Presentation on theme: "IBD MEETUP/NORTHRIDGE LETS MEETUP TO DISCUSS THE MARKET OUTLOOK NOW AND FIRST QUARTER OF 2014 DECEMBER 21, 2013."— Presentation transcript:
IBD MEETUP/NORTHRIDGE LETS MEETUP TO DISCUSS THE MARKET OUTLOOK NOW AND FIRST QUARTER OF 2014 DECEMBER 21, 2013
A RECAP OF 2013 Stock indexes established new records – Stocks added to their robust year-to-date gains in November. – The major indexes crossed highly publicized numerical thresholds: 16,000 for the Dow Jones Industrial Average; 1,800 for the S&P 500 Index; and 4,000 for the Nasdaq Composite Index. – Returns were strongest for the technology-heavy Nasdaq, but it remains roughly 1,000 points below its record established at the peak of the tech bubble in March 2000. – The S&P MidCap 400 Index recorded the smallest gain for November, reflecting a recent loss in market leadership for mid-cap stocks – Health care and financials sectors performed best, energy lagged and telecom services and utilities recorded losses. – Year-to-date period, health care a defensive sector outperformed all other segments, helped by biotechnology shares.
A TABLE OF US STOCK PERFORMANCE U.S. Stocks Total Return 1 Index 2 November 2013Year-to-Date DJIA 3.82% 25.65% S&P 5003.0529.12 Nasdaq Composite3.5834.46 S&P MidCap 4001.3229.50 Russell 20004.0136.14 2013 WAS A STRONG YEAR FOR THE MARKET AND DECEMBER IS CONTINUING THIS BULL RUN. WHAT DOES THAT PORTEND FOR 2014?
THE MIDTERM ELECTION YEAR “Midterm election years are historically prone to bottoms, especially in October,” says the Almanac’s Editor-in-chief Jeffrey A. Hirsch. “ 2014 is also a ‘fourth’ year, which year has the best record in each 10 Year cycle for the past 132 years. Of the last four midterm election years since the start of the Great Depression (1934, 1954, 1974, 1994) that were also fourth years, only 1954 was impressive. 2014 could be vulnerable to another sizable downturn if past trends continue. Prosperity More Than Peace Determines the Outcome of Midterm Elections and that Midterm Election Time Is Unusually Bullish. – Since 1934, the eight trading days surrounding midterm election days have produced an impressive 2.7% average gain.
THE JANUARY BAROMETER The January Barometer predicts that stock market performance during the month of January sets the direction for the entire year. In fact, every down January for the S&P 500 since 1950 has been followed by a new or continuing bear market, a 10% correction or a flat year. S&P 500 gains in January’s first five days preceded full-year gains 85.0% of the time, 8 of the last 16 midterm years followed first five days’ direction.
BEST SIX MONTHS SWITCHING STRATEGY The Best Six Months Switching Strategy AKA Sell In May – The stock market tends to make almost all of its gains during just six particular months of the year. – In most years, the rest of the time traders would be better off putting their money in T-bills and going fishing. – However savvy investors can combine the benefits of the Best Six Months with technical timing indicators and the four-year cycle, and dramatically increase results during this normally down time.
MARKET OBSTACLES IN 2013 2013 FACED SOME FORMIDABLE OBTACLES – Government Shutdown and Budget Crisis – Debt Ceiling – The Sequester – Fed Tapering – ObamaCare What does all this forebode for 2014?
Debt Ceiling House Budget Chairman Paul Ryan and Senate Minority Leader Mitch McConnell said this week that Republicans will demand something in exchange for an increase in the debt ceiling early next year. The White House, meanwhile, said it won't negotiate on the issue. The country now has had extensive experience with debt ceiling brinksmanship over the past three years -- as recently as October.brinksmanship While no two standoffs are exactly alike, budget analysts and political observers expect this next round of see-who-blinks-first to be tamer than hot rhetoric may suggest in the weeks ahead. For starters, 2014 is a mid-term election year and Republicans realize it was a political mistake this fall to shut down the government and risk default. The last two debt suspensions were only a few months long. If Congress opts for a third, it is likely to last much longer since neither Republicans nor Democrats will want to revisit the debt ceiling issue too close to the November electionsdebt suspensions
TAPERING Federal Reserve officials decided Wednesday to start gradually reducing their massive economic stimulus program. Beginning in January, the Fed will buy $75 billion in bonds each month, down from the $85 billion it had been buying since September 2012. "In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases," the Fed said in a statement. The Fed decided to cut back on both types of bond purchases -- mortgage-backed securities and Treasuries -- by $5 billion per month each. The bond-buying program has become so large, it's expected to push the Fed's assets to $4 trillion this week -- money the Fed basically created out of thin air. The new cut represents the beginning of a gradual wind-down process which Wall Street has nicknamed "tapering."
MARKET REACTION Stocks jumped following the announcement, with the Dow gaining 200 points after the news. Stocks jumped All three indexes surged more than 1% after the Fed announced a modest scaling back of its stimulus program, the Fed said it will scale the purchases back to $75 billion per month beginning in January.the Fed announced The Fed's decision to taper can be interpreted as a sign the economy is getting back on its feet and no longer needs as much assistance. That pleased investors as the change isn't so drastic to start. But it also may satisfy Fed critics who believe the central bank would be in danger of creating runaway inflation if it did not begin to cut back on polices that it instituted in response to the financial crisis. December has so far been a dud for the stock market. All three indexes are flat for the month. But a so-called Santa Claus rally still has time to transpire, especially now that investors have a lot more clarity from the Fed.
SECURITY ANALYSIS Security analysis falls into two broad categories - fundamental and technical. The goal of fundamental analysis is to analyze the characteristics of a company in order to estimate its value. Technical analysis, on the other hand, does not concern itself with the value of the underlying security. Instead, it focuses strictly on the price movements. – By analyzing the supply and demand of a security, technicians attempt to forecast its future price movement or trend. – The tools of technical analysis are charts and technical indicators, which help to identify patterns that suggest future price movements.
Types of Technical Indicators There are six basic types of indicators categorized by measurement function: 1.Trend 2.Momentum 3.Volatility 4.Market Strength 5.Support/Resistance 6.Cycle Most Popular
TECHNICAL INDICATORS Technical indicator - a series of data points that are derived by applying a formula to the price data of a security. What Does a Technical Indicator Offer? - a different perspective from which to analyze the price action. Moving averages, are derived from simple formulas and the mechanics are relatively easy to understand.oving averages Stochastics, have complex formulas and require more study to fully understand and appreciate. Technical indicators can provide a unique perspective on the strength and direction of the underlying price action. Stochastics A simple moving average calculates the average price of a security over a specified number of periods. A moving average filters out random noise and offers a smoother perspective of the price action. Veritas (VRTS) displays a lot of volatility but applying a 10-day simple moving average to the price action, random fluctuations are smoothed to make it easier to identify a trend.
WHY USE INDICATORS? Why Use Indicators? Indicators serve three broad functions: to alert, to confirm and to predict. An indicator can act as an alert to study price action a little more closely. – If momentum is waning, it may be a signal to watch for a break of support. – Or, if there is a large positive divergence building, it may be an alert to watch for a resistance breakout. Indicators can be used to confirm other technical analysis tools. – If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. – Or, if a stock breaks support, a corresponding low in the On- Balance-Volume (OBV) could serve to confirm the weakness.On- Balance-Volume Some investors and traders use indicators to predict the direction of future prices.
TIPS FOR USING INDICATORS Tips for Using Indicators Indicators indicate. This may sound straightforward, but sometimes traders ignore the price action of a security and focus solely on an indicator. Indicators filter price action with formulas. As such, they are derivatives and not direct reflections of the price action. – This should be taken into consideration when applying analysis. – Any analysis of an indicator should be taken with the price action in mind. – What is the indicator saying about the price action of a security? Is the price action getting stronger? Weaker? Even though it may be obvious when indicators generate buy and sell signals, the signals should be taken in context with other technical analysis tools.buysell – An indicator may flash a buy signal, but if the chart pattern shows a descending triangle with a series of declining peaks, it may be a false signal.
A FALSE SIGNAL On the Rambus (RMBS) chart, MACD improved from November to March, forming a positive divergence. MACD All the earmarks of a MACD buying opportunity were present, but the stock failed to break above the resistance and exceed its previous reaction high. This non-confirmation from the stock should have served as a warning sign against a long position. For the record, a sell signal occurred when the stock broke support from the descending triangle in March-01.
AN ART NOT A SCIENCE Learning how to read indicators is art not science. An indicator may exhibit different behavioral patterns applied to different stocks. – Indicators that work well for IBM might not work the same for Delta Airlines. – With careful study and analysis, expertise with indicators will develop. – As this expertise develops, nuances and favorite setups become clear.
CHOOSE WELL There are hundreds of indicators in use today, with new ones created weekly. – Indicators that merit the most attention are those that have been around the longest time and have stood the test of time. – When choosing an indicator to use for analysis, choose carefully. – Best to focus on two or three indicators and learn their intricacies. Try to choose indicators that complement each other, instead of those that move in unison and generate the same signals. It would be redundant to use two indicators that are good for showing overbought and oversold levels, such as Stochastics and RSI. Both measure momentum and both have overbought/oversold levels.overboughtoversold
SCANNING Scan for price reversals because they also attract attention. – For this scan, we are most interested in stocks that are starting to surge after their short-term moving average has changed from trending downward to trending upward. – When a stock has been in a prolonged downtrend, a great deal of pessimism has been factored into the stock's price. Usually long trends generate downside momentum and the selling has become somewhat overdone. Changing the stock's direction is like changing the direction of an ocean liner.
PRICE SURGES – Therefore, when a price reversal occurs, traders are interested. Why? Because the reversal means there has been enough new buying interest to absorb and reverse all that negative momentum. By definition, a price reversal occurs at the early stage of a new trend. Most people want to buy at the beginning of a new trend, especially if the price begins to surge. A price surge results when there is a sudden influx of new buy orders. – New buying interest may be the result of higher earnings expectations, a new product, a favorable FDA ruling, a new cure or discovery, or some other exciting news. – The price surge is the mark of new investor enthusiasm for the prospects of a company. – Traders love to buy a stock that has just had a price or momentum surge because a surging stock enables them to obtain a greater return in less time with less risk.
WATCH LIST FOR 2014 Apple Inc. (AAPL) is at the top of the list of stocks to buy for 2014.AAPL – One of the reasons is the underperformance of Apple in 2013. The analysts also continue to look to 2014 as a year for new products including a larger screen iPhone 6, an iWatch and a television. – They also see more near-term catalysts in the return to earnings growth starting in the December quarter and the addition of China Mobile for iPhone. – Investors are paid a 2.4% dividend, which some think will be raised in 2014. Best Buy Co. Inc. (BBY) is a top consumer discretionary stock to buy.BBY – Opportunity to drive earnings higher through a combination of positive same- store sales growth, gross margin improvement and cost-cutting initiatives in the coming year. – Shareholders are paid a 1.6% dividend. Salesforce.com Inc. (CRM) is another top techCRM – The company's 2013 portfolio expansion included the acquisition of ExactTarget, which rounds out its marketing automation capability – and the introduction of Salesforce1, a leap forward for developing applications that run natively on mobile devices.
F5 Networks Inc. (FFIV) seems to be a name that many top firms are suggesting for 2014 instead of Cisco Systems.FFIV – Company is well positioned to see increasing market share, accelerated product growth and strong earnings performance, which should result in further share appreciation. Gilead Sciences Inc. (GILD) is a top biotech nameGILD – With the approval of its hepatitis C drug Sovaldi, the company is entering a very lucrative and growing market. Acquired when Celgene bought Pharmasset in November of 2011, the drug is an oral nucleotide polymerase inhibitor that interferes with the life-cycle of the hepatitis C virus and suppresses its replication. GameStop Corp. (GME) should be a large benefactor of the two new gaming consoles released by Microsoft and Sony.GME – The Piper Jaffray team says the new dip in the stock makes for a perfect entry point for investors looking to buy. Unlike the software publishers that require a large installed base of hardware in which to sell games, GameStop sells new and used software and hardware and, therefore, will see an immediate positive impact from the huge holiday console sales. Shareholders receive a 2.2% dividend.
Novavax Inc. (NVAX) is also a top stock to buy.NVAX – This clinical-stage biopharmaceutical company uses recombinant nanoparticle technology to develop vaccines for a wide variety of infectious diseases. – The company presently has six vaccine candidates undergoing clinical trials, with a seventh (rabies) being readied for a Phase I study later this year. Regeneron Pharmaceuticals Inc. (REGN)REGN – With treatments for everything from macular degeneration to colorectal cancer, the company continues to exploit an extraordinary pipeline. – The company is viewed by many Wall Street firms as a leading candidate to be one the next generation biotech large cap leaders Starbucks Corp. (SBUX) continues to grow its brand and its store count.SBUX – Founded in 1971 and headquartered in Seattle, the company has aggressively expanded from a single store in Seattle's Pike Place Market to more than 18,000 stores across 60 countries, which are operated by licensees, franchisees or Starbucks itself. – Investors receive a 1.3% dividend. Western Digital Corp. (WDC) is another top tech name.WDC – The analysts view the migration of data to the cloud as the top secular growth driver for Western Digital. – The public cloud market is expected to largely outpace growth of the overall storage market through 2017, from both a revenue and capacity perspective. – Investors are paid a 1.5% dividend.