Each weekend, I will list signals from the most popular market indicators.
(A full list of the major indicators with signals can be found in my book, All About Market Indicators (McGraw-Hill).)
AAII survey (3/6/2013)
31.1% bullish. 38.5% bearish.
Sell signal: Over 60% bullish.
Buy signal: Over 50% bearish.
Investor’s Intelligence (3/6/2013):
44.2% bullish. 21.1% bearish.
Sell signal: Over 50% bullish.
Buy signal: Over 50% bearish.
Put/Call Ratio: .62
Sell signal: Lower than .75 is a sell.
Buy signal: Higher than 1.0 is a buy (more puts are being bought)
Sell signal: Lower than 12.
Buy signal: Over 40.
Moving Averages: S&P 500 above all three moving averages
Sell signal: Index crosses below 50-, 100-, or 200-day MA.
Buy signal: Index crosses over MA.
MACD: MACD above zero line and crossed over signal line
Sell signal: MACD line (black line) crosses below zero line. MACD line crosses below 9-day (gray) signal line.
Buy Signal: MACD line crosses above zero line. MACD line crosses above 9-day signal line.
Comment: The trend is your friend until it ends. Moving averages and MACD still going higher but other indicators reflect caution ahead.
Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.
Here is the full interview I had with Amy Smith about Lumber Liquidators and her newest idea, HomeAway.
Stock Idea of the Month: HomeAway
Last month, Amy Smith, author of the bestselling How to Make Money in Stocks Success Storiesmentioned Lumber Liquidators (NYSE:LL) as a stock to watch. For long-term traders, it was an ideal choice.
When Smith first discussed LL in my February 8th MarketWatch column (http://on.mktw.net/12tTDYx), it was trading at $58 per share. It slowly went higher, and on the day it released earnings, it shot up to over $65 per share.
If you are a trader, you remember the old rule, “Buy on the rumor; sell on the news.” After the earnings news came out, the entire market sold off, along with LL, which dropped to $54. It quickly recovered and is now trading at over $64.00 (as of March 7).
Smith has a new stock idea for this month: HomeAway (Nasdaq:AWAY). The following is her analysis of both stocks.
Q: What happened to Lumber Liquidators?
LL broke out of a price consolidation in early February, and it made a nice little run, but came under selling pressure on February 21st. Toll Bros, a homebuilder, missed their earnings, and there was some negative news on housing. It was mostly a lot of speculation of what was going on in the housing market. Even good stocks can get hit if the overall market trend is down. You can’t fight the general market.
On Feb. 26, LL recovered because the housing data that came out said new home sales jumped 16% in January, which was the highest level in four years. We also had a good earnings report from Home Depot; they beat their quarter estimates, and were up 36%. And the stock reacted well, turned around, and went up on much higher volume after a short selloff.
Q: Should investors continue holding LL?
So far LL is recovering nicely from the selloff. It is currently holding tight, but we’ll continue to see how the housing market does. If I was sitting on a large profit and bought LL some time ago, I might hold to see if it will recover.
If you look at the daily chart, the selloff might scare you a little bit, but if you look at the weekly chart, you get a longer-term view of what the stock might be doing. Is it forming a new base or a new price consolidation?
In terms of when to sell a stock, A lot when to sell a stock has to do with when you got into it, and how large of a profit you are sitting on. You never want to take more than a 7-8% loss from where you purchased a stock.
Q: Are there other stocks you are watching?
Yes, HomeAway (Nasdaq:AWAY). This company had its IPO in July 2011. They are the world’s leading online market place for vacation rentals. They have 720,000 paid vacation home listings in 168 countries. Some may recognize their web sites: Vacationrentals.com and Bedandbreakfast.com. HomeAway has rental properties in the U.S., Europe, Australia, and South America. If you have a home you own in Hawaii, Europe, or Brazil, HomeAway helps link people up who will rent your home for a week or so.
HomeAway shot up out of a price consolidation on very big volume on Feb. 21 to a 16-month high. It went up 13% because they beat 4th quarter earnings. The earnings in the recent quarter were what we look for: up 100%. Those triple digit numbers captures the attention of institutions.
The volume numbers: The stock gapped up Feb. 21 with stock volume 491% above average. With CAN SLIM® Investing, That is what we look for. When a stock gaps up with that much volume, it means that institutional investors picked up shares.
The gap up means there is enormous buying. I wouldn’t be surprising to see the stock slow down or pull back slightly as it digests its gains. As long as the stock pulls back on low volume, it means institutions are holding onto the shares. With this much power and volume going into it, it’s unlikely institutions will sell shares they just bought.
What are you looking for now?
We still have a ways to go before it reports earnings on April 24th. But it continues to look strong, although it’s a little extended because it shot up so fast. We like to buy stocks that come out of a price consolidation. If you buy a stock after it goes up several days in a row, and there is a huge volume and price increase, the stock will usually pull back a little at some point. If you buy it too late in the game, you are risking you will get hit on the pullback.
HomeAway is a good stock for your watch list. Remember that on the pullback, it should be on low volume, maybe to one of its moving averages. As long as it pulls back on low volume, the stock is fine. But never sit and hope a stock will come back when you are losing money. Sell it and get out of the way.
Note: As of this publication date, Michael Sincere and Amy Smith do not own shares of HomeAway.
Here’s the full article I wrote for MarketWatch on using puts to hedge or protect your portfolio:
(or you can select this link to the MarketWatch article: http://on.mktw.net/WwNPvY
Put Up or Shut Up
Commentary: Stop scaring investors with gloomy predictions—and buy puts
As the Dow flirts above 14,000, many journalists warn about an impending crash. There are dozens of reasons why the market should not go up, but the market still does. One day the journalists will be right, but until then, they should put their money where their mouths are…with put options.
Like many people, I love the stock market, but I hate losing money. This is a serious problem because to make money, you have to learn how to lose. Because of fear, at times I’ve been out of the market during some of the strongest bull markets.
And then I found an answer, one that put my mind at ease.
The answer is put options. As you may know, options have had a bad reputation going back to 1635. That’s when greedy Dutch townsfolk sold naked puts on tulips. As more people participated, the price of a single tulip bulb went as high as $200,000 each (using today’s exchange rate).
Eventually, tulip prices plunged, and many people went bankrupt, helping to destroy the Dutch economy. Rather than blaming themselves for using exotic strategies on exotic flowers, investors blamed options. Even now, some people say that options are too risky and complicated. Unfortunately, selling naked put options on tulip bulbs (or using any strategy you don’t understand) is crazy. Buying puts, however, is entirely different.
Put your best foot forward
I wish I had learned earlier about the power of buying puts as a hedge against fear (and potential losses). Here’s one strategy I like: To protect my individual stocks and mutual fund positions (my long-term portfolio), I buy put options on SPY (an ETF index based on the S&P 500.) You can also buy puts on ETFs based on the Dow Jones Industrial Average (DIA), Russell 2000 (IWM), and the Nasdaq 100 (QQQ).
For example, to help protect a $50,000 portfolio that invests primarily in stocks that track the S&P 500, you would need to buy approximately three put contracts. Next, you have to choose how long you want to keep the protection (it’s called an expiration date). The longer the protection, the more it costs. You can choose a month or two, a year, all the way up to three years.
Here’s what it means: Although you won’t get 100% protection, in case there is a correction or crash, as your stocks plunge, the value of your put option rises. It’s like buying an insurance policy. You hope that the market doesn’t crash, but if it does, your losses are limited. That should help put you to sleep.
Let’s look at what this strategy costs.
Put your thinking cap on
Only you can decide if the cost of put protection is worth it. Like any insurance, it’s not cheap. As of March 6, 2013, three SPY put contracts with a $150 strike price (or 1500 on the S&P 500) that expire on June 22, 2013 costs $336 each (subject to change) totaling $1,008 plus commissions ($336 x 3 contracts). That’s the cost for three months of protection. If the market crashes anytime before June 22, the put limits your losses.
Your risk: In this example, the most you could lose is $1,008, which is the cost of the three puts. Why three put contracts? Each put represents 100 shares. Since you have the right to sell 300 shares at $150 per share, that is $45,000 worth of stock.
If you wanted ten months of protection for a $50,000 portfolio, as of March 6, a LEAPS put on the SPY with a $150 strike price that expires on January 18, 2014 costs $808 each (subject to change) totaling $2424 ($808 x 3 contracts). That’s the price you have to pay if you truly fear a market crash.
What are LEAPS? Their full name is Long-Term Equity AnticiPation Securities, and they are long-term option contracts, identical to standard options except for the longer time period (from nine months to three years) Your risk: Again, it is the cost of buying the options. In this example, the most you can lose is $2,424.
Exercise: There is another complication when you buy puts. If SPY drops in price, and you have a winning put position on the expiration date, your option could be exercised. This means that your option is converted into a short position in SPY shares. This is not a sound idea. To avoid this from happening, sell your profitable put before the expiration date.
Don’t put all your eggs in one basket
If you’re a journalist warning of an impending crash, consider buying puts to hedge against your own fears. If you’re a beginner, don’t go out and buy puts if you’ve never traded them before. Start by reading my book, Understanding Options, or other option books. Also, go on the Internet and visit the Options Industry Council (OIC) and Chicago Board Options Exchange (CBOE) websites, or take free classes with the OIC. You can also call your brokerage firm.
Stock idea of the month
Last month, Amy Smith, author of How to Make Money in Stocks Success Stories, used the Can Slim® Investing System to choose Lumber Liquidators (NYSE: LL) as a stock idea. At first, LL went from $58.93 (when it was first mentioned in my column) to $65 (the day earnings were announced two weeks later). It dropped as low as $54 on the one-day stock selloff, and is now trading at over $60 per share.
Smith’s newest stock idea is HomeAway (Nasdaq: AWAY). This company, which is the world’s leading marketplace for vacation rentals, had its IPO debut in July 2011. Smith says this stock fits CAN SLIM Investing.
“The earnings in the most recent quarter were up 100%,” she says. “Those triple digit numbers captured the interest of institutional investors. The stock shot out of price consolidation on very big volume. When a stock gaps up with that much volume (491% above average), institutions have picked up shares.”
So should you run out and buy this stock? In Smith’s opinion, no. “Earnings come out on April 24th,” she says. “Although HomeAway is a little bit extended right now, you can look for a new entry point. If there is a pullback, however, it must be on low volume.”
As long as the stock pulls back on low volume, it means institutions are holding on to their shares, Smith says. “If it’s on high volume, it means that institutional investors are selling.”
Note: To read more about what Smith has to say about HomeAway and Lumber Liquidators, visit www.michaelsincere.com.
Michael Sincere www.michaelsincere.com is the author of “Understanding Options,” “All About Market Indicators,” and “Understanding Stocks.” Note: Michael Sincere and Amy Smith did not buy shares of HomeAway before this column was published.
How to Read Stock Market Indicators
Each month, I’ll review the top stock market indicators to find out what story they have to tell. You can learn how to read these indicators, as well as many others, in my book, All About Market Indicators (McGraw-Hill).
The idea is to use a number of indicators, not just one, to determine which way the market is headed. In addition, use the indicators as an early warning signal rather than to time the market. A market can remain in dangerously overbought territory for weeks, months, and even years before reversing.
What the Stock Market is Telling Us Now
The following market indicators monitor the sentiment, or psychology, of the market. These are contrarian indicators, which means you should do the opposite of what everyone else is doing. For example, if the indicator shows that everyone is buying stocks, you should consider selling. Do not use sentiment indicators to time the market, but only to measure what the crowd is doing.
American Association of Individual Investors (AAII): When investors are too bullish (over 60%), it’s a sell signal. When they are too bearish, (over 50%), it’s a buy signal.
Signal: The week of February 27th, investors were 28.4% bullish and 36.6% bearish. This is a neutral signal.
Investor’s Intelligence Advisor Sentiment Survey (II): When independent newsletter writers are too bullish (over 50%), it’s a sell signal. When newsletter writers are too bearish (over 50%), it’s a buy signal.
Signal: The week of February 27th, newsletter writers were 46.3% bullish and 21.1% bearish. This is a neutral signal. On the other hand, it shows that the independent financial media is more bullish about the stock market than the public right now.
CBOE Put/Call Ratio: This indicator tracks the volume of put and call options that trade on the CBOE. Because so many retail option speculators are often wrong, it’s a clue to do the opposite.
If the Put/Call ration is lower than .75 (more call options are being bought), it’s a sell signal. If the Put/Call ratio is higher than 1.0 (more put options are being bought), it’s a buy signal.
Signal: As of March 1, the Put/Call ratio was .67, which is a sell signal, but not as strong as last month (.55). This means that more individuals are buying call options on individual stocks because they are bullish about the market.
Note: Trader and author Martin Zweig was the first to use the Put/Call Ratio to identify tops and bottoms by betting in the opposite direction. Sadly, Mr. Zweig passed away last week at the age of 70. He will be missed.
Note: The International Securities Exchange (ISEE) also has an indicator, the ISEE Call/Put Ratio, which is also very useful.
Moving Averages are my favorite technical indicator because it tells you when a market trend has begun or ended. Basically, it keeps you on the right side of a trend. The most popular, and useful, moving averages are the 50-, 100-, and 200-day MA.
Signal: The moving averages are telling us the long-term market trend is still positive, although we had a bit of a scare last week. Looking at the three-month chart, the S&P 500 index is above all three of its moving averages.
Note: Moving averages are not designed to catch tops or bottoms, and are sometimes slow to react. They also don’t work well in choppy markets.
COMMENTS ABOUT THE MARKET
According to the market indicators, the trend is still positive. However, because of economic concerns, it would not be surprising to see a short-term pullback.
In my newest article for MarketWatch (will be published in a week), I’ll be discussing ways of using options to protect yourself if you are bullish about the stock market. To help you sleep at night, you can use options to insure your stock portfolio.
In addition, author Amy Smith will discuss her next stock idea using the CAN SLIM investment system. The last stock that Smith mentioned, Lumber Liquidators (NYSE: LL), performed brilliantly. It fit the strategy of the long-term trader, which means you can hold stocks and mutual funds long term, but also trade.
When Smith mentioned LL in my MarketWatch column, it was trading at $58.93 per share. When earnings were released, it shot up to $65. After the one-day stock market plunge of 130 points, LL dropped all the way to $54. It’s now at $60.70 and climbing. This is definitely a stock you could hold for the long term, but also use for short-term trades.
If you want to learn more about stocks and options, you can read my book, Understanding Stocks(McGraw-Hill), or Understanding Options (McGraw-Hill).
Here is my latest article for MarketWatch (February 6, 2013): http://on.mktw.net/12tTDYx
What the market indicators are telling us now
MIAMI, Fla. (MarketWatch) — Do we dare call this a bull market? The indicators were on target in January, and showed that the market had enough strength to go higher. Nevertheless, we’ll turn to the indicators to warn of potential dangers.
On the technical side, the Standard & Poor’s 500-stock index (SNC:SPX) is well above its moving averages, which indicate the bullish trend will continue. Obviously, a so-called Black Swan event can occur at any time, but after four years, we’re still waiting. The higher the market goes, the louder the crash warnings will get. But the market keeps advancing. MACD is also signaling that the upward trend will continue.
Meanwhile, the Relative Strength Index is signaling the market is overbought, which is a concern. However, the market can remain overbought for weeks or months before reversing.
Sentiment indicators, which tell you if investors are overly bullish or bearish, show that investors are becoming more enthusiastic about the market. The recent 0.67 put/call ratio hints that options investors are still bullish (and buying more call options). It wouldn’t be surprising to see the market have a short-term pullback, bringing investors back to reality.
CANSLIM sizes up stocks
Recently I had a talk with Amy Smith, author of How to Make Money in Stocks Success Stories , and an expert on the CANSLIM investment philosophy. I wanted to confirm that CANSLIM was showing what I see: a bullish market with possible warning signs. CANSLIM, created by William O’Neil, looks at current earnings, annual earnings, new products and services, share supply and demand, leaders and laggards, institutional sponsorship, and market indexes to identify strong and weak stocks.
Smith says that the overall market is continuing to act well, noting that “the Nasdaq (NASDAQ:COMP) is holding in a tight range.”
Because we’re in earnings season, Smith wants to know if institutions are starting to sell stocks, which would be a warning sign. If there is heavy selling, that would indicate mutual fund companies and other large players have lost faith in the market. Fortunately, Smith doesn’t see that yet.
Most important to CANSLIM, the leading stocks are still acting well, and so far there haven’t been major problems. Even though a few stocks (such as Apple Inc. (NASDAQ:AAPL) ) have had disappointing earnings, Smith says that happens every earnings season. Overall, according to CANSLIM, the market is acting strong but Smith is looking for signs of distribution (selling). The leading stocks are holding up, but she is watching them closely.
When I asked Smith for a leading stock that fits the CANSLIM criteria, she mentioned Lumber Liquidators Holdings Inc. (NYSE:LL) , a retailer that provides hardwood flooring and lamination at discounted prices. The company has profited along with the housing market recovery, and has a chart that any long-term investor (or covered call writer) might appreciate. Lumber Liquidators reports earnings on February 20.
Here’s why Smith likes Lumber Liquidators: “A lot of homebuilders are reporting earnings, which will tell us if the housing boom is continuing, or if there will be a slowdown from that group. Lumber Liquidators is a stock that has done well, and since October has been consolidating (a period of indecision). When they report earnings, we want to see if they can come out of this price consolidation on heavy volume.”
If the stock breaks out on strong volume, it would indicate that institutions are aggressively buying.
Because it is earnings season, the market may be volatile in the short term. Nevertheless, the indicators are generally positive, and unless there are unexpected surprises, February could be a good month.
Rather than get swayed by fear, rely on fundamental or technical analysis, or a method such as CANSLIM. If you do see danger signs, then sell or reduce your position. But staying out of the market permanently because the markets might crash is not an investment strategy.
Michael Sincere www.michaelsincere.com is the author of “All About Market Indicators,” “Understanding Options,” and “Understanding Stocks.”