Timing the Market

Timing the Market

The experts we used to rely on kept telling us the timing the market is impossible. The reason for that is they want you fully invested (all in-no cash reserve) at all times. Let’s take a look at how this can be done.

blog dia daily 3-7-2016

Above is a chart of the DIA which is an ETH proxy of the Dow Jones Industrial Average.

Timing the market is a matter of being able to read this and other index charts. The gap on the right just under the yellow resistance line is a 300 point gap down.

This was the first trading day of 2016 and set the tone for what was to follow. January has always been looked at as an indicator month. If January is up then the market is up for the year, if it’s down in January then the market is down for the year, or so the premise goes. Couple this with the doom and gloom coming from the prognosticators for the last year and a 300 point gap down to start the year off turned many folks into sellers, many to capture whatever profit they still held in their holdings.

The market (DIA) fell 2000 points in 12 trading days. The 11th day was a Wednesday and that Tuesday I talked with a trading buddy of my and advanced the hypothesis that the plunge down was nearing an end and would only last another day or two. I suggested we needed a capitulation day that gapped down 300 or 400 hundred points and ran down a few hundred more points before a recovery that closed higher than the open. That happened on the next day. The reason I thought this might occur was the volume and depth of the fall, the indicators had already turned.  With this large a drop many folks were sitting there waiting for a reversal so they could get back in the market at cheaper prices.

The psychology of the market is important in figuring out what the next likely move will be and then the magnitude of that move. In this case the prognosticators had been saying for more than a year that the market was way overdue for at least a 10 percent correction. The 300 point negative move on the first day of trading in 2016 told everyone this is it and they jumped ship for two weeks. In my memory a capitulation day always ends these runs and the market reverses there. When you see a gap and then a long tail on a candlestick after a run of anywhere from three or four days to several weeks that is telling you things are getting overdone and trying to reverse direction now. Notice that both bottoms on this chart qualify, the last one, as well as being a higher low almost qualifies as an island bottom which is an even stronger reversal signal.

The two white horizontal lines are the top and bottom of Fibanocci study with the heavy green line being the 50 percent recovery point. If the market can’t achieve the 50 percent recovery then it is going much lower. If it can achieve it then it is capable of a return to 17711.

blog dia fibex week 3-10-2016

Above is the weekly chart. On here I have circled the highs and lows. Although I don’t think Fibonacci studies work with equities 50percent does work. The daily chart tells us the DIA will most likely recover to $177.11 to $179.37. The weekly chart tells us that the reversal of the up move from $150.57 to $179.37 was heavily violated. The 50 percent retracement line was $163.09 and the bottom was $154.25, an 884 point break of the 50 percent line at $163.09.

This Fibonacci Extension study tells me that the target on the next move down is $146.81.

So why do I think the next move will be down? I. A seven year run straight up. 2. Low GDP. 3. Removal or reduction of FED market support. 4. Interest rate increases by the FED. 5. The upcoming presidential election. I could go on but any one of the items is enough let alone all of them.

Now let’s look at the market effect on your stocks.

blog tho daily 3-7-2016

blog dds daily 3-7-2016

Notice a pattern here? All were lifted by the bottoming of the market and all fell off to some degree at the second bottom and then took off.

It is easily apparent that if you are trading against the market (long when it’s falling or short when it’s rising) you’re going to have a very hard time.

DDS had fallen from $143.00 to $61.00 and had a P/E of 9.1 when the bottom occurred. As a value trader these are the types of trades I like to make. When the indexes (DIA, SPY, etc.) turn around and go higher equities will follow. Be sure and do your due diligence on any equity you want to trade.

Now let’s look at a few possible trades coming up.

blog hci daily 3-17-2016

03-Mar-16 16:20 ET HCI HCI Group misses by $0.13, misses on revs (single estimate)  (33.72 -1.62)

  • Reports Q4 (Dec) earnings of $1.05 per share, $0.13 worse than the Capital IQ Consensus of $1.18; revenues fell 2.1% year/year to $63.41 mln vs the $67.2 mln single analyst estimate.
  • Courtesy of Briefing.com

As you can see HCI issued a bad earnings report and has been trading sideways ever since then. In the rising market environment we are in right now this telling me HCI will go lower when the market corrects (go down) again. The target is $24.65 at which point the P/E will be 5.2. Then the targets will be $32.00 and then $35.50.

blog rh weekly 2-25-2016

Now here is a bad looking chart.

24-Feb-16 16:11 ET RH Restoration Hardware guides Q4 well below consensus  (51.92 +0.66)

Sees Q4 adj. EPS $0.99 vs $1.39 Capital IQ Consensus Estimate; revs +11% to $647 mln vs $710.85 mln Capital IQ Consensus; comp brand rev +9% vs. ests near +19%.

Courtesy of Briefing.com

Restoration Hardware (RH) has had a bad 3 months, coming down from $106.49 to $37.00 so far today.

NASDAQ tells me their earnings for FY16 were going to be $3.14 and FY17 at $3.79.

With EPS guidance for the quarter 40 cents lower and the next quarter in doubt I would take 60 cents off FY16. That takes us to $2.54.

There is a gap fill that may start the bounce at $34.31. Following that is support at $33.54 with a candlestick tail at 32.02.

So the buy area is $34.31 and $32.02.

Your stop price should just under $32.00.

The heavy green line you see in the chart above is 50 % Fibonacci retracement from a bottom at $32.02. Whether the bounce is from $34.31 or $32.02 the target of $42.04 is worthwhile.

Don’t forget that I am not an investor. I would much rather take a position for a few weeks to six months and make 30 percent or more.

Last but not least let’s look at LCI.

blog lci daily 3-16-2016

26-Jan-16 16:20 ET LCI Lannett offers preliminary Q2 results below consensus, sees FY16 revenues below consensus  (34.89 +0.42)

The co expects Q2 adj-EPS of $0.93-0.95 vs $0.99 Capital IQ Consensus Estimate; revs ~$127 mln vs $141.62 mln Capital IQ Consensus Estimate

  • Co sees FY16 revs of $585-595 mln vs $609.29 mln Capital IQ Consensus Estimate
  • Additional FY16 guidance included: Adjusted gross margin as a percentage of net sales of approximately 62% to 63%; Adjusted R&D expense in the range of $49 million to $51 million; Adjusted SG&A expense ranging from $59 million to $61 million; Adjusted interest expense in the range of $50 million to $53 million; The adjusted effective tax rate for the full year in the range of 34% to 35%; and Capital expenditures in fiscal 2016 in the range of $35 million to $45 million.
  • Courtesy of Briefing. com

I bought this a few cents over $23.00. I thought it could get back to the $35/37 area in 6 weeks or so. Obviously I was wrong.

The first high from the bounce was $27.81. The next was $27.46 and I sold half of my position at $27.00. The last circled high was at $26.68 and I set a stop at $25.00 and was stopped out. The progressively lower highs were the clue to protect my position.

At $23.00 the P/E was 6.2. This is a reasonable value P/E for someone who is going to hold for a few years. Assuming the company maintains its business (do your due diligence) it will eventually get back to the 50/60 area.

At $17.00 (next support) the P/E will be 4.6. From this level I am willing to hold even if it goes lower.

To recap here basically what I am saying is to trade with the market. When LCI gets down to support at $17.02 if the market is falling it could trade sideways until it starts to rise again. For me that just means just have some patience.

RH is an is another story because its P/E will still be around 12 and in a heavily falling market could go to the low 20’s.

Pick the worst scenario you can foresee and trade based on that. I do mean you, not the analysts or whatever prognosticators you may follow.

I recently bought RCII at $10.00 when everyone was calling it a dog not worth their money until it hit six or seven. The low on the stock was $9.76 and it closed yesterday at $15.06. So trade on value based on low P/E and PEG ratios.

I hope this is helpful.

Dave Cappaert



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