Monday, February 28, 2005

Interesting discussion from IBD's message board

Tuneman starts the thread:

  • Move money from laggards to winners... This was the key line mentioned in Big Picture today to maximize gains. How do you do that when the rally keeps rotating into sectors. Semi's rally for 2-3 days and then Internets follow, then a few days later Healthcare rallies.

and a great response from 8eight8 (bold added by me):

  • I got quite a chuckle over IBD's advice. How many times do you see the "leaders" get smashed more than so-called laggards at the first sign of profit taking. Park your dough in those leaders, huh? You are much better off diversifying because those laggards can pop up when leaders extend too far and institutions need new places to put cash. All this goes to heck when earnings come around anyway. Babysitting your leader for 3 months can evaporate in one or two days on bad earnings. CANSLIM is only an 8-week play: after earnings announced and during a bull run...then GET OUT.

ncep adds another great reply:

  • Your crazy if you put all your trust in canslim, after all its only a shallow version of real technical analysis which by the way is not that technical! Study a few books and you will see that making money by looking at charts is not that hard and you do not have to keep losing money by buying high and trying to sell higher!

Friday, February 25, 2005

Fun with SBUX

Check out this Starbucks pump on MSN money. I like reading John Markman's strategy lab commentary, but this SBUX pump is shameful. I have been pretty mum on here about what stock's I've been shorting since January, but I want to talk about SBUX right now because of that article. I began shorting SBUX just above the $58 level in mid January, and added to that position just above the $54 level.

As close as I can find to a thesis in Markman's article is this line from the second paragraph: "Perhaps the beans have addled my brain, because I think that the company's campaign to turn coffee into community -- while fully at odds with common sense much of the time -- will continue to work." This must be his main argument because the article is concluded with the following line: "Starbucks shares are down nearly 22% since Dec. 29 on growth concerns, but look for them to recover over the next couple of months and lead the pack again by year-end." The bold emphasis is mine.

Markman centers his argument around describing how compelling the culture and atmosphere that Starbucks creates is for its addicted customers, and leaves the real hope for SBUX going forward as a tiny sidenote to open his second paragraph: "Now it looks like Starbucks is getting ready to take its unique brand of caffeine capitalism farther into the world, as the company announced at its annual meeting last week a plan to open 1,500 new stores globally and boost total revenue by 20%." I was hoping this would be his thesis because I am interested in hearing commentary and analysis on Starbucks' foreign market expansion plans and what it will do for the company, but that is all the attention this topic got in the article. Sadly, the article feels like it could have been written at any time over the last 5 years and tucked away for a rainy day. I don't like arguments for buying stocks like the ones presented by Markman because they ignore the fact that timing is everything in business.

What Markman didn't mention is that coffee prices just broke out from a well formed cup & handle base in early February and have been tearing off into new high ground ever since. Any sustained coffee price advance will cut into Starbucks' profit margins, supressing future earnings. Additionally, the falling dollar hurts American importers as much as it helps American exporters, and guess what? Most coffee is imported. These higher coffee prices have not yet reached SBUX's bottom line because big companies hedge their product inputs using contracts in the commodities market. But SBUX see's it coming. Late in 2004 they raised the prices of many coffee items in the stores. However, I do not think that they will be able to pass this entire expense on to their customers because their customers are already reeling from holiday expenses. When I need to conserve money, the very first thing to go is luxury consumption like SBUX. I suspect I'm not the only one because SBUX reported same store sales growth for January has slowed to 7%, down from double digit numbers in the past.

Starbucks chairman Schultz warned on December 2nd that recent growth may not be sustainable, and then began dumping SBUX stock faster than he has in years. Glancing at the chart and the insider sales side by side, it is pretty clear that the chairman is trying to get rid of as much stock over $50 a share as he can, beginning about a week after the stock broke above $50 in October. No wonder SBUX had such a great November. Its no suprise either that Schultz is upset about the recent share price drop.

But a technical analyst doesn't even need to bother with all these details. The stock price and volume over the last few months told me everything I needed to know. Guess what a weak volume rally following a big volume selloff makes? A head and shoulders top. But the Motely Fool still likes SBUX. In fact, they even recommend buying more if it drops below $45: "In short there is much to look forward to, and if prices were to dip under $45, I'd consider adding to my position." If it crashes under $45 a share and drifts back up to there on thin volume, I may sell them some shares (short of course). I imagine John Markman might too.

Monday, February 21, 2005

The S&P 500 may rally up to a new high from here, but I doubt it will. It appears as if the S&P 500 may be cresting and join the naz in Head & Shoulders land. This coming week may be enough to know which way the index will commit. The topping pattern also shows up on the weekly chart, which is not a good sign for longs.

Wednesday, February 16, 2005

Naz meets converging resistance

I think the next couple of days may be a good time to add to short positions. Let me explain. The upper bollinger band has converged on the 50 day moving average and acted as resistance. The index bounced down off of this resistance today on above average volume. Even though the volume bars are black, I view the large volume days we've seen over the past week as churning and distribution because the naz has made very little upward price progress for the past two weeks. As usual, I will let the character of the sell-off I anticipate tell me whether I am right to be short or not. If the index does not under-cut its most recent low near 2020, or the index stages a powerful follow-through day, then I think it will be time to be a buyer of stock again.

Saturday, February 05, 2005

Something doesn't add up

Maybe somebody can explain this one to me. We are seeing all sorts of mergers and acquisitions going on because corporations have lots of excess cash, however the jobs report this Friday showed a suprising lack of new jobs. Why are corporations hesitant to add new jobs if they have the cash to do it?

Could it be that corporations feel that they are on the threshold of overcapacity? If this is true, then it follows that we are nearing the end of the earnings growth spree that has been going on since 2003.

Technically, the market has been breaking down for a month. I'm quite a bit short right now and don't plan on covering until I see a bullish follow through day with big volume created by short covering and bull buying all at once. I haven't seen that yet, even though the market has been up a good little bit, the conviction betrayed by volume has been absent. On Friday, the naz was up 1.4% on 1.95 billion shares: average volume. A painful day for the shorts for certain, but not enough to worry about. We are still quite a bit under the 50-day moving average.

Bill Cara has been providing quite a bit of commentary on the flattening of the U.S. Treasury yield curve, a leading indicator for the equities markets. A flattening yield curve has bearish implications. The spread between the 3 month bond and the 30 year bond has narrowed to 214 basis points, which is the lowest I've seen it lately. According to Cara, a 300 basis point spread is a healthy number, whereas anything below 250 is starting to spell bad news for equities.

As usual, it will be fun to see how the market goes next week. Good luck to all!