Archive for the ‘Stock Market Analysis’ Category

The S&P 500 is Now 1000 Points Up from March ’09 Lows

May 21, 2013 Leave a comment

Or: “…These Go to Eleven“.

S&P 500, Weekly chart,

S&P 500, Weekly chart,

We are currently sitting at $1666.29, which is about 1000 points above the March 2009 low of $666.79.  Contrary to my previous forecast, we blew through the $1600 level on a positive jobs report and rose rapidly to our current level.  All is well and $1700 is the next target, right?  Right?

As of May 19th, 90% of publicly traded companies have reported 2013 Q1 earnings.  Of those companies, the FactSet earnings insight report details that 70% have reported earnings above the mean estimate and 47% have reported revenue above the mean estimate, while the blended earnings growth rate was 3.2%.  I highly recommend taking a moment to read that FactSet report.  I’ll link to it again because there’s some great data in there.

Let’s take a moment to look more closely at these numbers.

Google, Comcast, Wal-Mart, and a number of other large-cap companies, reported profits that beat expectations, while their revenues missed.  What is one way a company can miss on revenue, but still beat on the bottom line?  That’s right, they can cut their expenses.  What is a company’s biggest expense?  Payroll.

Furthermore, I am not convinced that the jobs data is detailing a true picture of the job market.  One of the criteria accounted for in the unemployment rate is whether or not one is actively seeking work.  A falling unemployment rate could indicate that, as a group, fewer people are actively looking for work and therefore it would seem on the surface that there is a smaller pool of applicants causing the rate to fall artificially.

The up-shot of this is that Wall Street and Main Street have essentially been de-coupled.  I don’t think it can be accurate to say that since we’re hitting all time highs in the major stock indices, that our economy is all well and good and everything is peachy.

Companies have been getting more efficient and the markets are certainly rewarding that efficiency as we hit all time high after all time high. The question is at what cost to the broader economy. If this is the new normal efficiency level, it might be difficult to say we will return to pre-2008 employment levels.

I know I’m getting macro here, but I think it’s important to understand the economic climate prior to investing (or trading) any one company’s stock.  It can be difficult to swim against the prevailing long-term trends, so I try to react, or anticipate, accordingly.

So where do we head from here?  All the technicals would indicate that we’re overbought.  A Fibonacci retracement from March ’09 low of $666 to $1666 would indicate that a 23.6% retracement brings us to $1450.  I like that level as a potential medium-term pullback target, from which we can bounce up and continue our long-term bull run.  I would describe myself as cautiously optimistic, but I can’t see this run lasting for much longer without some sort of consolidation.

It should be noted that I have no positions in any stocks mentioned (or unmentioned, aside from an employer-sponsored retirement plan), nor will I be initiating any positions in any stocks mentioned (or unmentioned) in the next 6 months.  The information contained in this blog should be used for educational purposes only and should not be considered financial advice.  I am not an investment professional, nor do I possess any credentials implying myself as such.  The main purpose of the blog is to educate its readership, myself included, about concepts and ideas that were previously unknown to me.


Categories: Stock Market Analysis

The Top Is In… for now

April 16, 2013 Leave a comment

Or: Calling It, If Only It Weren’t for that Darned QE.

The S&P index peaked on April 11th, 2013, at $1597.35.  Interestingly enough, the current resistance level represents the third equidistant descending trend line that runs parallel to the descending trend line of the megaphone pattern (lines shown in light blue):

S&P 500, Hourly chart,

S&P 500, Hourly chart,

As I predicted on March 6th, we tested the $1576 level, couldn’t break it, so pulled back, then retested $1576, broke it and charged up to test the $1600 level, but could not break through.  This doesn’t mean, however, that the longer term uptrend has been broken and we may still test the $1600 level again.  However, we’ll see some consolidation as we trade lower in the next few days, testing the upwardly sloping parallel trendlines.  At worst, we may test $1550, where there is strong support.

I do think, though at the risk of sounding bearish, that we are at, or very close to, a medium term top.

S&P 500, weekly chart,

S&P 500, weekly chart,

A look at the Stochastic levels would indicate that we’re overbought on the weekly time frame.  Additionally, we’re way up above our 25- and 50-day moving averages, which would suggest we’re due for a consolidation back to these levels of support.


We can throw out whatever we think we know about the market trends when the Fed continues to purchase assets at the rate of around $80 billion dollars per month.  Quantitative easing might throw a wrench in my bearish outlook (Honestly, I’m really not a permabear, I’m actually a very optimistic person – I just trust my current math).  It is no secret that the stock market clearly likes it when the Fed announces rounds of quantitative easing as evidenced here and here.

But what I’m most curious about are these trend lines.  What are the slopes and are the slopes important?

S&P 500, hourly chart,

S&P 500, hourly chart,

Looking at a single date, the differences between the upwardly sloping trend lines (in white) are approximately $18, or ~1.1%.  That is, if we were to take the price of the trend line on April 1st, it would be $1572.  The next white trend line on April 1st is at $1553, and the next is at $1536.

Additionally, the slope of the white trend lines is ~1.9%/month.  That is, the level it was on April 1st was 1.9% higher than the level it was on March 1st, which was 1.9% higher than that was on February 1st.

The descending light blue trend lines paint a similar picture.  Between each successive trend line there is a difference of about $44, or around 2.9%.  And the slope is ~0.8%/month (interestingly, half of the upward trend line).

I can’t come up with a rational explanation for these trend lines, but I’ll be happy to hear any thoughts from my readers.  My best guess is that it has to do with the average GDP growth rate, and that the markets are trying to move in step with the economy.

End of day update:

S&P 500, Hourly,

S&P 500, Hourly,

Sure looks like a top.  We’ll certainly see some support at $1550, but beyond that, the 2nd light blue trend line has to hold, or else we’ll head lower.

Stepping back to a longer time frame, the weekly indicators (MACD, Stochastics) certainly look overbought.

S&P 500, weekly chart,

S&P 500, weekly chart,

If we were to draw Fibonacci levels from the low of November 2012, a move back to $1450 would be a 61.8% retracement.  Because we’ve moved up so high so fast, a retracement to $1450 and a bounce off the lower upward trend line of the converging triangle would still allow the longer-term uptrend to be intact.

Just some of my thoughts while we thank our lucky stars that we have our health and we have people around us that love us.

Categories: Stock Market Analysis

New Highs: Where Are We (and how’d we get here)?

March 6, 2013 2 comments
S&P 500, Hourly,

S&P 500, Hourly,

We’ve just broken into rarified air as the markets moved higher yesterday.  The $1530 mark seemed troublesome in February, but this yesterday morning we blew through it as we hit a high of $1543.47 on the S&P, while we blazed new highs on the blue-chip Dow.  It wasn’t easy getting here, and as I mentioned in an earlier blog post, there has been some volatility as we touched the lower trendline of the megaphone pattern on Feb 25th.  We are now among distinguished company as we are coming up on the highs of 2000 and 2007, $1552 and $1576, respectively.  Wall St. has made a pretty remarkable recovery, when you think about it, considering that Main St. hasn’t necessarily seen the same kind of recovery.  The national unemployment rate has been hovering around 7.9%, whereas it was just under 5% in 2007 and closer to 4% in 2000.  Indeed, it may be true that 8% is the new normal and we will never see pre-2007 unemployment levels again.  I just can’t, however, endorse these new market highs as indicative as a general economic recovery.  Label me all you want as a curmudgeon or a permabear, but hear me out for a second.

Let’s take a look at a very long-term chart:

S&P 500, Monthly,

S&P 500, Monthly,

This is a monthly chart of the S&P 500.  As you can see, we were in a reasonable trading channel in the late 80s-early 90s.  Something started clicking in 1995 and the markets shot up and never looked back, until, of course, late 2000-early 2001.  What exactly that something was would probably make for a good post, but I won’t open that can of worms right now.  Previous levels of resistance became support as we crashed down from the highs of 2000 to the lows of late 2002-early 2003.  After peaking again in 2007, we crashed back down to the lower trendline of the 80s/90s trading channel for the crash of 2008.  Clearly, this trading channel has served us well, so there must be something to it.  If you back-calculate the channel, the return for the that late 80s-early 90s trend is about 7%.  Which essentially means that if you put money in the market in the early 80s and took it out during the crash of 2008, you would average about an 7% return per year.  That’s really not so bad and it’s pretty much what the benchmark is for what an ideal return is for the markets.

The question then becomes: is the stock market overvalued or is it undervalued?  Since we seem to be nearing all-time-high levels, and way up above the 7% trendline, one could argue that the markets are overvalued at the moment.  However, the current Price to Earnings ratio of the S&P 500 is around 17.5.   That’s reasonable when you consider that a stock with a P/E under 20 is generally considered to be of fair value.

I would argue that the quantitative easing program by the Fed has artificially inflated equity prices and that when (not a matter of if) the Fed announces an easing of the easing, the markets will come back down to earth.  This was evident on Feb. 25, when the Fed announced they were just considering weaning off the QE program.  I’m not going to sit here and tell you QE hasn’t been a good thing, it’s clear that it has helped.  What I am saying is that as soon as the Fed pulls the plug, there may be some unintended consequences.

Of course, technical analysis has its limits.  It can only tell you where you currently are and how you got there.  Technical analysis is not a crystal ball and cannot tell you where you will go.  That part takes knowledge, experience, and a little bit of luck.  The best we can do is make an educated guess as to where the markets will go when you consider the historical price movements and the overall economic outlook.  The contrarian in me rejects the irrational exuberance of these new highs.  It has been said that early morning traders trade on emotion and impulse, whereas late-day traders trade on experience and knowledge.  Now, I’m not sure about the validity of that claim, but consider the intraday trading of last few days.  We popped up early in the morning on March 6th, Feb 28th, Feb 27th and we dipped on late-day trading on Feb 28th, and Feb 25th.

If I had to predict where we’re heading, I’d argue we’d make new highs here and may even test the all-time-high of the S&P at $1576, possibly testing $1600.  However, I expect to see an exhaustive gap up followed by a healthy pullback from these levels and a 61.8 fibonacci retracement to $1450 or lower to $1350.  It’s only once we create a solid foundation, we’ll push to new highs.  So I would be wary about adding money at these levels, so it may be best to keep equity levels where they are, possibly take profits.

It should be noted that I have no actual positions in any stocks mentioned (or unmentioned) nor will I be initiating any actual positions in the next 6 months.  Furthermore, the information on this blog should not be considered financial advice.  The main purpose of the blog is to educate its readership, myself included, about concepts and ideas that were previously unknown to me.

The Exit: Knowing When to Fold ’em

February 15, 2013 Leave a comment

or: What Goes Up, Must Come Down.

How do you know the right time to exit a position?  Everything you hear is always about initiating the trade or what the next big stock will be, but rarely does anyone talk about what you’re supposed to do once you’re left holding the bag.  Even if the trade generates profits, how do you know when is the best moment to realize your gains and take it off the table?

The simple answer is that you have no way of knowing when that “right” time is.  A lot of people talk about how it’s a “gut feel” or that they “just know”, but that’s all hand-waving exercises at best and self-delusional at worst.  Sure, the more experience you gain, the more often you will have encountered a similar situation and therefore better equipped to anticipate previously made errors.  But knowing when to accept losses or realize gains is a crucial part of playing the stock market and even life itself (I know, we’re getting deep here).

It doesn’t matter who you are or what level of investor you are, you will inevitably make incorrect calls.  Even the big guys make bad calls all the time.  It’s also very, very rare to be right 100% of the time.  So it’s best to accept the fact that you will make mistakes and you will make decisions that seem like a good idea at the time with all the available information.  There are things you can do, however, to offset your losses or protect yourself when things go awry.

First and foremost, don’t hang it up after a tough loss.  Realize that everyone makes a bad call here and there.  Once you accept that fact, things will be a lot easier to deal with when they do unravel.

For downside protection, diversification is an important consideration when developing your portfolio.  The laggards in your portfolio can be helped along with some star performers.  It’s also okay to hit a single and double once in a while and even strike out, as long as you hit the home runs and grand slams once in a while.  Indeed, it’s true in venture capital since it is said that 60% of a venture firm’s returns come from 10% of their capital.  According to the National Venture Capital Association, 20% or less of a firm’s capital generates high returns.  Of course, the type of investing you do in the stock market isn’t nearly as high risk as venture investing, but the concept is the same.  Diversify your portfolio so as to mitigate losses.  Diversification can take on different forms, too, including investing in different sectors, growth stages, or even investment vehicles (that is, perhaps investing in equities, treasuries, bonds, forex, etc.).

Hedging is another strategy to utilize for downside protection.  This can take the form of inverse ETFs, such as ones linked here, or a volatility index, such as the VIX, explained well here, or by using a protective put.  .  Keep in mind leveraged ETFs aren’t built to be held for long periods of time, especially leveraged inverse ETFs.  Their value decays and they are prone to wild swings.  Just use these as tools for hedging your long positions when you’re unsure of market direction, but you still want long exposure.

Additionally, it helps to consider your timeframe for investing.  Consider this diagram linked here from The New York Times.  It illustrates yearly percentage return patterns in the S&P 500 going back to 1920.  The basic premise of the diagram is that your returns on your investment are entirely dependent on what year you both initiate positions and exit positions.  Let’s say you invested in 1980 and took your money out in 1984.  Your return would be around 0-3% per year.  That would have been a pretty crummy return on your investment.  But let’s say you held on to your investment for 20 years.  The return would come out to around 8% per year.  Now that’s not bad.  So in short, timing matters.

If you’ve recently taken a loss and your timeframe is long-term, pay no mind, you’ll make it up.  If you’ve held on to some profitable stocks and you’ve got a short-term timeframe, take some profits off the table.  So always pay attention to what your time frame is and you’ll be able to shrug off losses and take your gains.

SZYM Daily,

SZYM Daily,

I know it might seem like I talk up SZYM a lot here, but aside from my bullishness, I think it’s an educational stock.  I half-expected a pullback from the recent run-up so I’m not too surprised by the dip in trading on Friday, 2/15, as we’re at levels of resistance.  As I mentioned, if your timeframe is short-term, and you’re in under $8, Friday would have been a good time to get out.  An astute trader would have seen the  bullish indicators on 1/31 (20-day moving average, MACD, etc) and initiated a position.  Further, the astute short-term trader would have anticipated a pullback at resistance levels and exited their position on Friday, 2/15.  This would have provided a 10% return, possibly more, of realized gains.

However, as a long-term investor, I would be okay not taking any profits off the table since I would be looking to ride it up past the current price levels.  So always keep your timeframe in mind.

Of course, there is nothing earth shattering, here, but these are important considerations when faced with a big loss or gain.

These concepts can even be applied to life itself.  How do you know when to let go of a long-held personal or professional goal despite all odds seemingly against you?  Simple: You don’t let go.  You diversify your approach in attaining your goal, hedge your risks, and consider your timeframe for what you want to achieve.  If one route proves difficult or doesn’t pan out how you’d like, have plan B, and even plan C ready to go.  As it happens, my motivation for the Pi Shaped Blog is to diversify.

So if you’ve just been hit with a loss, stick with it.  Most importantly: stay hungry, stay foolish.*

*Steve Jobs, Stanford Commencement Speech, 2005

SZYM: Technicals Turning Bullish

February 11, 2013 24 comments

A few weeks ago I mentioned Solazyme to be an interesting play.  Indeed, as of 2/11/13, SZYM is up around 14% since I posted on 1/26/13.  The technicals have since turned slightly bullish and the price has now been hovering at a key level of resistance at $8.50.  Check out the chart below:

SZYM Weekly,

SZYM Weekly,

The green arrows indicate bullish technicals and would have been a great time to enter the stock.  The price price breached the 20-day Moving Average as shown by the top green arrow.  The lower green arrow shows a bullish MACD.

If the bulls can break this key resistance here, we’re heading up to major resistance at around $9.60.  One caveat here is if we cannot breach the $8.50 level, we’ll head back down to the 20-day moving average, around $7.80, which wouldn’t be so bad as I would think some consolidation is in order before a major move up to $9.60.

Keep an eye out for some volatility here, but I’m liking how SZYM is setting up for 2013.

It should be noted that all transactions described on this blog were performed on the Investopedia Stock Simulator and not in the real stock market.  I have no actual positions in any stocks mentioned nor will I be initiating any actual positions in the next 6 months.  Furthermore, the information on this blog should not be considered financial advice.  The main purpose of the blog is to educate its readership, myself included, about concepts and ideas that were previously unknown to me.

Megaphone Pattern: Volatility ahead

February 6, 2013 Leave a comment

A rare megaphone pattern is setting up in the S&P 500 Chart.  When stock prices make higher highs and lower lows, it generally signals that there is a great deal of uncertainty (and subsequent volatility) in the markets.  You usually want to look for a breach of the widening trend lines for a indicator for longer term direction.

S&P 500 30 min Chart,

S&P 500 30 min Chart,

The austerity crisis has been temporarily averted, and, as expected, the markets reacted accordingly by breaking through previous levels of resistance.

S&P 500 Daily Chart,

S&P 500 Daily Chart,

January saw multi-year highs being made and is currently at levels not seen since 2007 (!).   With all this seemingly good news with the Dow breaching 13,000, there have obviously been numerous headlines exclaiming now is the time to jump back into the markets.  Indeed, January saw a large influx of funds from retail investors.  Unfortunately, I just can’t see how it’s a good time to jump back into the market.

For the bulls, we’ll need to see a breach of resistance at $1514.96 to see highers highs be made since we failed to make higher highs on 2/5.  Just keep in mind to protect gains in case of a break of support at around $1493 means, which means we’re heading down for a retracement.

It should be noted that all transactions described on this blog were performed on the Investopedia Stock Simulator and not in the real stock market.  I have no actual positions in any stocks mentioned nor will I be initiating any actual positions in the next 6 months.  Furthermore, the information on this blog should not be considered financial advice.  The main purpose of the blog is to educate its readership, myself included, about concepts and ideas that were previously unknown to me.

Categories: Stock Market Analysis

Science, People, IP

January 26, 2013 Leave a comment

or What Qualities I Look For in a Company.

After experimenting with various trading styles, it seems as though I am most comfortable as a Growth Investor.  Of course, the type of trader/investor you are is dynamic and can change with every trade you perform.  I’d like to consider myself a Growth Investor, but I also look at technicals and consider a company’s value before I buy, does that make me a Value Investor or maybe even a Technical Trader?  At our core, however, we all have our favorite ways of trading.  And if you don’t right now, yours will develop as you learn more about the market and what types of companies to which you are drawn.  Are you drawn to companies whose share prices have plummeted due to panic-induced overselling, but are still fundamentally good companies?  You may have been drawn to NFLX or RIMM and caught their recent price pops because they still have valid business plans.

For me, I’m drawn to biotech because of my experience in the drug discovery industry.  I really enjoy researching companies in the sector, seeing what therapeutics they have in the pipeline, and trying to predict how their pipeline fit in with the market.  It also helps me better understand the broader pharmaceutical industry, so I can do my actual, real-life job better. I like picking biotechs that I think will be high growth in the medium to long term.  So the title refers specifically to biotech companies, but the concept can be applied to a company in any sector when analyzing a potential investment of a company.

First and foremost, what is their Science?  In other words, what is the fundamental core of the company’s platform?  In the case of NFLX, their “science” is the ability to stream (almost) any TV show or movie at the click of a button.  No more speeding to blockbuster to avoid a late fee, no more scratched DVDs, and soon say “so long” to the days of sitting on your couch to watch a movie.  You now have the ability to stream anywhere you want.  This is the science behind NFLX and it’s seems to be a good business model.  Of course, they are reliant upon obtaining licenses from the industry for their movies, which is the reason why your favorite movie might not be available to stream.

Second, who are the People who run the business?  What have they accomplished so far in their life prior to their position in the company?  If they are young (as is the case with many tech companies), are they high potential individuals who are knowledgeable enough to know how to solve the company’s problems as they scale?  Look at ALNY, for example.  I’m extremely bullish on them for a number of reasons, but their management team looks solid.  There are Harvard MBAs, MIT PhDs, and a number of notable scientists on the Scientific Advisory Board.  Clearly, some pretty prominent people are leading Alnylam and, as such, I would anticipate them to be able to solve many problems they come across.

Third, what kind of Intellectual Property does the company own?  This particular metric is the X-factor for the company and one often overlooked.  Because no other company or entity can use another company’s IP, a company’s IP can help differentiate it from other companies in the sector.

Solazyme (SZYM) is a company that I’ve had my eye on for some time now because, in my opinion, it fits all my criteria for a fundamentally solid company in which I should invest.  Their Science?  SZYM is developing renewable fuel.  Think about that for 5 seconds.  I like big ideas.  I like ideas that will disrupt common thought.  I like ideas that completely and positively change the way things are done.  To me, this is one of those ideas.

O.K., you say, so they have a solid plan.  What kind of people are running the thing?  A PhD from Caltech, a few NYU MBAs, and a whole heck of a lot of combined operating experience.  And that’s just management, I didn’t even get to strategic and scientific advisors.  Needless to say, I think the team is doing a solid job, and will continue to do so. So, do they have any IP? Yeah, just a few patents.

So why aren’t I fully invested?

SZYM Daily Chart,

SZYM Daily Chart,

Technicals, technicals, technicals.  Since SZYM’s IPO, they’ve generally been in a downward sloping pennant.  It’s difficult to justify jumping into the stock with a chart looking the way SZYM does.  It seems as though many are scared off from the insider selling that’s been going on.  Particularly, there’s the curious selling from the CEO himself.  He’s essentially been dumping shares on the market monthly.  Regardless, I don’t mind eating crow for 5 years as the stock price most likely drops to $2.50, but they’re ramping up production and in the next few years, they’ll generate some strong revenue.  You heard it here first.

After starting a new portfolio from scratch this month, I’ve hit the ground running this year.

Courtesy of

2013, Stock Only, From

It’s difficult to believe ACHN has a market capitalization of only $744M when you consider that when Inhibitex was bought by BMS, it was valued at $2.5 billion.  I give a price target of $25.

So as you can see, I try to adhere to my investment thesis of picking high growth biotechs that are based on good science, are managed by a solid team, and own some key assets.  These are just a few of the considerations I look at when I’m analyzing a company.  There are others, but that’ll be for another blog post.

As always: It should be noted that all transactions described on this blog were performed on the Investopedia Stock Simulator and not in the real stock market.  I have no actual positions in any stocks mentioned nor will I be initiating any actual positions in the next 6 months.  Furthermore, the information on this blog should not be considered financial advice.  The main purpose of the blog is to educate its readership, myself included, about concepts and ideas that were previously unknown to me.

Guy Kawasaki

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Some thoughts from a scientist who moved to the business side of biotech

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Adam Gismondi, Ph.D. // Tufts University

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Recovering scientist turned early stage VC | A biotech optimist fighting gravity

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