Tuesday, April 26, 2005

4/26/2005 Investors Are Shocked By An AC/DC Market

Alternating currents deliver shock waves through a schizophrenic market leaving many investors wondering what is happening. A closer look at the details of the down then up then down again market reveal some telling insights. The S&P500 fell to a 2005 low on Friday, April 15th closing at 1142 ending a three day fall that bled 3% from the benchmark index. The ugly drop came on higher volume, a telling sign that large investors headed for the exits. To make matters worse the fall completed the right side of a head-and-shoulders chart pattern, one of the most negative signs market technicians use to trade on. Short interest seems to be shrinking as well, not a bullish sign. A drop of 1.4% was realized in the 60 most heavily shorted stocks on the NYSE (down 1.6% on the nasdaq stock market). I would expect the level of short interest to be higher given the recent fall of the stock market. With fresh yearly lows, negative technical signals and dropping short interest, it is no wonder why investors are exiting the market, but what is the smart money doing?

I admit that holding stocks in times like this can be difficult. I am cautious but there are some positive signs to consider. First, earnings have been ahead of analysts estimates. By most accounts earnings estimates are ahead of last year by 12% verses the 8% predicted by analysts. The stock market has been weak during recent earnings seasons and moves once the uncertainty of earnings reports has past. Technical factors may also be firming. Since the market's fall on April 15th the S&P500 has started a basing pattern, albeit a volatile one. Even though the market has gyrated during this time its short term trend is higher and the S&P500 has stayed above the 1142 support level. Fear is more prevalent now than in recent months as measured by the VIX. The volatility index (VIX) touched 18.5 last week and closed just below 15 today. The year end rally of 2004 started when the VIX climbed to 19.9. Other lesser rallies were sparked when the VIX reached 16.5. Can better than expect earnings, basing technical characteristics and building fear move the market higher? Only time will tell for sure, however, I believe a move will come sooner than later.

It is times like this that the market will act on a catalyst. I will not be surprised if on Thursday, when traders get the Advance GDP Report, the market moves in definitive terms. The consensus is for an increase of 3.4%. A much lower number will send fears of a slowing economy through the market, similarly a much higher number will send fears of inflation to investors. In both cases the market will likely correct, sending indices lower. For now I am staying the course. You can see my fund's position table by clicking on www.thesmartmoneyinvestor.com. The fund's performance has been good as its healthcare issues offer institutional investors inelastic growth and short positions have yielded short term profits. That said, a pronounced trend lower could sink all boats forcing me to make changes.

I am looking at several short sale opportunities. Many of the former leaders have already been shaken down and I have made some profits in RIMM and EBAY. Although energy is the obvious choice I am cautious as the sector has been strong and I am not likely to go against the grain without a definitive negative impetus. ERTS and EBAY both look like they can move lower as the US consumer weakens and technical characteristics continue their negative ways. Also, RIMM is still vulnerable because many of the company's former differentiating functions are becoming commodity features. Also, their peers have reported sales that have fallen short of investors expectations and the stock's technical characteristics are less than stellar. Stay tuned as I will post new positions on the website(www.thesmartmoneyinvestor.com).

Sunday, April 24, 2005

4/25/2005 Volatile Volatility

Last week the market's volatility increased as capital markets experienced daily positive and negative swings in excess of 1% on higher volume. The VIX, a measure of market volatility, expanded to a 33 week high touching 18.59 before ending the week at 15.39.


The S&P500 and S&P600 ended the week slightly higher. The S&P500 closed below its 200 day moving average (dma) on lower volume; down on Friday but up for the week. The benchmark index remains above the 1146 support level and may be starting a basing period. I am staying the course as my fund's positions are collectively doing well. To see my positions click on the following link www.thesmartmoneyinvestor.com.

The smart money seems to be rotating investments as they take profits in old leaders and find values in new ones. Below is a table of the top and bottom performers for the period between April 1 and Friday's close. It appears that large investors are still rotating out of commodities and into consumer stables and healthcare stocks, although Metal Distributors jumped to the lead during the period.

Top Performers 4/1 - 4/21

Metal Distributors +6.1%
Generic Drugs +5.3%
Consumer Electronics +4.8%
Water Utilities +2.9%
Drug Stocks +2.7%

Bottom Performers 4/1 - 4/21

Plastics -10.4%
Flour and Grain -9.6%
Trucking -9.2%
Basic Chemicals -8.9%
Gem Mining -8.8%

As I mentioned before I am staying the course. I am reluctant to add new long positions as the market remains volatile and technically vulnerable. I am afraid that if energy prices rise higher and inflation fears turn to stagflation fears the market could go lower. Shorter term traders should benefit while this push and pull continues between contrarians and worn out bulls. That said, I may add new short positions as my current monthly short interest analysis looks like bears are reducing positions.

  • MATR-Matria Healthcare reported earnings last week and the stock fell sharply on managment's conservative assement of the second quarter (they met eps estimates). According to the company the second quarter is on track and following a similar pattern to prior years. The company is expected to grow 2005 earnings by 53% and 2006 earnings by 31%. I did reduce my holdings as the stock retreated below my stop loss level and then bounced. The company is positioned well as its peers such as American Healthways AMHC have reach new highs last week. I am watching the situation closely as LIBM has dropped a bit. Stay tuned to see what I do.

Wednesday, April 20, 2005

4/21/2005 Where is the Market Heading? Corrective Bull or Precipitous Bear

The trading activity in the S&P500 was about as bad it gets yesterday. The index closed below 1142, a major support level, to end at 1137. Adding insult to injury the index touched its 200 day moving average early on then turned lower on accelerating volume, closing at a fresh 2005 low. In the my previous posts I warned of a "sick market". Technically the stock market has confirmed my assertion.

Fear indexes continued to rise causing contrarian investors to pause, as the market continued lower when previously a bounce was to be expected. The VIX closed the day at 16.92, above trend. If the stock market doesn't bounce before the VIX reaches 21 I am afraid it will signal the return of pricing volatility and further down side risk.

On the surface business fundamentals remain strong. First quarter earnings are, for the most part, in line with consensus estimates or better. Relatively low interest rates, a lower but more stable dollar and low tax rates continue to bolster business activity. However, uncertainty about long term energy costs and a concern that interest rates may structurely rise in excess of neutral have fuelled a decline in the value of stocks. Concerning oil prices, I believe that speculative energy is currently being worked out of the price of crude. A more accurate mean price for energy will likely result in my estimation and if I am right will help alleviate uncertainty around the issue. As for interest rates, globalization and higher rates of productivity are likely to hold interest rates down long term. In Alan Greenspan's testimony today he said he did not see stagflation. By all accounts increases in payrolls are negligible and will ultimately serve to keep prices down. Time will tell but if stable energy prices and low interest rates prevail long term the current decline in the market will prove to be a correction rather than a new bear market.

Rotating the fund's investments into healthcare stocks and special situations last year has paid off as the Focus 13 held up well during the decline in the market this year. That said, a falling tide brings down all ships. As the true structural nature of energy prices and interest rate change plays out I must consider whether or not the investment waters are stable enough to support owning stocks at this time. I am staying the course for now but may change the fund's positions to be better in line with the unfolding economic climate.

I want to welcome John Creighton to the subscriber base. John, your warning that I should proof read my post before I publish them is well taken. I promise I will make an effort to write in English from here on.

Monday, April 18, 2005

4/19/2005 Investors Hold Their Breath

The market held up yesterday after its precipitous decline of the prior three trading sessions. Although the capital markets ended flat decliners out numbered advancers on most exchanges. The fear factors (RSI, VIX and Newsletters) pulled back a bit as the fright of another drop greater than 1% was not in the cards. Mergers and acquisition news and a spat of positive earnings reports started to look like good news again helping to keep the market from collapsing.

Technical

The S&P500 remains under its 200 day moving average and although its member companys' fundamental characteristics remain good the index flashes signs of technical weakness. The nasdaq stock market bounced the most, however, I think that the smart money was absent from the buying for the most part especially in the tech sector. The nasdaq remains significantly below its 200 day ma.

Currently I am staying the course. Vist http://www.thesmartmoneyinvestor.com to see my fund's current positions.

Buying and selling in the month of April has been telling. Large investors have rotated cash and are building positions in some sectors while exiting others. Below are two tables that show the process. Table 1 shows the top and bottom 5 performing sectors from April 1, 2005 through April 15 (the day of the 191 point drop on the DOW). Table two shows the top and bottom 5 performers for the period from April 1, 2005 through April 18 (Monday's close). Notice the move from commodity type sectors to healthcare type sectors, then notice the change that came about when the market stabilized a bit on Monday. It will be interesting to see how this table shapes up at the end of the week.

Table 1 - 4/1 - 4/15

Top Performers

Drugs +5.7%
Genetic Drugs +4%
Hospitals +1.8%
Ethical Drugs +1.7%
Alcoholic Beverages +1.5%

Bottom Performers

Metal Ores -14.75%
Oil Drilling -14%
Steel -13.8%
Energy -13%
Specialty Steel -12.7%

Table 2 4/1-4/18

Top Performers

Drugs +4.5%
Genetic Drugs +4%
Consumer Electronics +4%
Water Utilities +2%
Generic Drugs 1.2%

Bottom Performers

Oil Drilling -13.7%
Metal Ores -13%
Energy -12.2%
Steel -12%
Plastics -11.6%

Sunday, April 17, 2005

4/18/2005 The Markets' Future: Black Monday? A Tremor or Earthquake

Technical

The S&P500 fell convincingly below the 1160 level in Friday's trade to end at 1142. The session's trade happened in the worst possible manner accelerating declines as the day progressed on accelerating volume. The S&P500 now rests at a support level of 1140. Many in the mainstream media have expressed that this is a buying opportunity. I am not so sure at least not right away.

Bad News is Good News?

Pessimism is at a high as measured by many indicators. RSI is below 30, usually a buying opportunity. The VIX is at 17.74, a number higher than what was experienced during past market rallies. And newsletter surveys show bullish writers represent 16% of the lot, a multi-year low. In general these numbers are quite positive, however, I have some reservations. First, RSI reached 30 a week or so ago only to end in a failed rally, perhaps it will go lower as investors don't trust the 30 level. Previously I expected a rally when the VIX reached the 16.5 level, a level that initiated the Oct 2004 rally. However, the fact that the VIX shot past the 16.5 level with no support until the 20 level makes me fearful the index may test the level of support at 20. I like that newsletter writers are pessimistic, however, just because writers are less sanguine about the market now does not necessarily mean the market will turn on a dime. It may take some time for weak investors to be shaken out of the market. Further, many fund managers interviewed this weekend articulated the level of the market as a buying opportunity; is this change in attitude a negative for the market.

I have increase my short positions and if you follow this blog you know that I have been defensive for a while now accumulating positions in healthcare and special case investments. This market can turn at any time now and then turn again just like that. I am staying the course with my current investments, although I have bought protective puts just in case, this seems like a good time for some insurance. Visit and bookmark my website www.thesmartmoneyinvestor.com to see the stocks currently in the fund.


A Tremor or Earthquake

No one can argue that the capital markets have not been shaken in the past few trading days. What has captured the attention of investors is whether on not the current market movement is a tremor or something more. I was young but I profoundly remember Black Monday, October 19th, 1987. No one knows for sure what caused the DOW to fall 508 points that day. Some blamed program trading, others say short sellers accelerated the trade to the down side and still others blamed portfolio insurance providers. Whatever the cause one thing was for sure a rabid herd mentality infected Wall Street that day. I am not predicting a crash today necessarily, however, Friday's trading action was reminiscent of the Friday before the '87 crash. I will not be surprised to see selling in a herd like manner in Monday's session. The question will be at what level is the next buying opportunity and what sectors are going to out perform?

The price of oil and cash (interest rates) have a demonstrative effect on the economy. In short, low prices for oil and interest rates mean more money is available for investment (growth); the higher the prices the less money that is available (for investment). It is quite possible, in the short run, the market will go through the process of finding a new equilibrium based on the effects of oil prices and interest rates that have been bid up too high by speculators. See my previous post "A Spoonful of Capitalism Helps the Medicine Go Down".

In my opinion oil prices rose too high as the Fed kept interest rates artificially low to boost the economy post 9/11. Global economies heated up as investment in business, driven by the desire for returns beyond what was available for simply holding cash, snow balled. Cheap money made growth easy thus increasing the demand for energy and commodities. Speculators, many of which are hedge funds, bought oil long on the promise of rising Asian growth. The problem is it is not steadily rising Asian growth. As usual growth will be cyclical. As it stands prices have likely overshot natural to the high side and are in the process of correcting toward equilibrium in a meaningful way.

I believe that globalization will help to keep interest rates low longer term. In several of my past posts, some of them months ago, I talked about a lower neutral/natural interest rate. As a large population of educated Asians assimilate into the global economy the competition for commerce is likely to keep prices low. However, a recent rise in energy and commodity prices accelerated the rate of inflation. The Fed in an effort to catch up with its already artificially low rates and now increasing inflation have raised interest rates seven straight times. It takes 6-10 months for each rate hike to be felt by the economy, so their effects lag. It is quite possible that the Fed raised rates too aggressively and the effects, not yet felt, will sink the US economy into a phase of lower growth and perhaps recession. If this is the case the Fed will have to reverse course dropping rates more in line with the new, lower, neutral/natural interest rate.

I believe capital markets are faced with a perfect storm of higher speculative oil prices and not yet felt higher interest rates that are going to drive markets in the short term. The stock market is likely to fall further or at least until it declines past equilibrium before another buying opportunity is born. Until then investors will probably rotate cash out of growth sectors and into defensive sectors like healthcare, consumer staples and bonds. Further, I believe that short sale opportunities exist to take advantage of these rotations. Visit, bookmark or subscribe to my website www.thesmartmoneyinvestor.com to see the fund's current trading table on the home page. The table lists the fund's current positions and is updated as changes are made. Stay tuned as I provide the commentary of the smart money during the changes in the nasdaq stock market and S&P500.

Thursday, April 14, 2005

4/15/2005 A Spoonful of Capitalism Helps the Medicine Go Down

Technical

The S&P500 rests just below a key level of support sitting at 1162. The latest decline in the index sets up a very negative technical pattern and does not bode well for stocks in the near to intermediate term. The fact that the market ended near its low on much higher volume adds to the negativity. Today is an options expiration day and history being my guide I would not be surprised to see a flat close. However, Monday may be a different story. Unless we get some very good news around interest rates or oil this market is likely to correct while speculative forces unwind. That said, the VIX is on the rise and the put to call ratio is above 1.0 both positive signals from a contrarian standpoint.

The Market is Sick

The good news is that its cause seems to be a dose of capitalism; the bad news is its cause seems to be a dose of capitalism. Speculation, a symptom of capitalism, often drives market prices to extremes one way or the other. Add competing speculative markets and you are guaranteed to double your pleasure. Case in point, interest rates and oil, two catalysts that have held the attention of investors lately. Oil prices have risen to all time highs partly on the belief that China's growth is going to super sap world crude supplies. How much oil will the world need in the future? Well no one knows for sure. Economic slow downs, more productive uses of crude and un-named crude oil substitutes may all negatively affect the use and price of oil. The crude market has been especially speculative of late as evidenced by its volatility. Speculative markets tend to be more volatile as the fast money investors push each other around. Interest rates on the other hand have experienced a form of indirect speculation. Intervention by foreign governments into currency markets and mortgage and financial institutions who hedge their interest rate risks are some examples of the indirect speculation that affects interest rates. Rates have remained low for a long time due in part to these indirect forces.

Competing Speculative Markets

Like a Yankees Red Sox game when two competitive markets meet sparks are going to fly. The world economy began to fire up with the unwinding of the tech bubble, the end of SARS and the normalization that came after 9/11. Until last year global governments remained fiscally accommodative adding liquidity to their economies. World economies recovered and began to thrive as the effects of globalization kicked into high gear driving the demand for oil and other commodities higher. Smart money speculators, seizing the opportunity, invested in these commodities. Side lined investors, not wanting to be left out piled in and drove prices higher. As prices inflated the Fed stepped in and raised interest rates applying routine inertia to prices. But long rates did not move, a "conundrum" due to the indirect speculative effects I explained in the section above. Artificially low interest rates made leveraged speculation a no brainer and prices rose even higher as investors added to positions. The price of energy and other commodities continued to rise even in the face of the Fed's rate hikes.

Speculators who drove up energy and commodity prices clash with speculators that indirectly kept interest rates low. Since all economies tend to equilibrium something has to give. Naturally, the change is being telegraphed by the stock market. Higher oil prices weigh down an economy in much the same way that higher interest rates do. In general it takes six to nine months before the effects of higher interest rates are felt, which is right about now. The problem is that higher energy costs have already started to slow the economy. Retail sales figures have lagged recently and consumer confidence has trended lower. I believe that the delayed effect of interest rates is going to further slow the economy and the Fed may to have to reverse course in order to thwart a recession. In the mean time energy and commodity prices are going to fall toward equilibrium. All this speculation points to lower levels in the stock market in the short to perhaps the medium term. However, the stock market is a discounting mechanism and has a certain amount of these developments built into its price. It will not likely take long before speculators step in betting that lower interest rates and fuel costs are going to feed the global economy. The smart money has already started to rotate cash into more defensive industries and they are eyeing future bargins. To see my fund's positions click on www.thesmartmoneyinvestor.com. Keep and eye on that site as I am also going to add new positions as the economy makes its transition.

Tuesday, April 12, 2005

4/13/2005 Astute Investors get a Look into the Future Today

Catalyst Pending: Interest Rates

The smart money showed their cards today giving astute investors a look into the future. In recent days the market seemed to idle around the uncertainty about earnings, oil and inflation. Investors held their breaths as they waited for a catalyst to kick capital markets one way or another. Although oil fell hard today, generally a catalyst for higher stock prices, the stock market fell just as hard in apparent sympathy. Similarly, earnings reports, which for the most part have been as expected, and an analyst upgrade for Cisco did nothing to ignite a rally; in fact they seemed to backfire on investors. The S&P500 fell 0.9% on light volume and stayed at that level for most of the day. It was not until the FOMC meeting minutes were released, a supposed nonevent according to most investors, did the stock market catch fire rising 0.6%, a 1.5% turnaround. Apparently, large investors' fear that the Fed would accelerate raising interest rates to cool inflation were quelled. More importantly a statement by Bill Gross, Pimco's bond investment head, that 3.5% on the Federal Funds Rate was neutral gave investors all they needed to buy equities. As it turns out, investors can live with $55 oil and 8% earnings growth, but high rates to stop inflation are a show stopper.

In my post last month http://thesmartmoney.blogspot.com/2005/03/3242005-phased-outthe-new-market-ahead.html I wrote about why I think that interest rates will remain low for the foreseeable future. If Mr. Gross is correct a 3.5% Fed Funds Rate would equate to about a 5.0% rate for the 10 yr Treasury, a number that would likely favor stocks. Gross went further to say that he thought the US economy was already slowing, again something I brought to light last month in my post above. In any case it is clear that events which affect interest rates and thus economic growth are likely to be the main driver for the stock market during this phase.

Technical

The S&P500 and S&P600 went through a substantial reversal today as both indices came back from harsh declines to end with solid gains on above average volume. The S&P500 bounced off the 1170 level midday to close at 1187. 1160 on the S&P500 has proved to be staunch support for the index, a level that has its roots back to March 2002. Today's move was encouraging as it again tested the low, however, it does not confirm a rally. In fact, if the S&P500 fails to get above 1212 near term I am afraid market technical characteristics will break down and the indices may make new lows. What is interesting is the nasdaq stock market. The index has been written off with most analysts recommending that investors stay clear of tech. Looking at the monthly chart today I noticed that a classic basing pattern is underway and I would not be surprised to see a rally in a new wave of nasdaq leaders. Stay tuned as I will being adding new nasdaq stocks to my fund so as to capture profits ahead of the mainstream. You can see my fund's current positions at www.thesmartmoneyinvestor.com.

  • GAP - Great Atlantic & Pacific Tea Company has held its gains through this choppy market. As of March 15th short interest was roughly equal to 50% of the float. The company has been a victim of Walmart's competitive pressure, however, its situation is much like that of Kmart's. The company has been family owned and in business since the mid 1800's and has some 649 stores. In many ways GAP is a real estate company and it can be argued that the true value of the company's real estate is being over looked by investors. Recently, the stock rose on news that the company intends to sell off some assets to pay down debt and re-organize, a move which will make it more competitive. Time will tell how GAP's story plays out but I believe that management is making the necessary changes to reinvigorate the company. I have been accumulating shares below $14.5 with a near term target of $18. I am waiting for signals that the stock worth more, an event which will trigger my targets higher.

Sunday, April 10, 2005

4/11/2005 Pending Catalyst: Markets Wait for Direction

Earnings, Oil and Inflation

Today earnings season goes into full bloom as many members of the S&P500 and nasdaq start their quarterly reporting ritual. Analysts expectations have been lowered since this quarter's comparisons with last year's super growth rates are widely expected to fall short. Negative pre-announcements are up slightly and the market showed signs of nervousness falling hard on Friday but remaining up for the week. Earnings, oil and inflation are the current poster children of uncertainty that will drive capital markets in the short term. So far this month the smart money has rotated cash out of inflation friendly sectors and into others. Below is a table of the top and bottom five sectors by performance for the first nine days of the quarter.

TOP FIVE SECTOR PERFORMERS

Airlines +4.6%
Consumer finance +4.5%
Drug stocks +4.03%
Automated machinery +3.9%
Discount Retail +3.7%

BOTTOM FIVE SECTOR PERFORMERS

Flour and grain -8.2%
Canadian oil and gas -3.5%
Trucking -3%
Security software -2.2%
Fertilizers -2.1%

Many large funds will make changes to their portfolios starting at the beginning of the quarter. It will be interesting to see how these flows progress into the start of the second quarter. Stay tuned as I will make updates to the top and bottom five periodically.

Technical

The S&P500 and 600 have held new support levels above 1180 and 315 respectfully. Recent price and volume action suggest that these indices are in a basing period as investors perform next phase asset allocations. High levels of short interest in some sectors like airlines and healthcare gave their stock prices an extra bump in the first wave of re-allocation, often a precursor to a longer term rally. However, the recent up trend over the first days of the month came on lower volume, almost always a bad sign, and may signify that stocks will head lower. Another negative is in the fear indicator, the VIX. The VIX remains at depressed levels and recently failed to reach the 16.5 level, a number I feel is the minimum necessary to see a more pronounced rally. Clearly the market is looking for a catalyst to define its direction. That catalyst is likely to come from earnings, oil or inflation news. I am very cautious near term, however, I am accumulating certain stocks at my buy targets. You can see the fund's positions by clicking on www.thesmartmoneyinvestor.com.

Healthcare

Healthcare stocks have held recent gains although many were down a bit on lower volume today. I expect select sectors within the group to significantly out perform the general market. As employment increases so do many healthcare stocks since new employees will be more able to pay for insurance and healthcare services. Further, the hospital sector has cleaned up its uncollected fees expense in recent times helping those issues to add more cashflow to their bottom lines. Couple that with a more friendly Medicare and Medicaid environment and superb demographics and this sector should continue to grow longer term, bouncing from the negative returns of the last three years.

  • MATR - Matria Healthcare reported higher than expected earnings numbers in its last report. I calculate intrinsic value above $121, well above my two times market value requirement. In addition, the technical characteristics of the company are solid, building a base and forming a classic break-out configuration. Currently shares are just above my $31.5 buy price. I am accumulating more shares on the dips and am considering raising buy levels. The company provides disease management, high risk pregnancy care and health enhancement services. Matria has found a way to increase customer service and satisfaction while also reducing costs and increasing profit.

Wednesday, April 06, 2005

4/7/2005 Just as Anticipated

Healthcare

If you are a regular to this blog you know that I have been accumulating healthcare stocks for the last few months, along with the rest of the smart money. If you follow my fund's Focus13 at www.thesmartmoneyinvestor.com you may have learned about these issues and perhaps bought them yourself. This week several of my investments made new highs for the year. Recent momentum in the stock market has been with healthcare, a trend that is likely to continue through the next phase of the market. Companies like American Healthways, Matria Healthcare and others experienced large investor buying momentum and media attention. See my story at http://thesmartmoney.blogspot.com/2005/03/3292005-phase-outthe-new-market-ahead.html; in it I give my views on the first phase of the next stock market cycle and some reasons why I believe healthcare will benefit from the change. You might also want to try clicking back through my archives on the right side of this post; there are many examples about why healthcare will be the sector to own in the next market phase.

Technical

The S&P500 has started to rally the last couple of days bouncing off its 1163 bottom twice. The VIX rose above 14.5 once again as the index approached its near term lows but has since backed off, standing closer to 13 now. A number closer to 16.5 would get me more excited about a real rally. Yesterday the market shot out of the gate and stayed there for most of the day, however, later in the session the S&P500 experienced a lower volume pull back to stand at 1184, a sticky resistance level. For the rally to extend itself I believe it needs a pronounced catalyst like a drop in oil, stellar earnings report or real good political news. Without a change in climate stocks will likely stay in this range as investors are likely to face continued head winds from high oil and interest rates; lack luster earnings will not help either.


Focus 13 - March Performance

The good news first, the fund is up 11.3% for the quarter, 45.2% on an annualized basis. That said, it lost (1.5%) in the month of March, its first monthly loss in nearly a year. I closed out several positions that were profitable on the year but not in March as they broke down technically and large investors redirected their funds. I also added several new issues to the group and cut several others. Click on www.thesmartmoneyinvestor.com to see the Focus 13 table that lists all the funds current investments. Also, details on the funds performance can be found at the same address, look in the left side bar for the link.

Hopefully the first few days of April are an indication of what the rest of the month will look like. Many of the funds investments are breaking out as the market moves like I anticipated.

  • AMHC - American Healthways broke out to a new 52 wk high for the second day in a row. The stock had been basing between $29 and $35 for the last several months until Monday when it rose above that level on high volume. Intrinsic value (IV) is at about $85/share while shares sold short were about 20% of total shares on March 15th. AMHC's market capitalization stands at $1.2 billion. Given its 2006 eps growth rate of 31% I feel the company can be worth in excess of $2 billion provided it continues to grow earnings at or above 31%. Given the favorable demographics and available market share I believe that $2 billion is achievable.
  • MATR - Matria Healthcare is very similar to AMHC on a smaller scale, which may mean it has more growth ahead of itself. The shares have been basing for several weeks between $28 and $32 per share. It too has many shares sold short exceeding seven days of average daily volume. I calculate IV at $121 /share. Currently I am still accumulating shares in MATR as its current price is just below my buy target. The company's eps growth is the same as AMHC listed at 31% for 2006. MATR's market capitalization is just under $500 million.

Monday, April 04, 2005

4/5/2005 Oil and Vinegar

Think about it? Oil last year...the Iraq war was raging, hurricane Ivan blew through the Gulf of Mexico like a hot winded wave maker and US refinery capacity was limited. The price of oil was less than $50/barrel then. Fast forward to today...when was the last time you heard about a disruption in Iraqi oil. The people of Iraq need money and you can bet they are pumping it for all its worth. And hurricane Ivan...at $56/barrel do you think those oil companies are taking their time fixing rigs. Fo get about it...I'll bet the rigs were fix the day after the winds stopped. Oil inventories have been building for several months, yet there has been a draw on gasoline. Think about it...if refinery capacity is limited it acts like an oil dam. Oil inventory will grow as a bottle neck at the refiners will in effect ration gasoline causing a shortage (or higher prices) in the fuel and an over abundance of crude oil. So why does the price of oil keep going up. Are there that many more people using oil today then last year? very doubtful. Perhaps speculators are keeping oil prices high. Remember the analyst who predicted Yahoo shares were worth $400 and the stock shot up in value eclipsing that level. Well that was the beginning of the end of Yahoo's rise. Climatic endings are the standard of market tops. It may very well be that someday we will experience $105 / barrel oil. Whether or not it comes sooner or later is something only time can tell.

The technical characteristics of oil are a bit top heavy. A drop in crude prices could signal a buy for the stock market with the exception of oil stocks, a vinegary situation. Intrinsic Values calculated using >$55 crude will have to be adjusted causing an oversold market to bounce. In my last post I wrote about noise: Incremental moves in capital markets whose action is based on speculation and hear say tend to equilibrium over time. The smart money knows this, therefore, I am staying the course with the fund's investments. If I sense a sustainable reduction in the price of oil or a change in the future direction/momentum of interest rates I will adapt my strategy accordingly. To see my funds positions click on the following link www.thesmartmoneyinvestor.com. The Focus13 table on the home page gives you an up to date view of what I am doing. I'll bet you find it interesting.

Sunday, April 03, 2005

4/4/2005 Market See Market Do


Noise

The stock market has seen a high level of selling this year. Although the S&P500 and S&P600 reached highs last month a significant amount of selling by large investors has reduced the indices to their 2005 lows. Energy is the clear leader in this market. Its rise has countered the fall of tech and financial issues leaving index charts flattish for the past five months (while many non-energy issues have corrected 10% or more). Unfortunately, the higher energy costs are pumping up inflation around the world making the stock market leary of the consumers' propensity to spend. That said, techical characters of the market have shown signs of strengthening. The Relative Strength Index, a measure of investor momentum, has reach a low in par with that of the last market bounce. Further, the weekly chart of the S&P500 is showing a bottom basing pattern also consistent with a bounce. I am not yet ready to buy up in bulk, but I am buying selected issues. See my website www.thesmartmoneyinvestor.com to have a look at my Focus13 trading table.

This week is likely to give investors a healthy dose of information to contemplate. The challenge will be to correctly distill the pertinent facts from the minutia. From earnings announcements to Greenspan, oil to inflation, investors will be busy discounting it all as their mettle will be tested. In the end the market will do what it will do. Just like some days the market goes down when oil rises and others it moves higher when oil goes higher. Though this noise will drive capital markets in the short term, in the end market fundamentals will prevail. The smart money will determine the future direction of the market by voting with their buys and sells. I pay close attention these LIBM trends (Large Investor Buying Momentum) for the individual stocks I invest in. Ultimately it is the large investors who will determine where and when I invest.

Right now large investors have sold tech and financials and bought energy. However, there is evidence that investors have begun the transition into other sectors like healthcare and consumer staples. One stock that has seen a rise in LIBM is The Great Atlantic and Pacific Tea Company (GAP). The stock has seen an increase in investment as investors have come to speculate that real estate assets will be sold to reduce costs. In addition, on March 15 the company had more than 1/2 its float shorted (over 7 million shares). I have owned the preferred issues of GAP for a long time and have been rewarded. I am accumulating shares.

Fear and negativity are growing. Investors have started to sell and perhaps are not yet done. A test of the 200 dma on the S&P500 is not out of the question, however, the index has been basing for last 19 weeks making it a tough short. For now I am staying with my current game plan, check out the website www.thesmartmoneyinvestor.com for the details. You can find my specific targets in my Focus13 table on the home page.