Why the U.S. Dollar is Critical for the S&P 500 Index this Week

J.W. Jones just posted a new piece on why the U.S. Dollar is critical for the S&P 500 this week.

I have pasted an excerpt below:

If the U.S. Dollar pushes down below the recent lows and we get continuation to the downside, we will break the recent bullish pattern. Furthermore, if the Dollar starts to weaken it should benefit equities and other risk assets such as oil. Higher energy prices would not be long term bullish for equity markets so there is concern if the Dollar really starts to extend lower.

 

However, if the Dollar finds a bottom and rallies it clearly would create a headwind for equities. We should know whether we have a major breakdown on the daily chart in the next few weeks. Until then, the Dollar could go either way and obviously the price action in the Dollar will have a major impact on risk assets and stock market returns in the near future.

More on this topic (What's this?)
Nearly 70% Of S&P 500 Stocks In Correction Or Bear Market Territory
S&P Approaches Critical Tipping Point
S&P500 Getting Ready to Break
Read more on U.S. Dollar (USD), S&P 500 (SPX), Oil at Wikinvest

Sunday Night Readings

Below is a list of articles on my weekend “to-do” list:

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The Five Best ETF Investments Ever – Index Universe

Gold Repeats a Prior Pattern – Tom McClellan

A Gold Standard? John Mauldin

Is the Fed pushing us into another bubble? Sheila Bair, Fortune

Joseph Stiglitz “Politics is at the Root of the Problem”

Kid Dynamite – Calling Natural Gas Experts – Let’s Find a Trade Here

The High Cost of Bad Buy/Sell Decisions – Abnormal Returns

Release the Kraken – John Hussman

ECRI Weekly Leading Indicator: The Growth Index Slips Again – Doug Short

 

More on this topic (What's this?)
Has Gold & Silver Finally Bottomed?
Gold Price Gravitating Lower Towards $1000
Read more on Gold, Natural Gas, Federal Reserve at Wikinvest

Small Cap Value Stock Screen, Cray Earnings

From 2009-2011 I tracked a small-cap value portfolio which contained stocks only with a history of recenet earnings surprises. The portfolio performed reasonably well over the course of its existence but was discontinued as Scott’s Investment’s decided to focus on dividend portfolios and ETF strategies.  However, given that we are in the midst of earnings season and equity markets appear near an inflection point, now is an appropriate time to check-in on the screen’s results.

The list could unveil some volatile names so further due diligence is always required.  However, it may be a list to start further research based in part on your overall opinion of the near-term equity market direction.  If you are in the “Sell in May and Go Away” crowd, or Spain has you worried, then this list may not be of interest. If you think we could buck the seasonality headwinds and the global macro and economic picture is looking brighter, then this list could contain a few hidden gems.

The screen is conducted using stockscreen123 and screens for the following:

  • Market cap under $1 billion
  • Daily average volume greater than 25,000 share
  • PEG ratio < 1
  • Recent history of earnings surprises
  • P/E using estimate of current year EPS < 20
  • Recent close above the stocks 200 day simple moving average

The current screen yields 19 names.  Keep in mind that we are in the midst of earning season, so the most recent quarter’s earnings may not have been reported for all of the companies listed below.

One name on the list that reported earnings after hours today (April 26th) was Cray Inc (CRAY). The company continued their recent trend of earnings surprises.  According to Briefing.com, Cray beat earning expectations by $.10/share ($.13 actual vs $.03 expected) and raised their fiscal year 2012 revenue above consensus to $430-$450 million.

The stock already gapped up two days ago on news that Intel was purchasing their network assets for $140 million. Given that the stock gapped up two days prior to earnings then consolidated, it will be interesting to observe the impact of the improved earnings and guidance on the share price.

(chart courtesy of Finviz)

 

Below is the full list of 19 stocks meeting the screen criteria:

Ticker Name Trend MktCap ProjPE CurFY PEGLT
TITN Titan Machinery Inc. Here 710.77 12.74 0.54
LAD Lithia Motors Inc Here 697.44 11.48 0.49
OMN OMNOVA Solutions Inc. Here 358.45 10.93 0.64
OMPI Obagi Medical Products, Inc. Here 235.29 13.69 0.83
AYR Aircastle Limited Here 872.85 9.03 0.7
FLOW Flow International Corporation Here 188.09 19.56 0.84
AACC Asset Acceptance Capital Corp. Here 154.34 11.44 0.79
ANDE The Andersons, Inc. Here 937.18 11.01 0.77
SIMO Silicon Motion Technology Corp. (AD Here 636.22 11.23 0.66
CNTY Century Casinos, Inc. Here 68.05 15.31 0.39
ATRO Astronics Corporation Here 396.65 16.67 0.78
PNK Pinnacle Entertainment, Inc Here 707.88 15.06 0.89
LIOX Lionbridge Technologies, Inc. Here 167.48 13.95 0.47
UCTT Ultra Clean Holdings, Inc. Here 155.37 9.26 0.81
PRIM Primoris Services Corp Here 769.71 12.13 0.63
OWW Orbitz Worldwide, Inc. Here 350.83 13.72 0.44
BCDS BCD Semiconductor Manufacturing Ltd Here 106.01 13.28 0.47
TSEM Tower Semiconductor Ltd. (USA) Here 304.39 8.15 0.38
CRAY Cray Inc. Here 315.13 16 0.84

 

Gold Update

Gold continues to consolidate, and with it the potential for the next big move. This one could go either way – the bears have some technicals in their camp but the long-term trend is still up.

I have regularly updated the Gold chart, this week I will keep it brief. Peter Brandt did a great post today on Gold, examining the inverse head and shoulders, long-term trend, and a descending triangle.

Below is the weekly chart of GLD I am currently watching. As Brandt noted if we draw the bottom trendline of the channel using intraday lows, we are still just barely above the channel. As drawn below we are just below the bottom of the channel:

More on this topic (What's this?)
Has Gold & Silver Finally Bottomed?
Gold Price Gravitating Lower Towards $1000
Read more on Gold at Wikinvest

Tuesday Readings

Investment and financial related articles for this week are listed below. Also, don’t forget to  me on Stocktwits and Twitter

The Pain in Spain (pdf) – Carmel Asset Management via John Mauldin’s Outside the Box

S&P 500 at 25-Year Resistance – Chris Kimble

Fiscal and Monetary Policy in a Liquidity Trap – Martin Wolf , Financial Times

Not Just Fire Sales: Contrarian Hedge Funds Find Alpha – AllAboutAlpha

5 Rules to Survive a Market Crisis – Jim Jubak

Facts 360 B.C. – A.D. 2012 (In memoriam: After years of health problems, Facts has finally died.) – Chicago Tribune (hat tip Barry Ritholtz)

ETF Trends on PIMCO’s new Global TIPS ETF and Sell in May and Go Away?

Run, Don’t Walk – John Hussman

High Dividend Stocks, Precious Metals and Oil

I wrote an exclusive article today for Seeking Alpha, 2 High Yield, High Dividend Growth Stocks.  The article contains a list of 25 stocks meeting stringent dividend requirements and features two of those stocks in further detail.

Chris Vermeulen also posted a video this morning over at The Gold and Oil Guy on what to expect this week for the Dollar, Gold, Silver, Oil and the S&P 500.

Weekend Readings

Below are some investment-related articles I am reading this week.  Too much information   (overload) can have the adverse affect of paralyzing our decision-making.   I enjoy reading current economic/investment events and commentaries but it is important to remain true to your personal investment plan – there is an opinion out there to reinforce or argue against just about any investment thesis.

GMO has released Jeremy Grantham’s Quarterly Letter and their 7-Year Asset Class Return Forecasts. Both are available to read for free with a free subscription to the GMO site.

A Little Bull’s Eye Investing (pdf) – John Mauldin

Summation Index Promises Higher Highs After Correction Ends – Tom McClellan

Doug Short: ECRI Weekly Leading Indicator: The Growth Index Slips 

An Uprising Against Piggish CEO Pay, At Last – Forbes

Geoff Considine: Chasing Yield: Is the Flow of Money into Munis and High Yield Bonds Rational

But Nobody Pays That – New York Times (hat tip to Barry Ritholtz; this is a Pulitzer Prize nominated series on the many loopholes in our current tax system)

A Book Review: Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading

Peter Brandt’s Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading has achieved a rare spot on my bookshelf: I will be reading it twice for fear I may have missed some morsel of wisdom in the first reading.

Brandt’s prose is direct and insighful. You will not find boastful claims of enormous returns. Rather, it is an insight into the methodology, daily thought process, and career of a professional trader. It could be considered both an encouraging and discouraging read, depending on your expectations. The discouraging (but necessary) part is the lack of a get-rich quick scheme (they doesn’t exist). Readers seeking a fail-proof system or a fast track to easy money should continue their futile quest elsewhere.

For the rest of us – the general investment community, aspiring/novice traders, and professional traders – we can take solace in Brandt’s successes and failures. On average he has more losing trades than winning trades, but by developing a trading plan, which he calls the Factor Trading Plan, and continually working to improve and hold his plan accountable, he has achieved a lengthy history of real, documented trading success.

Brandt uses classical chart patterns to identify his trade setups but he is clear that trade identification is the least important component of his trading plan. Proper risk/money management, trade management, emotional discipline, and accountability play bigger roles in his overall trading plan. This is a key point – too often in the financial media we see an emphasis on trade setups but little or no follow through in terms of how to manage an open trade, let alone one’s emotions.

The author provides a “live” diary of 21 weeks of real trading – all of the winners, losers and missed opportunities. We see his thought process with each trade, the pattern used for each entry, his position size, the initial stop loss point, and the eventual exit point. Brandt critiques each trade after the fact, holding himself and his trading system accountable for each winning and losing trade. We also see some minor improvements he makes to his trading plan after the conclusion of 21 weeks, showing us that even the most successful traders are always looking to improve.

While Brandt gives the key elements of a successful trading plan, he does not expect the reader to adopt his system. Rather, we are encouraged to develop our own unique trading plan and to hold our plan accountable. Trading takes hard work and discipline and Brandt does an excellent job of reinforcing this throughout the book. There is no easy path to wealth but if you want to become a better trader or active investor then read this book.

Mid-Week Readings

Below are investment related articles I am reading this week:

Market Correction? Try Perma-Crisis – Harvard Business Review

A New Era of Bad Money – Jim Jubak, MSN

No… Stop…  Don’t. John Hussman

10 More Years of Low Returns – Lance Roberts

Why the eurozone may yet survive – Martin Wolf, FT

George Soros: Eurozone crisis has entered a ‘more lethal phase’ – The Guardian

Dividend Paying Stocks meet Rule #7 – The Big Picture

Hoisington First-Quarter Review and Outlook (pdf) via John Mauldin

Whither Gold?

I am currently reading Peter Brandt’s Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading(expect a full review posted in the next few days). I can safely, without even completing the book, that it has already improved my technical analysis, shown me the patience required to trade, and made me realize how much I still have to learn.

With Brandt’s book fresh on my mind, I decided to take another look at the charts for Gold and GLD (SPDR Gold Shares ETF).  My last Gold update was April 10th and the price has changed little since that update. However, there are some key chart formations and levels to emphasize while patiently waiting for the next move.

Gold futures and GLD are potentially forming an inverse head and shoulders pattern.  If ultimately confirmed this would be a bullish sign for the precious metal.  Confirmation would occur if GLD (for the purposes of the charts I will use GLD) broke resistance at the neckline.

A long position could be initiated now if one wanted to speculate that GLD will confirm the pattern (i.e. go up). A logical stop loss price in this case would be around $156.50 – failure to hold the right shoulder low around $156.50 would be a bearish sign and signal further downside. The other option would be to wait for further confirmation and initialize a short position at $156.50 or long position if GLD trades above the neckline:

You will also note in the chart above the long-term channel in GLD that I have repeatedly detailed. The weekly chart shows we have broken below the channel, but this is not the first small break below the bottom of the channel. However, a break below the right shoulder low could move us far enough away from the channel to make the pattern obsolete.

Fibonacci retracement levels on long-term (weekly or monthly) charts levels often coincide with key support and resistance price levels. The 23.6% fibonacci retracement level from the October 2008 lows to the September 2011 highs is closely aligned with the potential right shoulder (see below), adding to the importance of the $156.50 – $157.50 level on GLD.

Until we get a decisive move in either direction, this should be a fun market to watch in anticipation!

No current position in GLD