U.S. stocks became oversold after a sharp sell-off, while emerging markets entered bear market territory.#-ad_banner-# Stocks Oversold After Three-Day Sell-off SPDR S&P 500 (NYSE: SPY) fell 2.13% on Friday and was down 2.59% for the week. Friday’s sell-off left the major market averages deeply oversold. The chart below includes Bollinger BandsR along with prices. The Bands are placed three standard deviations from the 20-day moving average instead of the standard setting of two standard deviations. Two standard deviations should contain 95.45% of the price action, while 99.73% of the price action should occur within the… Read More

U.S. stocks became oversold after a sharp sell-off, while emerging markets entered bear market territory.#-ad_banner-# Stocks Oversold After Three-Day Sell-off SPDR S&P 500 (NYSE: SPY) fell 2.13% on Friday and was down 2.59% for the week. Friday’s sell-off left the major market averages deeply oversold. The chart below includes Bollinger BandsR along with prices. The Bands are placed three standard deviations from the 20-day moving average instead of the standard setting of two standard deviations. Two standard deviations should contain 95.45% of the price action, while 99.73% of the price action should occur within the Bands when they are set at three standard deviations. Friday’s close, more than three standard deviations below the average, is expected to happen 0.27% of the time, or once every 370 trading days (about 18 months). Prices drop below the lower Bollinger Band a little more often than expected. This has happened 17 times since SPY began trading in 1993, or about once every 15 months, on average. Buying after prices fall this much would have been profitable in the short term. One week later, prices were up an average of 1.73%, and 67% of the trades would… Read More

There will be a number of earnings reports this week, and traders should start focusing on the trend in earnings. That could be bearish for the stock market. Weak Start to Earnings Season Puts Bull Market at Risk SPDR S&P 500 (NYSE: SPY) closed down 0.27% last week. Technical indicators are mostly bullish although bearish divergences are forming. The chart below shows Moving Average Convergence/Divergence (MACD) on a weekly chart of SPY, although a similar pattern can be seen with other indicators such as stochastics or… Read More

There will be a number of earnings reports this week, and traders should start focusing on the trend in earnings. That could be bearish for the stock market. Weak Start to Earnings Season Puts Bull Market at Risk SPDR S&P 500 (NYSE: SPY) closed down 0.27% last week. Technical indicators are mostly bullish although bearish divergences are forming. The chart below shows Moving Average Convergence/Divergence (MACD) on a weekly chart of SPY, although a similar pattern can be seen with other indicators such as stochastics or the Relative Strength Index (RSI). Bearish divergences are also visible on daily charts. A bearish divergence forms when prices move to new highs while an indicator fails to confirm the highs. Many technical analysts believe that divergences are eventually resolved with a decline in prices, but this belief is not confirmed by backtesting. Divergences lead to lower prices only about a third of the time in testing.#-ad_banner-# In testing divergences, I looked at various indicators and different time frames. Divergences that formed over eight weeks or more, like the current one shown in the… Read More

Investors are often told that the best time to buy is when everyone seems to be excessively negative on a sector or a country. That was certainly true in 2013 for investors who were able to trade in the sovereign debt of Greece.#-ad_banner-#​ Investors enjoyed a gain of 47% on Greek government debt last year even as fears of Greek default lingered throughout the year and the economic news remained mostly negative. Of course, most individual investors couldn’t actually invest directly in Greek bonds, and returns from investments that were available to individual investors were significantly lower. For… Read More

Investors are often told that the best time to buy is when everyone seems to be excessively negative on a sector or a country. That was certainly true in 2013 for investors who were able to trade in the sovereign debt of Greece.#-ad_banner-#​ Investors enjoyed a gain of 47% on Greek government debt last year even as fears of Greek default lingered throughout the year and the economic news remained mostly negative. Of course, most individual investors couldn’t actually invest directly in Greek bonds, and returns from investments that were available to individual investors were significantly lower. For example, the Global X FTSE Greece 20 ETF (NYSE: GREK) gained 25% in 2013, less than U.S. stocks — even though Greek stocks should have benefited from the same factors that drove Greek bonds higher.  Given the higher risk Greek stocks provided, buying when the news was negative in early 2013 doesn’t seem to have been a wise investment for most individuals. The example of Greece illustrates some problems with the idea of buying bad news — there is no way to know when the news is bad enough to drive big gains, and there is no way to be… Read More

Traders are struggling to understand what the unemployment report means to the Federal Reserve and to the markets, but their initial assessment seems to be bullish.#-ad_banner-#​ Concerns About Spending Offset by Weak Jobs Data SPDR S&P 500 ETF (NYSE: SPY) gained 0.68% last week despite negative news from several companies throughout the week. Until Friday, retailers dominated the news about the stock market. J. C. Penney (NYSE: JCP) and Sears (NASDAQ: SHLD) reported disappointing holiday sales and the stocks sold off. Other retailers also reported lower sales. Addressing future profitability, Macy’s (NYSE: M) jumped after… Read More

Traders are struggling to understand what the unemployment report means to the Federal Reserve and to the markets, but their initial assessment seems to be bullish.#-ad_banner-#​ Concerns About Spending Offset by Weak Jobs Data SPDR S&P 500 ETF (NYSE: SPY) gained 0.68% last week despite negative news from several companies throughout the week. Until Friday, retailers dominated the news about the stock market. J. C. Penney (NYSE: JCP) and Sears (NASDAQ: SHLD) reported disappointing holiday sales and the stocks sold off. Other retailers also reported lower sales. Addressing future profitability, Macy’s (NYSE: M) jumped after announcing plans to cut costs. SPDR S&P Retail ETF (NYSE: XRT) has a high correlation with SPY, and weakness in retailers would be a warning sign that the broad stock market is vulnerable to a sell-off. On Friday, however, traders’ concerns shifted away from retailers to the broader economy. The unemployment report showed that job creation stalled in December, and the weakness was generally considered to be bullish for stocks, bonds and gold. As usual, traders trying to anticipate what the Federal Reserve will do seemed to drive the market. Last month, the Fed announced that it would begin tapering… Read More

A popular investment strategy is to buy quality stocks and plan to hold them forever. The buy-and-hold strategy became popular because it works well — sometimes.#-ad_banner-# From 1982 to 2000, buying and holding delivered exceptional returns. At other times, the results are nothing short of disastrous. Bank stocks offer an example of the latter case. In 2006, Bank of America (NYSE: BAC) was one of the world’s largest banks, with a profitable mortgage originating division. It seemed like the perfect company for a buy-and-hold investor, with the ability to earn steady profits from mortgage servicing rights and other banking operations. Read More

A popular investment strategy is to buy quality stocks and plan to hold them forever. The buy-and-hold strategy became popular because it works well — sometimes.#-ad_banner-# From 1982 to 2000, buying and holding delivered exceptional returns. At other times, the results are nothing short of disastrous. Bank stocks offer an example of the latter case. In 2006, Bank of America (NYSE: BAC) was one of the world’s largest banks, with a profitable mortgage originating division. It seemed like the perfect company for a buy-and-hold investor, with the ability to earn steady profits from mortgage servicing rights and other banking operations. BAC began trading down as home prices peaked despite assurances from many analysts and policymakers that the housing market did not present a risk to the overall economy. BAC has gained 500% since March 2009. Despite that gain, the stock remains more than 65% below its 2006 high, and long-term buy-and-hold investors are still showing losses. Anyone who bought the stock before May 2010 still has a loss on their position. Investors who bought in 2008 or earlier are also likely to be showing a loss. Some buy-and-hold investors will point out that the dangers of individual stocks… Read More

With 2014 off to a lackluster start, investors need to consider whether they should take action to avoid a likely sell-off. A Pullback is Not a Sell Signal On the first trading day of the year, SPDR S&P 500 (NYSE: SPY) fell 0.96% and extended its loss with a small decline on Friday. For the week, SPY fell 0.51%. The two-day sell-off at the end of the week was not a very significant event, but in a search for new indicators, some commentators are trying to compress the January Barometer into an… Read More

With 2014 off to a lackluster start, investors need to consider whether they should take action to avoid a likely sell-off. A Pullback is Not a Sell Signal On the first trading day of the year, SPDR S&P 500 (NYSE: SPY) fell 0.96% and extended its loss with a small decline on Friday. For the week, SPY fell 0.51%. The two-day sell-off at the end of the week was not a very significant event, but in a search for new indicators, some commentators are trying to compress the January Barometer into an ever shorter time frame.#-ad_banner-#​ The January Barometer claims that the market will end the year up if the S&P 500 moves up in January. A lower close for the index in January is bearish for the full year. Several years ago, a widely admired technical analyst, Louise Yamada, CMT, revealed she had found a way to improve the January Barometer. She told The New York Times that when there is a gain in the first five trading days of January and a further climb through the end of the month, “there is a 94% chance of the market being up… Read More

Individual investors often point to the long-term success of Warren Buffett as proof that value investing works. They are correct, and Buffett is just one example of the many long-term investors who have found success with value investing.  However, although value investing can work, many investors fail to succeed with this strategy.#-ad_banner-# I think the reason value investing is so difficult to implement is because it is challenging to define exactly what “value” means. Some investors use the price-to-earnings (P/E) ratio and buy when the P/E ratio is low. Others search for stocks with low price-to-sales (P/S) ratio in… Read More

Individual investors often point to the long-term success of Warren Buffett as proof that value investing works. They are correct, and Buffett is just one example of the many long-term investors who have found success with value investing.  However, although value investing can work, many investors fail to succeed with this strategy.#-ad_banner-# I think the reason value investing is so difficult to implement is because it is challenging to define exactly what “value” means. Some investors use the price-to-earnings (P/E) ratio and buy when the P/E ratio is low. Others search for stocks with low price-to-sales (P/S) ratio in their hunt for value. In addition to these two tools, there are dozens of other ways to measure value. In the right hands, and with enough time, any disciplined approach to value investing should work in the long term. Another well-known investing strategy is buy-and-hold, or index, investing, which is an admission on the part of the individual that they cannot beat the market and are willing to accept all of the losses in a bear market with no chance of outperforming in a bull market. Momentum, or relative strength (RS), investing is a less widely… Read More

Seasonality is bullish for gold but bearish for stocks. The outlook for gold is confirmed by more traditional indicators and could provide one of the best trading opportunities in the next few months. Seasonals Favor Lower Prices SPDR S&P 500 (NYSE: SPY) gained 1.26% last week and is now up 31.71% in 2013.#-ad_banner-#​ Seasonals indicate the market could be due for a pullback. There are seasonal trends in almost all markets, and these indicators work with varying degrees of effectiveness. Traders should not base buy and sell decisions solely on seasonals, but… Read More

Seasonality is bullish for gold but bearish for stocks. The outlook for gold is confirmed by more traditional indicators and could provide one of the best trading opportunities in the next few months. Seasonals Favor Lower Prices SPDR S&P 500 (NYSE: SPY) gained 1.26% last week and is now up 31.71% in 2013.#-ad_banner-#​ Seasonals indicate the market could be due for a pullback. There are seasonal trends in almost all markets, and these indicators work with varying degrees of effectiveness. Traders should not base buy and sell decisions solely on seasonals, but they are a factor to consider. While the idea of seasonal tendencies might not be widely followed, they can be profitable as the popular “sell in May and go away” rule often is. The chart below shows the seasonal pattern for SPY. This indicator uses all of the available history and shows how the ETF has done, on average, on any given day. If history repeats, the year-end rally in the stock market could stall as seasonals point toward a flat market with some downside risks for the next three months. Seasonals are known in advance, and the… Read More

Income investors have two equally important objectives when it comes to investing — obtaining high amounts of income and limiting risk. Many survivors of the 2008 bear market learned this the hard way. They found out that they must either balance the two, or face heavy losses. Case in point: Many investors jumped at abnormally high yields in financial stocks like Citigroup (NYSE: C) when its yield jumped above 10% shortly before the company eliminated its dividend. And investors looking for a bargain in General Electric (NYSE: GE) endured a dividend cut of almost 70%. #-ad_banner-#Remember, these are companies that… Read More

Income investors have two equally important objectives when it comes to investing — obtaining high amounts of income and limiting risk. Many survivors of the 2008 bear market learned this the hard way. They found out that they must either balance the two, or face heavy losses. Case in point: Many investors jumped at abnormally high yields in financial stocks like Citigroup (NYSE: C) when its yield jumped above 10% shortly before the company eliminated its dividend. And investors looking for a bargain in General Electric (NYSE: GE) endured a dividend cut of almost 70%. #-ad_banner-#Remember, these are companies that were once widely assumed to be among the safest in the world, yet they eliminated their dividend practically overnight.  To be fair, these were also extraordinary circumstances that happened during a financial crisis. But long-time income investors still follow a general rule of thumb — “The higher the yield, the riskier the stock.” Today, I’m making an exception to this rule. As I mentioned to you last week, there is a way to invest in stocks with great yields, but without all the added risk that comes from dividend cuts. Let me explain. As you’ve probably heard in the past,… Read More

Federal Reserve action gave stocks a short-term boost last week, but without additional news, trading volume is expected to be low through the holidays. Traders Cheer the Fed SPDR S&P 500 (NYSE: SPY) gained 1.94% last week after the Fed gave traders everything they seemed to want. Asset purchases will continue, but instead of buying $85 billion worth of bonds every month, the Fed will only be buying $75 billion a month starting next month.#-ad_banner-# The general expectation seems to be that there will be a gradual decrease in the purchase amount announced at future Fed meetings unless the… Read More

Federal Reserve action gave stocks a short-term boost last week, but without additional news, trading volume is expected to be low through the holidays. Traders Cheer the Fed SPDR S&P 500 (NYSE: SPY) gained 1.94% last week after the Fed gave traders everything they seemed to want. Asset purchases will continue, but instead of buying $85 billion worth of bonds every month, the Fed will only be buying $75 billion a month starting next month.#-ad_banner-# The general expectation seems to be that there will be a gradual decrease in the purchase amount announced at future Fed meetings unless the economy weakens. Even though the amount of the purchases will be smaller, the Fed should still be adding a significant amount of money to the economy through this program. Reducing purchases by $10 billion after every meeting would result in $460 billion in monetary stimulus to the economy next year. The Fed is a bullish factor for the stock market in 2014. However, earnings and economic growth will probably be the factors that determine how stocks actually do in the next year. For now, those factors are bullish and gains for the full year seem likely unless earnings disappoint or… Read More