Monthly Archives: June 2016

Finding a Trade Candidate 4

Psychology

The fundamentals tell you what a stock should be worth and the charts show you good entry and exit points, but the mood of the markets can and do have a large impact on how the stock reacts to support and resistance.

When we start talking about psychology most males shy away because they’re not into “feelings”. We are not discussing feelings but the perception of the value or strength of a company. Perception is the key word here.

 

Target beats by $0.10, reports revs in-line with comps below guidance; guides Q2 EPS, comps below consensus; FY17 EPS guidance achievable  (73.61)

5/18/2016, 8:06:01 AM ET

  • Reports Q1 (Apr) earnings of $1.29 per share, excluding non-recurring items, $0.10 better than the Capital IQ Consensus of $1.19; revenues fell 5.4% year/year to $16.2 bln vs the $16.31 bln Capital IQ Consensus.
  • Comps +1.2% vs. +1.5-2.5% guidance (estimates near +1.6%); more than offset by the impact of the sale of the pharmacy and clinic businesses.
    • Comparable digital channel sales grew 23% and contributed 0.6 % points to comparable sales growth.
    • EBIT +4.9% to $1.32 bln.
    • EBITDA and EBIT margin rates were 11.5% and 8.2%, respectively, compared with 10.5% and 7.4%, respectively, in 2015.
    • First quarter gross margin rate was 30.9%, compared with 30.4% in 2015, reflecting the benefit of the sale of the Company’s pharmacy and clinic businesses, combined with the benefit of the Company’s cost savings initiatives, partially offset by investments in promotions.
  • Co issues downside guidance for Q2, sees EPS of $1.00-1.20, excluding non-recurring items, vs. $1.36 Capital IQ Consensus; comps flat to down 2% vs. ests near +1.9%.
  • Co sees FY17 EPS within $5.20-5.40 prior range achievable, excluding non-recurring items, vs. $5.27 Capital IQ Consensus Estimate.

Courtesy of Briefing.com

 

Target: Softer consumer trends hit TGT heading into 2Q16 — Telsey Advisory Group  (66.60 -7.01)

5/18/2016, 9:58:46 AM ET

TAG stays at Outperform, $91 tgt on TGT following earnings as they are disappointed by co’s 2Q16 guidance, but not fully surprised. Over the past two weeks, many retailers, including Macy’s (M), Nordstrom (JWN), Kohl’s (KSS), and Gap (GPS), experienced a slowdown in overall consumer spending and the negative impact from unfavorable weather on the apparel and discretionary businesses late in the quarter and into May. These trends also are taking a toll on co, reflected in the recent stock price decline and current valuation. Further, they noted co still expects to achieve its prior 2016 adjusted EPS guidance of $5.20-$5.40. Firm is at $5.30 and the FactSet consensus is $5.27.

TGT trades near lows of the session, down nearly -9.5%

blog tgt daily 5-18-2016

Courtesy of Briefing.com

When TGT, M, WMT, WSM or any of the other major retailers issues a poor earnings report almost all retailers go down with them. This is called a sympathy trade and is a great trade on other retailers if you can find one that isn’t having the same problem.

What this does is change or reinforces the perception that retailers and the market in general are weakening. The perception is all it takes to change the market direction. All the professional traders have already exited the market. The only buyers left are your 401k, (all in all the time) and retail traders. The reason the retail traders are still buying is that the stock is at a much lower price and thus appears to be of greater value. The problem for them is that they don’t have a sense of overall market direction or an objective basis to determine the value of the stock. Without these two little items in their arsenal their account is doomed.

In my opinion if the market (macro) can maintain itself in the 17500 to 18000 area TGT will trade sideways to slightly up. If the market falls, TGT goes with it. With the current sentiment of the market (country) TGT has no chance of recovering and going to new highs.

Company news/events.

When a company has a bad earnings report it is considered an anomaly unless there is proof to the contrary. They may take a hit in their share price but they recover quickly. In this instance quickly can be anywhere from two weeks to six months.

To get to the deep value area a company has to have bad news, usually several times. Don’t let it scare you. It has scared most traders, that is why it has dropped so low. Get out the calculator and figure out the fundamental value and determine if you have a viable trade candidate.

On December 19, 2013 Target revealed they had a massive credit card breach. Over a two month period the stock went from $67.00 to $55.00. There was nothing fundamentally wrong with the company except the perception by the public that they had breached their customers trust and because of that people would stop shopping there. As soon as folks realized that TGT only had a minor blip in sales the stock recovered to $77 a year later and then $87 a few months after that. Although this was not a deep value situation, the stock was a relative value to its peers and as a leading retailer recovered nicely.

blog tgt daily 12-2013

TGT didn’t bottom out until 2/5/2014 but when it did it gapped down, formed a hammer candlestick and then formed a cup and handle and a breakout over a three week period.

 

 

Economic news and reports.

May Nonfarm Payrolls 38K vs 155K Briefing.com consensus; Prior revised to 123K from 160K

6/3/2016, 8:30:04 AM ET

May Nonfarm Private Payrolls 25K vs 160K Briefing.com consensus

6/3/2016, 8:30:07 AM ET

April Trade Balance -$37.4 bln vs -$41.6 bln Briefing.com consensus

6/3/2016, 8:30:45 AM ET

May ISM Services 52.9 vs 55.4 Briefing.com consensus

6/3/2016, 10:01:26 AM ET

April Factory Orders +1.9% vs +1.6% Briefing.com consensus

6/3/2016, 10:01:54 AM ET

Courtesy of Briefing.com

Huge Jobs Miss Scares the Markets

Yellen Speech Attempt at Damage Control

blog indu 15 min 6-3-2016

The chart above is a 15 minutes chart of the Dow Jones Industrial Average ($INDU) the morning of the reports above the chart.

The most glaring numbers in the reports were the 38 thousand vs 155 thousand consensus expectation for Nonfarm Payrolls and the Nonfarm Private Payrolls of 25 thousand vs 160 thousand consensus expectation. ISM Services, a gage of service business activity came in at 52.9 vs 55.4 consensus, thus continuing a downtrend in that large sector of the economy.

As you can see from the INDU chart above the market dropped 150 points off the open but rebounded to close down 31 points on the day. So if the reports are so bad, why didn’t the market close down 300 points you ask?

I’m sure you have all heard the talk of the FED raising interest rates this coming year. Interest rates are inverse to the market, when they go up the market goes down and visa versa. Do you think raising interest rates is possible with economic reports that look this bad? Nooo!!!

As always amateur traders opened the market and sold it off on the bad economic reports but the professionals close the market and they bought the shares the amateurs were selling on bad news because it is now very unlikely that the FED will not be able to raise interest rates. The inability to raise rates trumps the bad news. The correlations of this nature and many other reports are part of the learning curve you must go through to become a consistently profitable trader.

You must become professional in your thinking as quickly as possible. The only way to do that is to read as much as you can on anything related to the markets. Until you have enough experience and knowledge you need to find someone who you think is unbiased about market direction and critically analyze whatever information they are producing. Once you think you can analyze the market and you have strong confidence in your analysis then do so and stick by your analysis. Don’t forget that all market situations are fluid and some component of your analysis is going to change eventually (like tomorrow), when it does change your analysis to reflect the new or changed data.

The perception of the economy is our first concern. This is the overlying macro picture. I’m not an economist and I’m sure you’re not either, but we don’t have to be to understand the overall picture of the shape the country is in at any point in time.

For the last several years the national debt has skyrocketed, more and more people are jobless, on welfare or some other government assistance program, businesses are overburdened with new regulation and a heavy tax burden. What has kept the markets climbing was the Federal Reserve Bank (FED) through their Quantitative Easing (QE) program that supported the markets. The QE programs have come to an end now and the earnings of the companies are all that support the markets. FYI. QE injected 4.6 TRILLION dollars to support the markets. That is in addition to the 19 trillion we all hear about daily.

The next part of this picture is interest rates which are also controlled by the FED. Historically when interest rates rise the stock market’s fall. This is because those higher interest rates (interest on outstanding debt – short or long term) come directly from a company’s profits and thus reduce their earnings per share which reduces their value as an investment.

Finally we have the business cycle which is normally three to five years which consists of one to three years rising and then one or two years falling. Currently, because of the money pumped into the markets by the FED through Quantitative Easing we have had a seven year rising market and are long overdue for a big drop.

The piece on Target and next one on the economy are my feeble attempt to get you to look at the overall picture of individual stocks and the markets as a whole. If you can do that your trading will profit handsomely. You will find that you are taking fewer trades but making a lot more money.

The two primary emotions that rule the markets are greed/euphoria and fear/panic; in between these two extremes are a million shades of gray.

Advice

When you’re talking to a broker he explains that over time the market keeps going higher and higher. He will also explain that you can’t time the market. Bulls*$^. Because of that he says it makes no difference where you buy at since you’ll be in there for years so let’s get this done today. So you buy at the top of the price range and then sit on that stock for years before it finally recovers from the fall a few months after you bought it. Many retail traders buy into the market in individual margin accounts (not 401k or ROTH) when the market is breaking to new highs in anticipation of selling at even higher prices later.  This is called the Greater Fool Theory. Those are retail traders, buying at what the market asks. Always buy LOW, sell HIGH. In the meantime, your broker is buying low and selling high for his account. He can time the market, not you. The difference is buying wholesale or buying retail. When you have a choice why would you pay full retail price when YOU WILL get the opportunity to by wholesale?

The biggest bias here is your political affiliation. No matter what that is you have to set that bias aside and focus on the stock you are contemplating becoming an owner of. Whether you are a democrat, a republican, a socialist, a conservative, a Christian or a pagan or some hybrid of these philosophies you can’t let that philosophy color your opinion of a stock or sector that you’re looking at. If you let your philosophy color your opinion you will wind up in a trade that can’t make money or more likely miss a trade that will make you a bundle. Whenever the fundamentals line up for you to buy at a ridiculously low price, buy it.  Whatever other bias’s you may have try to set them aside.

Global warming seems to be a big deal with a lot of people and if you use that or some other bias as a basis for a trade you are setting yourself up for failure. What I’m trying to say here is; just the facts ma’am, that’s all I’m interested in. If you let anything else influence you you are reducing the odds of catching a winning trade. If you think you can influence some aspect of our society with your trading please close your trading accounts while you still have some money left because the market cares not a whit for your cause.

Personally I believe that the big pharmaceutical companies are ripping off the country and everyone in it but they sure have given me some great money making opportunities lately.

Patience

When computer trading came along back in the 90’s I was one of the happiest traders out there. Why? Because I didn’t have to wait around for days or weeks or months anymore. I could open a trade and close it that day. Hurray for the computer. Although I made some money the stress was a killer. Of course I was a young guy back then, still not into my 50’s yet. I’m not young anymore and I can definitely live without the stress. Patience is the key. It’s hard to teach and old dog new tricks but this is definitely worth the effort.

The biggest change for me after many years of day trading was patience. The way I have overcome my impatient (restlessly eager) tendencies was to scale in and out of my trades.

Often a trade will have some bad to horrendous news and drop 20 to 50 percent in the first few minutes of the trading day. If it takes several days to get there then there are a lot more people waiting for that price level because more people have noticed the price action and have had time to research the stock. When that happens there are many little eager beavers like me out there waiting for that trade to reach an obvious support level.

On the blog you may have noticed that I will sometimes buy fifty cents to a dollar above support. What that is is a small buy (one or two hundred shares normally) and then the support level buy of one to two thousand shares or more. The most recent example of that was GPS. I had support levels at $17.24 and $17.62. My initial buy was at $18.00 but I only bought 200 shares. $ 18.00 is a round number support level and GPS was 60 percent off their high and a fundamentally sound trade. When GPS hit support I bought 2000 shares at $17.26 in that account for an average of $17.38 and bought at $17.26 into two other accounts.

The two hundred share buy allowed me to precipitate in the trade and get that DO SOMETHING eagerness off me and wait for the trade. The stop was $16.99 from the first entry. If I lost 200 bucks on that portion of the trade I was mentally prepared for that. I could always rationalize it as a 38 cent loss. Sounds better, doesn’t it? After I was in the trade I noticed that on their conference call they said they may not be able to make their annual earnings per share (EPS) numbers if their slow sales at the first of the new quarter continued which prompted me to sell three quarters of the position at $19.44.

It is far from unusual to have new news break a day or two after you have entered a trade. You must stay open to what that news is and judge it critically. The analysis of a stock doesn’t stop until you’re out of it, if then. I normally follow a stock for at least a few months to see if I got out at the top or blew it and left a big chunk of change on the table. As a side benefit, I get to find my mistakes.

In another recent trade (TPC) I bought at $10.41. I sold 20 percent at $13.50. That was to reduce my risk (number of shares times stop price equals risk), satisfy my need for action and book some profits. I had two targets in the trade at $19.50 and $26.00. I sold half at $19.24 and am holding the rest for $26.00. The $26.00 figure may take a year or so.

As a swing trader, position trader or investor your biggest asset is patience. Often I will see a stock that is down 70, 80 or even 90 percent on a well established brick and mortar company with real assets and I immediately want to get it before it moves higher and I miss buying low on a great trade. This can be a costly mistake.

blog rh week 6-11-2016

Unfortunately we are trained to buy when all the indicators are pointing up. At that point in a stocks life the price has already risen substantially. The risk that we incur buying at that point is astronomical compared to a deep value trade.

If you have any market training at all you were taught to buy the strongest company in their sector with strong management and a strong balance sheet. In that instance, where do you think the price would be? Right, right at the top of the chart.

In the Restoration Hardware (RH) chart above you see the kind of chart I’m interested in looking at.

Restoration Hardware misses by $0.10, reports revs in-line; guides Q2 EPS well below consensus, revs below consensus; lowers FY17 guidance below consensus  (36.07 +0.69)

6/8/2016, 4:18:31 PM ET

  • Reports Q1 (Apr) loss of $0.05 per share, excluding non-recurring items, $0.10 worse than the Capital IQ Consensus of $0.05; revenues rose 7.8% year/year to $455.5 mln vs the $452.27 mln Capital IQ Consensus.
  • Comparable brand revenue growth, which includes direct, was 4% in Q1 (ests +5.4%) on top of 15% for the same period last year.
    • Stores revenues increased 19% to $256.1 million in the first quarter of fiscal 2016. This growth is on top of a 13% increase in stores revenues in the first quarter of fiscal 2015.
    • Direct revenues decreased 4% to $199.4 million in the first quarter of fiscal 2016. Direct revenues during the first quarter of fiscal 2016 represented 44% of total net revenues.
  • Co issues downside guidance for Q2, sees EPS of $0.28-0.33, excluding non-recurring items, vs. $0.80 Capital IQ Consensus Estimate; sees Q2 revs of $505-520 mln vs. $531.78 mln Capital IQ Consensus Estimate.
  • Co issues downside guidance for FY17:
    • Lowers EPS to $1.60-1.80 from ‘flat to down slightly from $2.72’, excluding non-recurring items, vs. $2.66 Capital IQ Consensus
    • Lowers FY17 revs to +1-3% (from low to mid single digit growth) to ~$2.13-2.17 bln vs. $2.21 bln Capital IQ Consensus Estimate.
    • Courtesy of Briefing.com

I bolded and highlighted the most important portion of this report. With the retail sector at 15 P/E the most I would want to pay for RH is $13.50. Most assuredly RH is going to get a strong bounce or two before it gets to $13.50 if it ever gets there.

In this situation you must not buy a stock that is trading at twice its deep value price. RH will go much lower as the news sinks into the trading population that this really is a dog. Personally I think RH is a good company but was oversold and hyped by the broker trading community. Once it gets down to value it will be a great trade.

Here is one of those spots where patience is a premier virtue. I really am not trying to find a way not to trade. I just want to be in that trade at a price I am willing to stay in there at.

So add it to your watch list and wait. Check it weekly to see if it is forming a bottoming pattern. If so, is the pattern close enough to value to enter a small position?

Are you confident in your trading an analytical ability? What is your trading record? Do you keep a record of your trades? What’s your win/loss percentage?

Confidence, patience and discipline are your greatest assets. I can’t quanified one over the other because if any one of the these is missing you are S.O.L. The only way to acquire these attributes is through experience and loss. The reason for the losses is trying to short circuit the trading rules. Yes, there are rules for everything you do in life. If these rules are not followed rigorously in trading you will take yourself out of the game because you’re broke.

It takes a lot of discipline to trade properly. If you have a problem with following the rules, try this. For your next 15 trades go strictly by the rules. No deviations at all. You will be surprised by the results. I guess I should say astonished to be more accurate. In my experience I went from being up an average of five percent on all trades combined to being up about sixty percent overall.

Patience is what gets you in and out of a trade at the proper levels. If you’re like me and you get a little, or a lot, anxious about getting in or out of a trade then scale in and out of it. If you do that be sure that you buy small to start if the stock is not at the support or resistance level. If the plan is 1000 shares only buy a 100 to start the trade. If it turns around before it hits the S/R levels at least you have a piece of it.

My first few years trading I lost more often than not. Because of that when I did get a good trade I would sell it way to early. Often I would only get 20 or 30 percent of what the trade should have generated. The reason for this behavior was I was scared of losing the paper profit I had. Also I didn’t have good buy or sell targets. When you’re trading in the dark it is a terrifying experience.

With discipline comes confidence. When 90 plus percent of your trades are winners it’s easy to be confident. When you have a winning system you have to watch the overall market and the sectors within it. These will help you determine if you need to adjust your buy/ sell parameters.

Now the problem becomes overconfidence. Don’t buy too early or hold a stock to long. One of my problems was buying too much. If I determined that I was at value I would sometimes overbuy. If you do that and the stock continues lower your account could be down 10 or 20 percent before you know it. In that situation you can’t let the losses continue. Size your trade properly for your account. Always check support levels under your buy level and be prepared for it to reach them. If it doesn’t then add share when it bounces.

You need to learn to find support and resistance faster than you can draw the lines on the chart. Learn the various candlesticks that indicate continuation or reversal of a trend and chart patterns that do the same.

Have you met someone who could act as a mentor or coach? A mentor could shortcut your trading education by pointing you in the right direction when you go astray or leading you in the right direction before you do.

In the late 1990’s I hired a mentor that charged me $5000 for 15 minutes a day for 90 days. He came highly recommended but was more into investing than day or swing trading. I learned a little from him but not enough to justify five grand. In the early 2000’s I also attended a one week trading school. Here the focus was on reading charts. This was beneficial and I do feel I got my money’s worth there. As with many of you, my problem was discipline. Until I resolved that issue I traded sideways.

It is much easier to learn the proper way to do something than to go back and change bad habits or to completely change your thinking on any subject. If you decide to look for as mentor try to find someone who is currently trading in a style that you aspire to emulate.

A good mentor will point out your shortcomings and have solutions to rectify those problems.

A trading coach looks more at the psychological / emotional aspects of trading. If you think you have the technical aspects of trading down pat and your problems are more emotional then a trading coach is what you need.

Discipline, buy or sell anxiety, lack of confidence or overconfidence, lack of focus, not being able to follow your own rules and numerous other self-inflicted problems would be helped with a trading coach.

If you’re a new or intermediate trader I would suggest finding someone who could help with both aspects of trading. I don’t think you (or I) need a Ph.D in psychiatry to address our mental trader shortcomings. Of course, you may be a little more screwed up than me so I’ll leave that up to you.

In conclusion, if I can do this, so can you.

Discipline Discipline Discipline

Dave C