Sunday, August 28, 2011

Weekend Update - August 27th

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I believe that one of the more important criteria for longer-termed stock selection is expanding earnings per share (EPS).  Expanding EPS states that earnings will be higher than either the previous quarter, or the previous quarter a year ago, or both.

I think though that we need more than simple accelerating EPS.  Specifically, I think we need management to be on the record stating that earnings, revenues, or both are going to be higher this quarter than whatever the reference period.  When a company launches a pre-announcement concerning earnings, revenues, or both it typically comes from either the CEO or CFO and they are bound by these words.  Hence, when they pre-announce that earnings are going to be higher this quarter than some period ago, I pay attention.  When they say earnings and revenues are going to be higher, I really pay attention.  When they say revenues are higher, I tend to yawn, because these generally are net and there can be a whole number of ways to increase net revenues that aren't healthy for a company.

I've done my homework and here is a list of stocks that are guiding up in either earnings or earnings and revenues combined ("guiding up"):


As with all my images, right-click on the image to open in a new window or tab.

If you are a member of my dropbox folder you have access to this file each day -- it's in the general stock file under the "DashboardEV" tab/worksheet.

The Guidance Date is the date that my sources list for the data being accurate.  I use a combination of Briefing.com and web sources.  I've validated each of the stocks listed and the indicated status as of 8/28.  Note that there could be news on 8/29 which undoes the positive outlook, so always do your diligence.

The point here is that if we're going to start looking at stocks to buy for the long term, it makes sense to start with a list of stocks where the CEO or CFO have gone on record stating that they are sure their earnings, revenues, or both are going to be higher in the next reporting cycle.  This doesn't guarantee that this will be the case, or that the Street will treat the future announcement as positive, but it's a better position to be in than trying to select those stocks with decelerating EPS or declining revenues, or both.

If you doubt this assertion, compare the two following presentations:

Top Figure - GGT Universe of Stocks


Bottom Figure - E+ER Stocks



The top figure is my traditional 5d / 65d macro signal on the GGT universe of stocks (about 2810 stocks or so).  The bottom figure is the same presentation using the list of stocks that are guiding higher in earnings or earnings and revenues (E+ER).  The panes of each figure, from top to bottom are:
  1. slope of the 65d EMA
  2. position of the 5d and 65d EMA
  3. pricing series, plotted with the 65d EMA and 200d SMA
  4. volume plotted with the 50d SMA
See the differences?

The primary difference is that the list of stocks that are guiding higher in E+ER stay in an uptrend longer, as evidenced by:
  1. the top pane of each figure shows the slope of the 65d EMA, which I take as an intermediate-termed indicator.  When this is above the horizontal line the slope is positive, e.g., we are in an uptrend on the 65d-length scale.
  2. in the pricing panes of the lower figure, the slopes of the 65d and 200d MAs are pointing upward, even after all this damage that we are sustaining with recent market action.  This is remarkable and notable.
If you look closely, we just had the 5d EMA cross the 65d EMA from below from within the E+ER list, so there are stocks that breaking out in terms of this basic, primary signal, and we should be looking for those stocks.

Here's one way that I do this.


Right mouse click on this image to open in a new window or tab.

This is the same list as before, but sorted differently and shown with more information.  On the left is the GGT status for the respective stocks, and on the right is the Effective Volume status for each stock.  This is the same "DashboardEV" page in the stock file that I referenced above.

GGT New Long stocks, which are at the top of the list, get this designation whenever they:
  1. were in some form of cash status (New Cash, Aff. Cash, Cash) and
  2. had significant price AND volume AND rate of change of price on the day the analysis is performed
Unfortunately, blindly taking the top of the list won't work -- but we're getting closer to choosing some candidates.

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HS.   Healthspring is part of the Health Care group, and we're seeing money flow back into the group as evidenced by the following graphic:



The graphic is available to you if you are a member of the Effective Volume group at http://forums.effectivevolume.com.  I've republished here with permission.

While below the 0% line, meaning that the net flow into the group is still negative, it's becoming less negative at a great rate so this should be a candidate group.

As per the previous table HS is guiding up in terms of earnings, and is offering no guidance in terms of revenues.

HS' active boundary score is a 20, so it's made a good portion of it's move.  I tend to like stocks with AB values > 50, so this one has to be considered carefully.  This being said, here's the AB chart:



Indeed, we can see that at the worse point in the sell-off that we were very low in the AB levels, and we've moved quite a bit since 8/8 or 8/9.  This being said, we potentially have a favorable risk reward from here, as we are presently at $38 and the upper boundary is calculated around $44.

Another thing going for HS is that the total EV (TEV) values are continuing to increase:



Of importance here is the slope of the 20d average line -- it's upward, and more importantly, it looks as though it will continue on this path.  The distance of the blue line above the average line is called the Extension Total EV and this value is at 19%, indicating that we're at 19% of the total variation over the past 60 days.  I take this as a healthy value.  Further, as can be seen in the previous stock listing table the 2d Extension value continues to grow and is now 8.3% above where it was 2 days ago, so there is momentum in the stock.

I wouldn't rush right out on Monday and buy HS though.  It needs to give us an opportunity to buy it at a good price, and right now, it's on a tear.  For this component I use Elder's methods, and for those of you who know my HGSI work, you know I use the following screen:


There is considerable content on here so let me draw your attention to two things I'm watching for entry:

Status of the 13d Force Index ribbons
Status of the 2d Force Index ribbon

You'll have to expand the figure above in a new window or tab so you can clearly view it.  The 5th and 6th ribbon from the top are the 13d Force Index indicators, one calculated as an EMA, the other as a SMA.  Both have recently turned green, which means that their 13d FI values are positive.  This is a required condition for entry.

Next, below the 13d FI (SMA) ribbon, is the 2d FI ribbon.  You can see that it is red -- I have INVERTED the colors so that when red, the 2d FI is positive, effectively blocking entry.  What is important here is that we want the 2d FI value to turn green -- negative -- and THIS becomes the necessary condition for watching for entry.

Finally, with both 13d FI's positive (green), and the 2d FI negative (green), we want to purchase HS when it's price takes out the previous day's close (aggressive) or high (more conservative) by a few pennies.  In doing so we are assured of entering on strength.  If we don't take out the previous day's highs/close then we wait for the subsequent day, as long as the 13d FI levels remain in positive territory and that the 2d FI level remains negative except on the day of entry.  Of course, you won't know that the 2d FI level has moved positive until after the market close, but you will have a good idea that it has occurred if the price continues upward from your entry.

I reinterate that the Health Care group, while showing that money flow is less negative than it's average line, is still showing a net outflow.  It issued a "buy" signal 4 days ago because the money flow line crossed the moving average from below, but these values are still net negative.  Based on this we are early in this group, but this is the time when money is to be made.

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ERTS -- Software Enterprise Group

ERTS is a GGT New Long as of Friday's close.  Per the stock table management is offering upward guidance in terms of both earnings and revenues.

The group money flow picture is as follows:



Here again we see that the daily value has crossed the average value from below, issuing a buy signal for the group 3 days ago.  The rate of change is explosive, but again, with both values clearly negative, we are indicating "less net outflow" as opposed to "positive net inflow".  The group is a candidate though and ERTS should be reviewed on this basis.

The active boundary situation for ERTS is favorable:



Here, I've included the price action for comparison and clarity.

ERTS is in my personal AB sweet spot -- crossing the 0% (neutral level), and is clearly in an uptrend.  The raw AB value of 26 shows that it has moved quite a bit, and to reiterate, I like AB values greater than 50.  This being said, the upper boundary level of $25 shows that we could have room to move here from our present level of $21.

The TEV picture for ERTS looks early but favorable:


 We are clearly above the 20d average line, the average line is just forming a new up trend, and while we are extended above the line, we're not overly so.  While not an ideal candidate, it bears watching.

Again, using my Elder entry methodology, ERTS needs to give us a point to enter.  Here's my HGSI screen for ERTS:


There are a number of things I like about ERTS when viewed through this lens, but suffice to say, the red 2d Force Index ribbon indicates that we are POSITIVE on the 2d FI and we need this to pull back for entry.  Note that the Bull and Bear Power values are both positive -- this is a strong uptrend confirmation, as it shows the distance the high price is above the 13d EMA (for Bull Power) and the distance that the low is above the 13d EMA (for Bear Power).  Any time the Bear Power value is positive we need to have the stock on our radar.

I also like the status of the MACD lines -- they're in the lower half of the window and the histogram is positive.

I also like the fact that the 13d/34d slopes are upward pointing AND the 34d slope is about to move positive -- this is a good confirmation signal too.

ERTS is worthy of consideration, but wait for it to pull back a bit under the Elder entry rules.

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R - Ryder Systems -- Commercial Services/Leasing group.

R was a GGT New Long on Friday, and management is offering upside guidance on earnings for the next quarter.

There is no group money flow graphic available for this group at the EV site, so this one stands alone.  All is not lost though.  In the GGT dropbox file for the stocks, the "By Industry" tab lists all the stocks in this group:


Of importance here is that most of the stocks in this group have been in a "Cash" mode for the past three or four days, which is encouraging.

Additionally, on the "Industries" tab of the same GGT workbook, "BusSvc-Leasing" is ranked 37th of 154 groups, which is favorable, and on Friday it ranked 67th in 1-day strength change as an aggregate group.  The group is moving upward and has a high relatively strength, so it's worth looking at.

From an AB perspective, the raw AB value of 73 is encouraging to me:



We're well below the neutral boundary level though, which means that this is an early player.  This being said, the potential upside from an AB perspective is attractive and the AB trending is in the correct direction.

The TEV picture is encouraging too:



Of importance here is the crossing of the average TEV line from below, and additionally, the newly-established upward trend of the TEV average line.  While obviously early, we can say that R has very good characteristics.

Unfortunately, HGSI is not so forgiving and is not painting an "enter me" now picture:


According to this panel, we are early in R:

  • Bull Power is barely positive and Bear Power is strongly negative.
  • Both 13d FI's are very negative
  • MACD histogram *just* moved positive, with the MACD signal and lines just crossing in a bullish fashion.
  • While the slopes of the slopes of the 13d/34d lines are clearly pointing upwards, they are both still negative, which is early.
So, we have lots of ways to indicate whether we should/should not enter R.  From the perspective of this presentation, we should wait, but that is an individual determination.

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Next down on the GGT list is MDRX.  I typically will not move into an Affirmed Long stock, but this one has been signalling "New Long/Affirmed Long" continuously for the past 4 days, so let's look at it.

MDRX is in the Medical SW group:



Large player strength is certainly active in the group, so check that block as positive.

Next, I like to look at the AB level.  The raw AB level is 0, which means the chance of decline from here is pretty high.  This isn't to say that it can't go on to newer and higher levels of price, but the R/R ratio is not necessarily in our favor.  Here's the chart:



Of particular concern is that we're just over $17 and the Upper Boundary level is around $18.  While this bears watching, it's moved far and fast, just as the GGT Aff. Long assignment for the past 3 days indicates.

MDRX gets a pass from me.

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CROX and PRGO are both listed as GGT "Long" stocks, which means they are not jumping up and down waving their arms at you.

CROX has an Extension Total EV of -6% which means that TEV is below the average.  In general, I tend to ignore any stocks with a negative Ext TEV value.  CROX gets a pass.

PRGO has an Extension TEV value of 0% -- no man's land.   Further, on a short-term basis, PRGO has a negative 2d Thrust in terms of new money moving in (which is bad), and the 2d Extension value is -11% below what it was 2d ago, which means money is outflowing.  PRGO gets a pass from me too.

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TJX has a very weak GGT Cash strength value -- (-2) -- and this typically is not a buy candidate.  Nevertheless, we should go through the paces.

Here's the big money flow picture into the Clothing group:



Clothing signaled long 4 days ago with the crossing of the MF indicator and it's average.  Both are below 0%, which is cautionary, but the slopes are pointing upward, which is positive.

The AB values for TJX suggest some upside.  The raw value of 67 is ok, but the chart does make me pause:


With a price at $54 and an upper boundary at $58 the upside could be single digits ...  Remember though, that AB levels are not ceilings, and stocks that break out move through their upper boundaries and continue on.  AB levels are simply guides and provide a good R/R evaluation criteria.

The TEV picture for TJX is improving:



Again, TEV is above the 20d average line, and the slope of the average line is somewhat upward.

Finally, HGSI is telling us that TJX needs to work out a few issues:


Extra credit to those of you who have read this far and leave a note in the comments area about why TJX gets a pass from me based on this presentation.

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You can go through this drill, and I urge you to do so, until you understand the data in each of the columns of the table provided and you can relate each of the columns to a GGT presentation or EV presentation.

If you make the jump and say "I want all Extension TEV values to be greater than 9%", which is showing some form of buying, and also say "I want all 2d Extension values to be positive", which is showing short-term accumulation in terms of TEV, then you have the following table:


We've already covered the first 3; the last 3 are left for you to eval.  PCLN is part of the Leisure Services group which signaled a buy 4 days ago.  MCK is part of the Medical Whlsle Drg group and there is no chart for money flow in the EV universe for this group.  This being said, the GGT group assigned to MCK is Health Med/Dent Supplies and this group is listed on the "By Industry" tab in the GGT dropbox file.  You'll need to review this on your own; post your conclusions in the comments field if you like and I'll validate.  KBR is part of the Heavy Construction group and it fired a buy signal 4 days ago...

Let me know your thoughts on PCLN, MCK, and KBR in the comments field below.

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The Bigger Picture

While some of my CANSLIM colleagues are citing the IBD "Confirmed Uptrend" call, I'm not so sure.  Time horizon is important on any call, and this is no different.  While the next few days may be upward-trending I think we're early at this point, and as you will see below, not all markets are in sync.  This needs to get worked out.

As evidence of my uncertainty, take a look at the following presentations:


The top trace is the S&P500.  The middle plot is the cumulative tick pattern on stocks within this index -- and this resets to 0 daily.  Hence, values above the blue line show the bulls are winning for the day, and the values below the blue line show that the bears are winning.  The bottom plot is the non-resetting cumulative tick pattern for the S&P500 (heavy white) and several moving averages.  The bar duration is 1 minute, so you're looking at about 4.5 days worth of data.

The eye is immediately drawn to the bottom plot where we show that the cumulative tick pattern is in an uptrend, and this is confirmed by the visual rotation of the various moving averages from being inverted (fastest MAs on the bottom) to the fastest MAs on the top.  Further, for the most part, the slopes of the various MAs are up-trending, which means that for the SPX that the buying algorithms are certainly buying stocks that comprise the S&P500, or have been doing so since 8/10 or 8/11.

A bit of a crack in the ice, but not a shattering crack, is that the behavior on Friday was not solidly upward.  You can see that the top MA, which corresponds to a 1/2-day MA, as well as the 1d MA just below it, have negative slopes.  If we are to have confidence in this bull leg we need these two to have positive slopes, and this can only occur if the cumulative tick pattern starts to pull these two upward.

It's also clear that on Friday that despite the significant price action in the S&P500 with gains approaching 1.7%, there was considerable selling into the rally.  I do not take this action as strength, and I need to see it reversed on short order if I am to have confidence in this rally.

This next presentation is of the Russell 2000 Small Cap stocks:


It is said (by those who say such things) that small caps need to lead our way on the next sustained rally.  The Russell 2K was up 2.56% on Friday, so by all rights, we can say that the rally is underway.  Is it?

You saw the pattern of the SPX above -- the rotation of the MAs over the past few days, the upward, almost parallel pattern of the MAs as the buying algorithms kick in.  Unfortunately, we see nothing of the sort here, and what we actually have is a tremendous amount of volatility across the board for the past few days.  The tight grouping of the MAs shows indecision, and the ONLY saving grace is that the 1-day cumulative tick pattern from Friday shows clearly that the bulls were in control.  The fact that Wednesday and Thursday are not in sync with the SPX is troubling to me, and the clear selling on Thursday tells me that we're not out of the woods yet.

I'm looking for the cumulative tick pattern to move upward quickly and decisively, pulling the MAs upward into a proper bullish formation, and this rally to find it's legs and sustain it's gains.  As far as the R2K is concerned, we're not nearly as strong in the R2K as we are in the SPX, at least from an institutional point of view.

Here's a presentation of the NDX-100, the top 100 stocks on the NASDAQ:



While the NASDAQ finished up 2.49% on Friday, it did it on a neutral basis without the help of buying algorithms.  This is fine, but note that without this help there is not a tremendous amount of institutional support under the broad markets.  Only in the last 30 minutes of the day did we see significant program buying -- for the most part there was considerable selling into the rally on Friday, as is evidenced by the lower lows of the cumulative tick pattern and the subsequent rolling over of the MA presentation, e.g., the faster MAs are now at the bottom of the presentation, as opposed to the top.

The NDX-100 is completely out of sync with the SPX, and we need this fact to right itself in order to move the markets higher across the board.

With these shadows cast, let's look at the GGT indicators.

The following table is the GGT Price Slope Model:


The GGT price index rose +2.22% on Friday on volume that was -8% below the 50d MA.  -8% is within 1 standard deviation so all I can say is that price action rose on (yawning) volume.

The GGT Strength Oscillator, which measures price action, volume action, and rate of change of prices, rose from 0.3 to 0.53, a considerable 1d move.  This is now mid-scale and by itself, it is a terrible forecaster of the future.  What is important is that it's not at either end, so we've room to move both ways.

The slopes of the MAs on the GGT price series are become more bullish, with the 13d now joining the party. Until I see all green on the left side of the table I'm not going to say we're in a bull trend, I'll simply say we're making progress towards that goal.  I've also highlighted a recent period in the presentation where we did more-or-less the same thing -- look above to the 6/20 time frame.

It isn't necessary to wait for all green to appear on the left side -- if we were to do this then the bull-ship would have sailed.  What is important is that we see the gradual staircase pattern of the next higher Fib MA moving long, e.g., a positive slope, so that we have confidence on the action.

What is important is that we see lots of green on the right side of the table.  This is the "slope of the slope", and if these are pointing down (red), there is no chance for the left side of the table to move green (why?).  We're seeing more green across the board and this is good for the bulls, so while I can certainly state that we're moving in the right direction, I can also state that the progression isn't all that powerful for the bulls.

On the PSM presentation alone I'd say caution is advised.

My next plot is of the Long-Cash Ratio Slope Model, or LCR-SM.  This shows the relative change of stocks in the database that are moving to the long side compared to those that are recommended in cash.


Unlike the PSM, we're not getting a corresponding movement into stocks from a database (2810 stocks) perspective.  Only the 5d EMA on the LCR has moved positive, and as you can see from the right side of the table, although we're indicating more bullish in the "slopes of the slopes", we're not making huge progress.

This latter fact is very troubling too me, and gives me great pause about moving long into these markets.  You can see how the action around 6/20 on the right side of the table preceeded the action on the left side, and while we may have that occurring here, we are still quite early.

Again, caution is advised in terms of the IBD call that we're in a confirmed uptrend.   Yes, but it's not nearly as powerful as past calls.  Be careful with this one.

These next three graphs are plots of the slopes of the various moving averages.  They compare the present slope values to that attained a few weeks ago, and as many of you know, I've been looking for us to take out the previous levels in slope to have confidence to move long in this market.



The top graph is the 21d MA, the middle is the 34d MA, and the bottom is the 65d MA.  While we've surpassed the previous slope peak on the 21d, and we're par on the 34d, we're still under in terms of the 65d.    Again, we're early, and I feel that we need to see these take out their previous highs to have confidence in this market.

Also note that the slopes are in the pink areas on each of the plots.  If you go back to the PSM figure above you'll see that the 21d, 34d, and 65d values are all RED and Bearish on the left side of the figure, but the slopes of the slopes are positive for the last 1 day on the right side of the figure.  Please make sure you can relate these graphs to that figure, as the data presentation is different but the underlying data is the same.  This should help you understand slope analysis better.

This next graph shows you where we are at in terms of Percent Longs within the database:



You can see that we're digging our way out of tremendously oversold areas, and that it will take time to clear the green zone, which historically has been a turning point WHEN WE APPROACH FROM ABOVE.  I have no idea how we are to behave now -- the only comp in the history of GGT is the period that we saw prior to the March 2009 lows -- the % Longs went up to over 60% but as you can see, we did not make tremendous progress in terms of GGT price.  Let's hope that this is not what our future will be ....

Further evidence of how far we have to go is in this plot below:



This is a plot of the GGT Price Index along with three distinct moving averages -- the 21d, the 34d, and the 55d.  Right now the 21d MA seems to be acting like resistance to the GGT Price Index, and if we are to have a sustained up leg, we need to penetrate each of these MAs from below.  We're not doing it yet.

This next view gives us a cross section of the GGT database in terms of the status of each stocks.  We already know that the LCR value is incredibly low, with CASH-rated stocks dominating the count in terms of the ratio.  Here's a graphical view of the same:





If you click on the image, save it, and zoom in, you'll see that we are seeing the % Longs increase, as well as a definite increase in % Affirmed Longs and % New Longs.  We're also seeing a great drop in the % Affirmed Cash, which is necessary if we are to move long.  This is a trailing indicator, but it shows just how much wood is available to us to fuel a Bullish Fire if one is to occur.  There are a tremendous amount of stocks in CASH status, but it will take time to move them into the long side of the graphic.

This next graphic is important.  It shows, in terms of LCR acceleration (number of stocks moving long on a daily basis), of where we are at in this present market cycle:


Across the top is a yellow zone that historically has indicated a reversal point downward whenever this indicator (blue trace) has approached it or hit it.  This has occurred when we get over a value of 100, and presently, we have a value of 87.  This difference suggests that we have a ways to go, but as we get closer to the yellow zone, the present market cycle will be "longer in the tooth" and there will be players taking profits off the table.

While I think this chart shows the best indicator of the IBD folks stating that the market is in a confirmed uptrend, I think it also shows that there isn't a whole heck of a lot of gas in the tank from this point.

Take a close look at the blue trace and you'll see some days that have rocketed upward in terms of the LCR Acceleration value.  You can conclude that a few of these days and we'll be in the yellow (overbought) zone.  Conversely, you can see that there have been periods where this indicator has inched up little-by-little.  In this latter case it could be days or weeks before we hit the yellow zone, and the rally could certainly last this long.

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Summary

I think that this rally is early.  I think that the algos on the SPX is showing the best behavior, so concentrate on stocks that are in the S&P500 if you want to follow the bigger footprints.  The R2K is trying to play catch up, and for the present time, I think it should be avoided.  The stocks in the NDX, despite the end-of-day performance on Friday, are not in sync with this rally and should be avoided.  I think too that this will take some wind out of the bull's sails if we do not get participation across the board from the algos.

The Price Slope Model is early and slow.  Slow is the deathnail of a rally, and we need aggressive buying on higher volume to drive prices upward.  We're slowly marching, which gives me pause.

The LCR Slope Model is not confirming the plodding action of the PSM.  We're not seeing a large number of stocks move to the long side in aggressive (price + volume + rate of change) sprees, and this too gives me pause.

The LCR Acceleration indicator shows that there is some gas left in the tank, but we're approaching areas where we have historically sold off.  Of course we could make new highs with this indicator, but I'm not seeing any evidence of this behavior.  The market behavior will drive what we see in this indicator over the next week or so...

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Thanks for reading if you made it this far.  Remember, you are responsible for your own investment decisions, and I am not.  Please do your own diligence, and please take ownership for your actions.

I can be found on a daily basis at http://forums.effectivevolume.com.  I urge you to join the site (joining is free, as is my GGT content, which is posted daily).  There is far more at the site than me and the quality of the daily dialog surpasses 99% of what you will find on the web.

Regards,

pgd