Click graphs to enlargeThe graph at the top shows the relative year-to-date (YTD) performance of the indexes and the LED stocks we've been following. The chart at the bottom shows how far off each stock is from its recent highs. While the indexes are basically flat for the year, the LED stocks are still way ahead of the game. This may be little consolation to those who bought in more recently.
Another thing can be deferred from these charts, and it happens to be the most important thing going ahead. One stock stands out as the clear leader in relative strength... RBCN.
RBCN has not only outperformed the others on a YTD basis, it has also fallen less than any of the others from recent highs. This is spectacular when you consider how contradictory this is. The stocks that do very well (have the highest momentum) usually correct the most. RBCN has managed to post impressive gains AND resist giving them back. This leads us to believe that the stock is in strong demand, and will emerge from this correction with explosive strength, posting tremendous gains over the next several quarters. It is our belief that smart money is flowing into RBCN, giving it its incredible resistance to decline. In an ideal world, we would now be blessed with a few sessions of capitulative selling which brings RBCN into the low 20's or high teens, at which point we could back up the truck. Opportunities like this are rare, but in a nutshell, they are what the other 70% of our portfolio is for.
This all takes great patience, but in time it will all make perfect sense.
38 comments:
Great chart Snot. It's unfortunate to see VECO going so low and not having a buy signal. In a broad market basis, how much lower do you think DOW/S&P can go before it stabilizes and resume its steady climb? How do you think the market will react after passing the financial reform?
Thanks.
I got a chuckle about your Poll Question.."How bad will My Big Fat Greek Correction get?"
Hard to say!!! The market is NOT in a good mood right now, and deservedly so. The Gulf Oil Crisis helps nothing, in addition to all of the OTHER issues. Our government and BP have certainly done a masterful job of hiding the depths of this crisis, but the truth is slowly seeping out, unlike the horrid amount of oil & gas spewing out of the blown well.
I'm not in the market at all right now, but it IS a good question, and while I don't read here everyday, I still am keeping up with and appreciate your thoughts on investment matters.
I'm looking forward to getting back in when I am able to. I think the drop will be somewhat limited at present, but we might experience a far bigger one in the fall.
Kay
Kay, we can't take credit for coining the phrase "My Big Fat Greek Correction", but it sure is fitting! We agree that there are a lot of problems currently, but when isn't this true?
With every day the market drops, the risk of investing decreases. Just think of it that way. Look what happened when it fell to 6,500... it went straight up for 9 to 12 months afterwards. We feel that the market will be substantially higher than it is today in just 3 to 4 short years. While we may still have extremes of volatility while coming out of this ongoing debt crisis, the worst is behind us and if you focus on the big picture, things will improve. Two steps forward, one step back.
We just added some CREE to our portfolio at $66. Granted only 5% of our available cash went into it, but it's a start. This correction hasn't run its course timewise yet. For a correction to end, it has to have enough magnitude AND take enough time. The magnitude could be enough (or maybe not), but the time has not been enough. We're still waiting for those rock bottom prices that makes it scary to buy. That's when we buy.
Cree will see 40's before reaching triple digit if it will do.
Trading range is 60's now since we broke 70 and once it break 50, it will take short time to go to 40.
Strictly on a fundamental basis, it probably deserves to be about $40.
Well, ALL the major indices breached AND closed below their 200 day moving averages, didn't they? I've heard you speak before about this being a major event. Refresh us?
Kay
CREE made the list of stocks down on unusual volume today. Not a good list to be on.
list
How much further do we go down? What is the best short ETF or equity with shares you can borrow to short? Financials? Or is it too late to short?
Snot, a friend of mine is looking at some emerging markets stocks that have dropped so far that they are now trading for 2x the cash on the balance sheet. What is your opinion of jumping into something like that and if "yes", when?
Now, I get all the 'market doesn't follow the news' thing. I also get the fact that the market was looking for an excuse to correct. But, and this is a big 'but', I think the macro picture is too big right now, and is actually driving the market more than usual. The Europeans are in a real quandry with the Euro. IMO, the folks sitting in the cat bird seat are the Asian tigers. Sure, they'll get knocked around a bit, but long term, they'll come out far ahead of every one else.
I sold all of my VECO two days ago. I have no short term, or medium term holdings. I'm thinking of purchasing some more 2x shorts like QID tomorrow (wish I had done so today). I think this will get more ugly before it gets better. No way do I feel comfortable purchasing any long positions right now.
Kay is right, no one should really be long right now. It's more than just a healthy 10% correction now that we've closed below the 200 DMA.
Us, on the other hand, we're going to remain focused on buying (crazy as it may sound), because if you look at what we went through in 2008 (failure of BSC, MER, LEH, ABK, F, GM, not to mention C!), do you really think it could ever get worse than that?
The way we see it, we may correct to Dow 6,500 again, but it really isn't likely. If we do, people will have far greater problems than their portfolios. Of course we don't know where the market is headed, but let's say it goes to 8,000. So we're two to four days from hitting bottom? Big deal, we can ride that out. And we can buy more when we get there. As scary as the last correction was (the worst since the Great Depression), we came out of it with flying colors. And we'll do it again. This isn't a pep talk, it's just reality. Unless there's a rally right now, it's a bit late to short. So why not focus on bargain hunting instead? We're not recommending reckless behavior where one throws their life savings at the first stock they see, but to add a little here and there on the market's worst days is a good thing. Look at MRVL... amazing strength that stock has considering all that's going on around it. It, too, will give in to the pressure. When it does, we won't be selling, we'll be buying. Because unlike some investors, we know the market may go to 6,000 or 5,000, or even 4,000 for that matter. But our investment style has that built into it. We've got another 70% of our account to put to work, and only about 7,000 points of downside to work with! So that math is easy... invest 10% of our account value for every 1,000 points the market drops. And if we're dead wrong and the market goes to Dow 500 or so, then we'll just do what we did last time and buy teh ultralong index ETF's until our account recovers. It's like this... at Dow 500, buying Ultralong index ETF's is a sure bet because if the market goes much below that, then your money will be worthless anyway! This Big Fat Greek Correction won't end because the market hits a certain predetermined level. It'll end when it runs its course timewise. It'll turn around when people get tired of watching it drop.
OK, Snot, let's bargain hunt. Is this a bargain or, "Ouch!", a falling knife? Stage 4ish looking chart. P/E of 5. Forward P/E of 5. Both possibly lower. Not sure how often Yahoo updates. 135 million cash. 1.5 million debt. ROA 18%. ROE 42%. Margins of almost 30%. Revenue per share 7.59. After six months of decline, the price is now 1/3 of the high. It has got to be China, right? It is RINO. [Would buying this be like taking a trip to RINO Nevada?]
Joe, last year Rino made 2.25, this year it looks to be on track to make 1.80 to 2.00, hence the fall. We can't argue with the numbers, they do look great going forward, but the company lacks consistency. We like companies that have consistent earnings growth year after year, and preferably even quarter after quarter. This keeps their chart in an uptrend. Only when the momentum in earnings is about to break will the chart break.
In our opinion, all Chinese stocks are like taking a trip to Reno. Even our Asian American friends admit they would never trust Chinese business practices. If it were a U.S. company, we'd research it further based on its numbers, but China has lost our trust.
I can't agree more with you about Chinese companies, Snot. Good example is LDK I guess. They lost trust among analysts and market does not buy their story no matter what they say. Considering what BP does to our gulf coast, it's sad observing struggles of entire solar sector, by the way.
Back to the today's directionless market, I would rather going short side if markets up considerably. I will patiently wait for CREE to fall into reasonable price level at 40's in the mean time.
Is today's action short covering on op ex day before the weekend, so that shorts don't get caught with their shorts as Timothy G. heads to Europe and big news might break? Or is this the bottom for this correction? The underlying debt issues are still there. However, companies keep on reporting some pretty good numbers, even if they are timid on guidance.
Market seems to hold up in the expectation of something from Tim G.'s visit to Europe but the situation is far worse than people realize.
We might see a big downday coming Monday...
Joe,
Just had some time to look into why RINO is doing so poorly. Didn't take long to find the story. Analysts expected them to post 47 cents for Q1 2010 and instead they posted 30 cents.
The article is at Yahoo finance>>>RINO>>>headlines.
We found the first paragraph of the article best summarizes what we've been saying all along about "news" and why trusting in the relative strength of the chart is a far better way to invest than looking at the fundamental "news".
Here is the text of that paragraph...
"Rino Intl (RINO) was a high flyer last year as revenues and earnings soared, but the stock began to sell off in January and continued to slide even as growth remained very impressive. Now we know why. As I’ve mentioned before, technicals always lead fundamentals. That is, the stock will sell off long before the fundamentals turn sour. Conversely, a stock will run well before the growth begins to appear."
Getting back to how this plays into what we've been up to...
We see enormous buying interest in RBCN. Truth be told, we don't know why and nor do we really care. All that matters is that a lot of people want to buy this stock, and few people are selling it. This is the only info we need in order to feel good about buying a stock. RBCN's actions late in the week even further solidified our belief that when this market turns, it will be a leader, if not THE leader. There's no reason to look at any stock that isn't behaving the way RBCN is right now. If RINO was expected to do well a year from now, people would be buying it and its price would therefore be rising. The action of the chart is telling us that RINO is not going to do well fundamentally for some time.
When and if you have time, Snot, would you comment on multiples in estimating the value/price of a stock. Aren't multiples in large part a measure of bearing versus bullish sentiment. If people are bullish on a company or in general, they will allow bigger multiples, thus take on greater risk by paying more, and vice versa.
Bargain hunting: PALL.
RINO has a very well defined downtrending channel. Eventually it is going to rise to the top of that channel. Best thing to do is buy puts when it hits the top of the channel. That is the only move to make that isnt totally reckless.
Really Cliff? Thanks for "teaching us" by being a parrot.
Snot, how do you rate LED stocks relative strength compared to the market? They look relatively weak right now.
VECO broke its trendchannel and is basically over as far as we're concerned. We traded all of our VECO shares for shares of RBCN (still 30% invested). RBCN is still holding up well relative to the market. The other LED stocks are basically doing what the market is doing. They are neither weak nor strong, they're just trending lower with the indexes.
CREE looks like it's broken below it's trend channel along with VECO. Why aren't you dumping your CREE shares?
looks like RBCN is sitting at the bottom of its lower trendline that I drew with little to no experience. The 10 EMA has also crossed over the 20 EMA to the bear side. Should I be looking at SMA or EMA? Linear or Log charts?
RBCN would have to drop another $5 and hit it's 150dma to be sitting on the bottom of it's channel. I hope it does because that will be time to back up the truck.
A general comment - wouldn't it be better to buy ETFs, say one of those 3x, when the market turns around. We know all stocks go up only if the market goes up, and since we are certain that it will, why not buy 3x ETFs? There's no risk of it going bankrupt and other kinds of problems. I just think people should consider moving away from individual stocks to the safer ETFs. If 3x is too volatile, then maybe the 2x. Take VECO for example, a rumor that Samsung would get into the LED business has turned VECO into a speculative play, even Snot sold it. This can't happen to ETFs. Just some food for thought.
Thanks.
The problem with those leveraged ETFs is that they lose value over time no matter which direction the market goes. The only people who truly make money on them are the managers who skim their "fees" off the top on a daily basis.
Leveraged ETFs lose value no matter which direction the market goes? NOT!
SSO holds its gains over SPY at a little below 2x
SDS loses value over time as median point drops
If the market is going up, a 2x ETF will typically make about 1.8x over time.
Here is a rsi chart of CREE which shows my preferred "scenario B" vs what actually occured. It turned out pretty close. Needless to say I'm pretty bullish. Heh
I can't see your picture. Somebody said this before too.
I'm not sure what is going with tinygrab and firefox. I may switch to Jing if they cant get their act together. Try opening in internet explorer and pressing F5.
Icon, I've heard that 80% to 90% of options expire out of the money. You frequently brag about your major profits from your incredibly precise options actions. Do you have a high percentage in the money or are you only telling us about your big takes on that small percentage that are "in the money"?
Actually what you should notice about Cliff is that in his latest CREE blatherings he provided "scenarios" but never posted what, if any action he took on them. I'm sure now he'll "report" that somehow he magically bought at the precise low and sold at the precise high, as usual.
Sorry, was away for the long weekend. re: why not sell CREE... you have to understand that we are only about 30% invested. By most yardsticks, we've already sold. Experience tells us that if 30% of our account drops 30%, the loss is negligible next to the profits we make when invested during the upside (in stocks just like CREE). This blog isn't old enough to record how we got where we are today, but in time it will all make sense.
Re: RBCN resting on support... no, it's not near the bottom of any trendline. Make that trendchannel begin in Mar 09 and you'll see RBCN is holding up incredibly well. Insanely well. It's relative strength is off the charts.
re: Ultra ETF's... their value does degrade over time. You can call the market right and still lose money on an intermediate term basis. They are a dangerous vehicle for gamblers, not investors.
Re: where to go from here? No one (except for the top brass of GS) knows where the market is headed short term. Dow 12,000 or Dow 6,000? No one knows. The best you can do for your portfolio over the long run is to keep your capital invested in the highest relative strength stocks possible. Sure, there'll be bad times, but the good times will far outweigh the bad if your capital is in the strongest issues. Those that resist decline during bad times will be the leaders of the next rally. To that end, we remain focused on loading up on shares of RBCN with the understanding that "My Big Fat Greek Correction" may not be over yet.
Check the link below for an article on ETFs as a possibly "buy" right now, based on the same strategy that Snot uses: "Among ETFs, the proven winners would be those that have the highest IBD Relative Strength Ratings and that fell the least during the swoon. It suggests institutions wanted to hold on to or get into the ETFs' underlying stocks. While the market sold off below its 200-day average and undercut its prior low, a handful of ETFs held their ground. Among those that held above their 200-day averages and didn't undercut their prior lows:"
article
I don't share the sentiment presumed in the poll. I think the operative word is: unprecedented. Back about 20 years ago, a DC10 experienced complete hydraulic failure when a rotor blade in the #2 engine severed a main hydraulic line. All hydraulic fluid drained out of the aircraft, leaving it uncontrollable except for the brilliance of the pilot's, who brought the plane down to a runway at Sioux Falls by using assymetric thrust. Point is, nobody thought this scenario even statistically relevant. Many years went by, with millions of flight hours, without this even remotely occurring.
Now we have BP and the oil rig failure. Same type of scenario. Nobody thought that this could even happen. That's what the blowout preventer is supposed to be: the last defense against all other failures. Currently, there are about 3500 rigs in the Gulf, with about 45 deep water rigs. There are obviously many more rigs scattered throughout the world. The estimate is around 40,000. So, the question must be asked: 'Has this ever happened before?' Answer: 'No.' At least, not in water. There have been accidents on land.
Anyway, I think it grossly unfair to lambaste BP because of this. This could of happened to any rig operated by anybody else. You can rest assured that the other folks (Chevron, Standard Oil, Exxon, ect.) feel like they've dodged the bullet on this one. Rest assured that these fail-safe measures will be scrutinized by everone operating in water.
So, I'm not voting on this one.
That's my 2 cents.
Sb, your points are totally right, but you have to understand why we're fuming at BP's top brass. It's not because they had an unprecedented mishap. It's not because they have failed several times to fix it. It's because they've lied to us every step of the way.
Are we at a point that it has become so expected that big business will bend the truth that this aspect of their behavior is just overlooked?
BP's estimates of the amount of oil leaking has been "convenient".
They estimated the leak to be at 1,000 barrels per day.
Scientists upped this to 5,000 barrels per day. To this, BP's COO, Doug Suttles, replied that their estimates were "within a wide range." Where's the "range" in that 1,000 barrel per day estimate? Why didn't they just say it was somewhere between 1,000 barrels and 50,000 barrels per day?
At least then they'd be on either side of the consensus, which is 25,000 barrels per day.
CEO Tony Hayward reminds us that the spill is "relatively tiny" compared to a "very big ocean".
How dumb are we supposed to be?
We've also been lied to several times about the effectiveness of their various fixes.
Only Bill Clinton emerges from a controversy with loyal followers after spewing a string of lies. No CEO's get that privelege. Not in today's world. All BP managed to do in regard to the way they handled the leak thusfar was to further increase the American's already colossal hatred of CEO's and their forked-tongue antics.
What's wrong with good old-fashioned honesty? If BP had given that a try, their stock wouldn't be being burned in effigy at the moment.
This was not "unprecedented". In 1979 in the Gulf of Mexico the Ixtoc 1 well blew out spewing 140,000,000+ gallons of oil into the open ocean. Pemex Oil tried the exact same methods to cap it as BP is now, and none of them worked. It was only stopped nine months later when two relief wells were completed.
That was 31 years ago, and isn't it interesting that while drilling technology has improved vastly, the methods to stop spills like this haven't been improved at all. I wonder why that is?
Anon, while the remedies haven't improved, the precautions have. BP avoided equipping its rigs with certain fail-safe devices as a cost-saving measure. Google "bp acoustic switch" and you'll find a Wall Street Journal article about one such device that other oil companies use that BP chooses not to.
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