Here
MA MasterCard Incorporated Here
CPLA Capella Education Company Here
STRA Strayer Education, Inc. Here
BWLD Buffalo Wild Wings Here
QCOR Questcor Pharmaceuticals, Inc Here

6 High Yield, Low Payout Dividend Growers

Below is a list of 6 stocks yielding more then 3% with a dividend payout ratio less than 70% as of the close on March 23rd. In addition, I required the stocks have a recent history of rising dividends. I looked for Dividend Percent Change, Year Over Year (%) > 10, Dividend Growth Rate, 3 Years (%) > 15, Dividend, 5 Year Growth Rate (%) > 20. The screen was done using stockscreen123February’s screen results can be found here. This month’s list is smaller compared to last months list due primarily to share price appreciation causing yield to drop below 3% and also some stocks having a 1 year dividend growth rate now below 10%.

Two additions to this list are TKC and OSG.  Shippers are potentially volatile, so OSG may not fit the typical dividend investor’s risk profile but there may potential to use trading strategies for those interested.  TKC is an emerging markets telecom stock based in Turkey which, again, may not fit a typical dividend investors risk profile. However, what intrigues me about TKC is the yield in excess of 5%, low debt (.26 debt/equity, source: Finviz), low valuation (forward P/E 9.71, source: Finviz), and the fact that the stock offers diversification through exposure to a dividend paying stock in an emerging market.  For investors worried that equity market – including emerging market – rallies may be getting long in the tooth, high yield emerging market stocks with strong cash flow may offer a small buffer for skittish investors who still want to maintain equity exposure.

No positions in stocks mentioned

Ticker Name Trend Yield Div5YCGr% PayRatioA
HCBK Hudson City Bancorp, Inc. Here 4.3 22.03 54.7
LLTC Linear Technology Corporation Here 3.19 25.16 62.1
LPHI Life Partners Holdings, Inc. Here 4.43 26.48 13.54
MCD McDonald’s Corporation Here 3.28 30.1 49.12
OSG Overseas Shipholding Group In Here 4.16 20.11 67.16
TKC Turkcell Iletisim Hizmetleri Here 5.43 32.27 65.2

A Plethora of Must Read Articles

As I often do once or twice a week, below are some recent (free) articles I’ve found interesting:

10 to 1 Up Volume Shows Initiation – Tom McClellan

For Now, the Money’s Made in the USA – Jim Jubak

The Threat to Muddle Through – John Mauldin

The Implications of Velocity – John Mauldin

An Update on Valuation and Forward Earnings Assumptions – William Hester

Zombies and Rube Goldberg Machines – John Hussman

Swap Tango: A Derivatives Regulation Dance, Part 1 – Satyajit Das

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