Is Amazon a Short?

Adam Hewison is calling for a significant pullback in Amazon – AMZN in this post.  He called for a further pullback at 112.37 this week based on AMZN breaking a trendline.  Watching the video gives you an idea of some of the technical analysis tools he uses and ones that I use as well.   It is clear that Amazon is facing some significant bearish technical signals.  I personally love the company and in full disclosure do business with them, but the stock is not looking so lovely….

I would look for AMZN to pullback to the fibonacci levels highlighted by Hewison in the video and would also look for it to fill the gap on the left hand side of the Finviz chart below. I have included the ADX and stochastic indicators as well:

No current position in AMZN

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Do Candlesticks Spell Doom for Equity Markets?

 In this video Adam Hewison shows a candlestick pattern known as a bearish engulfing line and how it may spell some further negative action for equity markets.  Keep in mind this video was produced before the huge decline on Tuesday, so it was certainly a timely production.  He is looking for another leg down in the markets based on the guidelines set forth in the video and based on today’s price action.

The equity markets obviously had a huge day down today.  We just broke a level of strong support  level  today on SPY, signaling a short position. Obviously, there are multiple timeframes and potential trades to consider, but for investors with current long positions one option is to hedge your portfolio with a short position in SPY, bearish option positions, cash (which should always be considered a viable alternative), or a long position in SH (the S&P 500 1x short ETF).  Looking at the chart below you will see the support line and how it has served as support on multiple occasions and was broken by a small margin today and which I have noted on multiple times on my site is a crucial level. In addition, you will see the “head and shoulders” pattern which has been discussed of late by several market technicians, another potential bearish pattern:

No current positions but I am looking at a position in SH this week and/or option positions in SPY.

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Upcoming Posts and Updates

Here’s what is in store for the next week or so.  I will be writing a review on Tom Lydon’s  The ETF Trend Following Playbook: Profiting from Trends in Bull or Bear Markets with Exchange Traded Funds, the monthly trend following portfolios will be updated on the 1st, and I will also be launching and tracking a portfolio powered by ETF Replay.

I also changed how the portfolios are organized on the right hand side – portfolios that I track on this site are listed under “Scott’s ETF and Stock Portfolios” and portfolios tracked on other sites/authors are now listed under “Other ETF and Timing Portfolios”.

Don’t forget you can follow all posts on Twitter under scottsinvest

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Top Stocks Based on PEG and Momentum

I have begun conducting the following screen on a monthly basis. Early out-of-sample results have been positive, especially during bullish environments.  May’s list is here, Aprils’ list is here, March’s list is here, February’s list is here and January’s here. The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio
  • low debt
  • a history of high return on equity and investment, and
  • 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. March returned 7.91% vs. 4.23% for SPY, April was a tough month returning -11.57% vs -11.52% for SPY, and May’s list returned -6.55% vs -.56% for SPY.  One note on May’s list is that due to the pullback in the market there were very few stocks that qualified for the list, four in total.

When the screen results in more than 10 stocks I have also started tracking returns of the top 10 stocks at the beginning of each list, the top 10 are selected based on fundamental factors.  The top 10 on March’s list returned an average of 10.77% and the top 10 for April did slightly better than the entire list returning -8.01%. This month has less than 10 qualifying stocks. For the full list of stocks and results, please see the right hand side of Scott’s Investments.

The screen has tested well historically in bullish periods so 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 position in SH or write 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 Last MktCap Industry
MDF Metropolitan Health Networks, Here 3.99 159.26 Healthcare Facilities
ARO Aeropostale, Inc. Here 29.62 2770.17 Retail (Apparel)
UTI Universal Technical Institute Here 24 578.8 Schools
FCFS First Cash Financial Services Here 21.93 660.34 Retail (Specialty)
DECK Deckers Outdoor Corporation Here 155.05 1999.68 Footwear
LRCX Lam Research Corporation Here 40.25 5092.99 Semiconductors
QCOR Questcor Pharmaceuticals, Inc Here 11.24 697.39 Biotechnology & Drugs
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A Trend Option Strategy for Investors

I previously detailed an academic study on a trend trading option strategy for investors (special thanks to Steve at CXO, one of the best free financial sites available).  I’m trying to put together a way to track the strategy on my site.  It will be a work in progress and I want to make the tracking as realistic as possible so input is appreciated.

In a nutshell, the strategy is invested 50/50 in 1) SPTR (S&P 500 total return) and 2) cash, rebalanced on golden/black crossovers. It switches between selling at the money calls and puts equal to the value of 1 and 2 on golden/black crossovers on SPTR.  A golden cross occurs when the 50 day moving average crosses above the 200 day moving average.  A black cross occurs when the 50 day moving average crosses below the 200 day moving average.  Calls are sold during black crosses and puts are sold during golden crosses.

Currently we are in a ‘golden cross’ period, although in some of my other writings I am cautious at current levels. However, the purpose of tracking this strategy is to track its success over time regardless of my own personal opinion.  It has tested well historically.

I will be using SPY and tracking dividends to represent the total return of the S&P 500 used in the study. For cash, I will be using SHV, a short-term bond ETF and tracking dividends.

Option expiration are the third Friday of the month and for June this was last Friday.  I think it makes most sense to update this strategy using either the opening or closing option prices on the Monday following option expiration each month so I am tardy starting this month.  I will most likely assume option positions are bought to close the position on options expiration day. The strategy will be tracked on the right hand side of my site for free for those interested in following along.  Slippage and taxes will not be tracked and I am debating on tracking commissions.

For this month I used the closing options prices for SPY on Wednesday June 23rd.

No current positions

Looking for a Euro-FXE Sell Signal

Adam Hewison gives a technical breakdown of the Euro in this video and his ultimate long-term target is parity, 1:1.  In the short to intermediate term, the technical picture shows some momentum indicators rolling over (a potential bearish sign) but the Euro is still somewhat of a mixed picture in the short-term.  Looking at FXE, the CurrencyShares Euro Trust ETF, the levels I am watching closely are 118.79, 121 and 124.  If FXE drops below 121, a short trade could be in order.  Alternatively, an investor could wait for a new low below 118.79 before entering a short position.  On the upside, a close above 123.80-124 could signal the short-term rally still has some legs, possibly to the 23.6% fibonacci retracement level of 126.46.  I will keep an eye on FXE and offer any new updates on my site in coming days.

Besides going short FXE, some potential option trades: Sell a 124/125 call spread.  It last traded at $.32 giving you a max profit of $32 per contract and max loss of $68, but the risk of entering the trade now is that we don’t have a clear short-term signal.  Obviously, if FXE dropped below 121 the premium on this trade would decrease significantly so at that point I will look at the 121/122 spread since 121 becomes resistance.

One could also go long the 126 July puts if a sell signal is triggered.  It last traded at $3.75 and has a large open interest (which means its more liquid) than most other FXE July strikes.  The max loss is $375 per contract but by buying a put that is in the money it is possible to leverage a small amount of capital in a swing trade. In the money puts like the 126 strike have higher negative deltas (currently -.77), meaning that for each $1 change in the underlying security the 126 July put will change $.77 in price.

Hewison also notes that recently the Euro and US equity markets have been positively correlated – the Euro rallies and US equity markets follow (or vice versa).   Looking at an asset correlation chart of FXE and SPY positive correlation between the two has spiked since mid-April and is around .46.  However, I personally am not going to place much stock in the current correlation between the two to make a single investment decision on an individual position.  Using ETF Replay correlations between the two can change quickly and vary from positive to negative – over the past 5 years the 60 day correlation between the two has ranged from -.56 to +.67.

The long-term trend in the Euro is still negative. However, in order to increase odds for a successful short trade in the face of the Euro’s recent mini-rally, I think right now is a time to wait for a sell signal using some of the price levels and indicators mentioned above.

No current positions