ANALYSIS: msft, cenx, bab

As I've said before, I try to combine both fundamental and technical investing together when picking which companies to invest in. These three companies have both a fundamental idea that drives the stock price and technicals that make it a good play at the moment.

MSFT

Fundamentals
Personally, I really like microsoft from a fundamental perspective, even considering its 30% gain since July. I believe their products are really starting to shine, especially with Vista coming out next month for consumers.

Let's first consider the XBox. The Xbox dominated this Christmas and the reason was simply because it had more available consoles for consumers to buy this holiday season. While all the hype may have been around the Wii and the PS3, it's a moot point if no consumers can actually buy one for their kids. Gears of War has also seen huge success, which will help spur Xbox sales. Looking further down the road, I think the Xbox is going to benefit from the one year advantage it has on the other consoles. This helps the producers of the videogames as they get used to the console and are able to better use the system resources. It also means that more people have Xboxes right now.

Another product they just released was the Zune. I don't have too much to say about this, personally I think it sucks. However, they are marketing it like crazy, and sales have met expectations (which have been low). I don't see much out of the Zune though, and I think Microsoft is mainly using it as a way of getting its foot into the marketplace for now.

Microsoft is also releasing Vista, which I'm sure everyone knows about. There's been a lot of debate about whether people will need to make the jump to Vista. I think people will simply because it looks better, it offers better security, and it allows for faster multitasking. Of course we also can't forget the Microsoft Office that everyone will also buy. Has anyone seen OneNote? It's an amazing note taking program by Microsoft but it's unheard of in the student population. I think it's gonna be in demand as more and more students learn about it.

Technicals
The stock is sitting near its 52-week high, which it set not too long ago. It has maintained a solid uptrend in the last 6 months. Recently the movement has stalled a bit in the 30 area, but I believe the stock is taking a breather from its large gains. I see this as a buying opportunity before it moves further up.

BAB

Fundamentals
I see three fundamental reasons to be in this stock. The first is dropping oil prices, which have stayed low throughout this mild winter. This will lower costs for airlines. The second reason is the gradual consolidation of the industry, which has long been overdue. With more mergers we can expect more control on prices, which will lead to higher margins. As some of you know, the industry is extremely competitive. The consolidation will help reduce the competition. Finally, the third reason is the overall economic look. This is pretty important in such a cyclical industry. US economy is doing well and many investors are optimistic about the Fed's ability to keep inflation in check without hurting the economy. The housing slump looks to be improving a bit, which will help increase consumer wealth. I know British Airways isn't based in the US, but the industry as a whole will benefit from all of these reasons.

Technicals
52-week highs, and you know how I love stocks hitting 52-week highs. Strong uptrend, but I'm keeping a tight stop-loss.

CENX

Fundamentals
CENX makes aluminum, and aluminum's prospects look great in the coming years. Originally I was in Alcoa, but I didn't like how I was so closely tied to the Dow. Aluminum looks great because of rising demand, especially in the emerging markets. Boeing has been doing extremely well because of the orders it was able to win in China and India, and it just so happens that aluminum is used heavily in the planes that Boeing builds. Aluminum will also be used heavily in construction as China and India continue to grow.

Technicals
CENX just recently crossed its 20 day EMA, a bullish signal.

ANALYSIS: hov, dhi, len, phm

So I've been a little busy since this last summer, so I haven't updated in awhile. I've still been following the markets though! The last post on RRGB actually was a pretty good trade, and I was able to get a good 20% out of it. Right now I'm currently in MSFT, AA, and BAB. I'll make a post on why I'm in there a bit later. For now, I wanted to talk about home builders, which I've been keeping an eye on in the last couple of months.

Home builders have taken huge hits this past summer with the whole housing bubble burst; Hovnanian, Pulte, KB Homes, and DR Horton have all dropped anywhere from 30% to 50%.



However, you can also notice that after a certain period of flatness (I'm getting real technical here), the stocks have slowly started to climb back up. Technically, this looks a lot like a round bottom, which is just what it sounds like. Fundamentally, this pattern also suggests that the housing market has finally hit a bottom. Back in September and October, I repeatedly read about the lower-than-expected housing orders for the month, yet I never saw these stocks in the red following the news. It looks now that the housing market is slowly recovering from the exaggerated sell, and I would suggest looking into some of these homebuilders.

TUTORIAL: Shorts, Short Squeeze, and rrgb

Shorting is basically the opposite of buying, or going long, on a stock. When you short a stock, the broker is selling its shares of the stock and giving you the money for it. When you want to close your position, you "cover" your short by buying back the shares that the broker sold. This way, if the shares drop in price, you'll be able to buy them back at a cheaper price, earning you some money. Because the broker also has to sell the stock for cash, a short position is made on margin.

The interesting thing about covering your position is the fact that you have to buy back the shares. When a lot of people are short on a stock and good news comes out, shorters are forced to cover their position, which generates buying pressure on the stock. This buying pressure can create big upward price movements. This is called a short squeeze.

I spotted a good candidate that looks like it's about to have a short squeeze the other day. Red Robin Gourmet Burgers has been beaten down for quite awhile. Its large debt, increasing prices, and the economic slowdown brought on by gas prices and rate hikes have made many people bearish on this stock. In fact, 33% of rrgb shares were short as of July 11th.

However on Friday the stock surged up 8% on a better-than-expected earnings report. The large move was supported by huge volume as well. This type of news is the type that would cause many to cover their shorts. With 33% of the people short on RRGB, I think the 8% gain on Friday is not quite finished. I've bought into RRGB and if I'm correct, it should have some nice gains in the coming days as shorts scramble to cover.

ANALYSIS: hov

Hovnanian Enterprises is a home builder like KB Homes and Pulte. Basically, it's been tanking along with the rest of the industry. It actually reached $70 at one point back in July of last year, but after a head and shoulder formation, it's been on a downward trend since then.



I'm short on HOV because fundamentally it's lookin bad, and technically it's lookin bad. Fundamentally, the housing market has been slowly deflating since the start of the year. Analysts have been cutting back price targets and orders have continued to decline. Technically, HOV has been in a strong downtrend and the stochastic and macd has recently shown a bearish cross.

HOV has some good things going for it as well. It has been dropping for a long time, and some might think that the slowing house market is already priced into the stock. Also, the short interest, which shows a percentage of the outstanding shares that are short, is at 33%. On one hand, it shows that a lot of people are bearish on the stock. On the other hand, it also means that there are a lot of people ready to cover, which would generate buying interest and cause a dramatic increase in the stock price. I've read of an entirely separate strategy where a position is entered into a stock with a 40% short interest and positive relative strength. Finally, the downtrend is gradually straightening.

Personally, I still think it's got some ways to go down. The housing market just sucks and there's been nothing but bad news about it. Also, the macd and stochastic cross, along with the downtrend, is a strong enough sign for me. However, I'm keeping a tight stop-loss just in case.

Another note: MSN Money had these grades for HOV:
Factor Grades
Fundamental D
Ownership NA
Valuation A
Technical F

I thought that summed it up pretty nicely.

I've been short since 27.20, and although the rise about 5 days ago really scared me, HOV has dropped about 12% in the last four days.

Quick update, LH has been looking pretty hot lately. Even after friday's bear market where i believe 9 out of the 10 major sectors were down, LH showed relative strength with only a .32% drop. It's been up about 6.5% since I posted about it.

ANALYSIS: lh *update*

Lab Corp does blood tests, hiv tests, urine tests, dna tests, basically every test you can think of that's used at a hospital. Here's the chart.



If you were to look further back on LH, you'll notice that it has a history of making large moves after consolidating for a certain period of time. As you can see, until mid June, LH has traded in a very narrow range. Yes, the move was made almost a month ago, but I see it as a move that should last longer than its previous moves largely for one technical reason; its move upwards has been much more gradual. Its past moves were huge moves that lasted at most one month, but each time the rise was meteoric.

Again though, following my momentum strategy, the main reason I'm in this stock is because it is trending well in an industry that is also trending well in the last couple of months, the medical laboratories and research industry.

A word of caution: there was previously a case pending on a patent that Lab Corp was infringing on. It was thrown out by the Supreme Court in favor of the other company in late June. The news stopped LH at its 52-week-high, dropping it back to the consolidation resistance where it found support (resistance turns into support) on around June 28th. After people began to realize that the case would not hurt the company, the stock has begun to climb back towards the high set before the case was thrown out ( a bullish sign). Even still, with bio companies, it's always important to keep up on company lawsuits, patents, etc.

Update: LH is looking more and more like an ascending triangle with declining volume to strengthen the formation. This is a bullish chart pattern, one that you should trade on the breakout above the resistance line.

ANALYSIS: deo

While I was looking through the brewery industry, I noticed the chart of DEO.



As you can see, it looks like it has formed what is called an (a)symmetrical triangle; the highs are getting lower while the lows are getting higher. This is generally a sign of investor indecision, but they also tend to be followed by a break towards the direction of the preceding trend. In this case, it would be an uptrend. Does this mean you should bullish on the stock? Personally, I’d say no. Although the brewery industry has been on a tear lately, there is no reason really to go long on the stock now while it’s stuck in this symmetrical triangle. Instead, it might be better to wait ‘til the triangle is broken, and then make your decision on the break (short if it is broken to the down side, long if broken to the up side). Keep an eye out on DEO.

ANALYSIS: nvda

Nvidia is a producer of computer graphics cards. I've actually got a card of theirs that I just bought recently. They've been hit hard by slow demand recently, but it looks like they might be emerging from a bottom. Here's what I saw:



The first thing I noticed was a "double bottom" formation, or an "Adam and Eve bottom", or a "W formation", or whatever you want to call it. I wrote a post earlier about double bottoms here. It looks like a double bottom has formed, which would be a bullish signal.

Another bullish signal I noticed was an MACD cross. The article on MACD crosses is located here.

The third positive sign was what looked to be a move north on the RSI. Basically, when the RSI is in the 20 area, it is a signal that the stock is oversold. When it's at 80, it's overbought. Right now, NVDA looks to be moving up from oversold territory.

Finally, NVDA has crossed its 20 day ma. Any time the price of a stock is above a major moving average (20, 50, 200) it is a bullish signal. NVDA just recently crossed its 20 day ma.

Based on all of these signals, it looks like NVDA could possibly have found a bottom, and may be moving up from here.

Market Update 07/03

The market has calmed down a lot in the last couple of days. After the huge sell offs in May and the back-and-forth trading in June, market volume has begun to slow and the dramatic swings of the market have turned into consolidation. With the 4th of July just coming up, everyone on vacation, and the Fed decision past us, volume will be pretty dead.

For me, I like these conditions much better than what has been going on in the past couple of weeks. Before, macroeconomic news was affecting every stock. If you look at the charts of the industries, you'll notice that almost all of the industries followed the huge drop in May. Now, with the market calm, I can get back to my old strategies, such as the one I outlined here.

However, it is important to remember that this is historically one of the worst performing times for the market. I mentioned this in my last post; we are currently in the summer doldrums as well as the midterm of the presidential cycle. A lot of people have entered cash positions, which isn't too bad an idea right now.

Sorry I haven't updated the site too often, but the market has been a little boring. Right now I'm long on Google and short on GNSS, I'll get a post up on why I'm in them a bit later. For now feel free to check them out.

Overall Market Analysis 06/20/06

When I last made a post on the overall market sentiment, things were looking bearish. Today, things continue to look bearish despite a small rally today. Here's a quick look at the Dow's chart:


Technically, things aren't looking too great. It looks like the Dow Jones has formed a top in early March and has started to develop a downtrend. Even worse, the 20 and 50 day moving averages, which have served as support levels, are now resistance. The market has now failed to move above these levels twice. Also, what looks to be a small double top has formed. This occurred in late May, and the subsequent drop followed.

Fundamentally, things are still looking bleak. It is almost certain that the Fed will hike rates up again in the next meeting (next week I believe). Bernanke has made comments about the Fed's responsibility to maintain a reputation as inflation fighters, and other Fed members have described the current inflation as unacceptable.

Also, historically the 2nd and 3rd year of the presidential cycle (so for Bush that would be 2005 and 2006) are almost always the worst years for investing. Furthermore, the months from May to September are historically bad months for investing as well.

Technically, there are some positives. If you look at the chart again, you can see that the MACD and the Full Stochastic are both showing some signs of a reversal. The MACD is on the verge of crossing the signal line, and the full stochastic is slightly starting to turn upwards from oversold territory. However, none of the data is conclusive. Also, the market is going to need some big strength in the coming days to break above the resistance. With the fed hike looming, I can't see this happening.

Fundamentally, there was good news today with housing construction coming in well above expectations. Some investors believed this to be a sign of continued strength in the economy. Even still, the housing market is expected to dramatically slow this year, and the sharp rise for last month's construction was followed with a bleak forecast for June.

Ultimately, I think you should remain short on the market. Technically there is a chance of a turning point in the coming days, however none of it is too convincing yet. Also, fundamentally, things look pretty bad with the upcoming fed hike. Until the market shows more signs of a bottoming, I would remain short.

One more thing. If you want to go long on stocks, look into Japanese stocks. The Japanese economy is coming out of a deflation crisis, so some inflation could be good for the economy.

Simulated Portfolios

Hey all,

The simulated portfolios ended a week ago. Due to some errors at the site, I couldn't really tell who won the contest (somehow, some fake stock that doesn't exist was added to Henrique's portfolio, and it added like 25% to his portfolio gains). If you're still interested in doing this, you can join a public investing contest. I'm in the one called "Beginners Game for Investing". I'm also planning on starting up a new one when the school year starts.

Bonanza

ANALYSIS: Overall Market, Commodities, Bird Flu

The market has been doing pretty badly lately. There is a strong sense that the market is oversold, having dropped so many points in the last week or so, yet even still the market finished down for another day. The market shouldl rebound in the next couple of days, but I don't think it will last very long. The concerns that I mentioned in my last post are still lingering, and it appears more and more likely that the Fed will raise interest rates yet again.

Commodities have followed (or maybe lead?) the drop in the market. Steel, silver, copper, aluminum, and many other commodities have all seen huge drops in the last week. It seems that many on Wall Street (from what I've read and heard) believe that this is just a healthy correction in their meteoric rise this year, and have made predictions that it will continue to rise later (maybe after summer). However, I'm going to stay out of it for now. The drops have scared me a bit, and some think that they have reached a top. It is generally believed that the time around the beginning of Summer is always a bad time for the market. People go on vacation, taking their trades (volume) and their money (selling) along with them. Because of this, I am going to stay out of them for awhile until more data is available.

Consider taking a look at life insurance, which continues to do really well. The Entertainment - Diversified industry also continues to do well. This industry includes companies such as Disney, Time Warner, and Vivendi. DIS, V, and NWS are all showing relative strength.

One last thing, bird flu-related stocks may be a good play. It's been a hot topic for some time now, and it has gotten worse now that some scientists are worried that the virus has evolved into a new strain that can be transmitted from human to human (dang, that's pretty scary). Cases are also being investigated in Indonesia. Also, there are some reports that Australia is not well equipped to handle a bird flu outbreak. MedImmune (MEDI) is one company that has signed a contract with the US Government to produce an inhaled vaccine.

Overall Market Analysis

It looks like now is time to be short on some of your positions. The market has shown strength in the last couple of weeks, but it appears that it is now correcting itself. After dropping 260 points on Thursday and Friday, the market recovered a bit today. However, it appears that this rally will be shortlived; there are still oil concerns (problems with Chavez and in the middle east as usual), and with the increasing gas prices comes concerns of inflation and another upcoming rate hike by Bernanke. Also, the Hurricane season is coming up as well, which could be further bad news for the economy and for gas prices.

Technically, the Dow Jones appears to be ok. You can see that the uptrend is still in tact and the Dow remains above the 50 day moving average.

However, the fundamental news suggests that the drops are not yet finished. Because of this, I would suggest having at least one short position in the weeks to come.

TUTORIAL and ANALYSIS: Double Bottoms - AAPL and GOOG

A double bottom is another chart pattern. It basically should look something like a W with a large drop in price, a small rebound, another drop that stops at its previous drop, and an eventual climb back up to high prices. It's a bullish chart pattern that usually will climb after the W pattern has formed.

GOOG

Google formed a double bottom not too long ago. You can see that after it had a huge drop from missing earnings expectations, it formed the double bottom pattern. After forming it, it climbed back up to 450 before settling down again. Yes, as of today Google is looking a little bad. Even still, if you had gotten in after the W had formed and you used tight stop losses, you could have gotten out with a good gain.

AAPL

It looks like after today, Apple has formed a double bottom as well. This W pattern is a little smaller, but it is still legitimate. There's heavy resistance at its current price, and I would wait for a break of this resistance to get in. If you do get in, I think a stop loss at just under 70 would be good.

UPDATE: msft

MSFT missed profits, and as a result the stock plunged huge on Friday. The post I had made on Friday was actually meant to go out on Wednesday, but I had accidentally posted it on a different site and this blog was also having some problems.

As I had said, most investors had stepped to the sidelines to watch MSFT; the price had been trading in a very narrow gap. When the news of the profit miss came out, the buy side was overwhelmed by the sell side. Once the news came out, with the buy side already weak, the stock was bound to take a nose dive. The profit miss by itself was a large part of the 10% drop, but it wasn't all of it. The narrow trading channel that had been created prior to the news I feel played a large part in the drop.

ANALYSIS: msft and intc

Intel and Microsoft are followed by a crapload of people, so I thought I'd do a real quick analysis on both of them.

INTC

INTC has been in a strong downtrend. As you can see, the price has been declining ever since mid January when I believe it missed earnings expectations by a lot. However, it does appear that the price may be slowing in its decline. The MACD, which basically measures momentum, has noticeably slowed and is moving towards zero, and the downtrend has become more drawn inwards. As of now, it looks like INTC has just about reached the bottom of its fall. However if I was thinking of getting in, I would definitely wait until this downtrend is broken just as confirmation.

MSFT

Microsoft is in a somewhat similar situation as INTC. It's not in a downward trend, but at the same time I can't recommend a buy or sell signal on it either. Since January, MSFT has been forming what's called a symmetrical triangle pattern, which is where the stock reaches lower highs and higher lows. Basically, the price begins to narrow into a small channel. This pattern is a sign of investor indecision; investors are unsure of where the stock is going, and until big fundamental news is released that changes investors' view on the company, it will stay in a tight range. However, once that news does come out, MSFT will have a huge move in price. During that moment, both the bullish and bearish investors will agree on the direction of the company, and the stock will move largely into the direction of the news. So basically, with Microsoft, I would stay out until the triangle is broken on big news and big volume.