Well, the invasion of those fat furry clawed critters was pretty tough. The bunker is fill of bullet holes but was not attacked by grenades of frag weapons (we were part of the bearish invasion, being largely short ES and NQ on most of those days, but that is only on a need to know basis!). At any rate, last week ended with the first real rally since the end of July for most of the US stock indexes and index futures contacts. Regardless of that, though the momentum on the weekly basis way be turning slightly bullish, we are still in a bit of “no mans land” still with regard to a bullish momentum. Take a look at the daily charts this time for each index (QQQ, $INDU, $SPX) and you will see the same recurring pattern.
If we see a break above the intermediate highs shown on each chart, the there is a chance that the rally can be sustainable. If not, and we test and take out the previous lows, we are likely going still lower. The jury is still out on that trend. It should be noted from a pattern perspective if that current highs that do not exceed the recent August daily gap are not exceeded, the QQQ could have another leg down, but still, it is a little hard to determine if that will happen currently. The potential low target on QQQ would be 77.88 approximately.
As the weekly charts begin to seek a bottom (and hopefully monthly chart follows), we should begin to see market breadth improve in terms or rising stocks versus falling stocks. While that has not totally been the case recently, one can still look inside of sectors to see some perhaps interesting sectors.
What I did was to scan my 20000 stock universe for a few items:
1) Daily volume greater than 1,000,000 shares.
2) Close greater than open
3) Volume at 150% of 50 day MA of volume
4)Price greater than $10/share
5) Daily price momentum ( as measured by Andrew Cardwell’s CFGMO ) positive and the CFGMO also greater than the 3 period moving average of CFGMO.
6) For the purposes of this discussion, I added a screen which included the requirement that the 50-day simple moving average of price had to be greater than the 200-day simple moving average of price. Many people look at that for reassurance of an uptrend, but often times it will not quite pass the reliable standard. The reason for that is that as ALL moving averages LAG price. The only possible exception to that are special mathemtical formulas that are used to reduce it or shift it.
I did not look for a bullish engulfing candle this time, though I could have just to make it a little tougher to pass.
7) I did a fundamental screen for stocks that had a free after tax cash flow enterprise value greater than or equal to its current price.
After finding 60 of those names, I attempted to put as many as possible through the neural net screens to find potential C to D leg rally of the AB=CD pattern. I really only found one stock that got close, but it was not close enough, and that was VOTA (ING US Inc.). It is a financial services and asset management company. It had a ratio of free after tax cash flow enterprise value to price of 1.54. Based on its close of 42.56, it would have a ESTIMATED value of roughly 65.51 if it were to continue to meet its earnings expectations over the next 2 years. Remember, that is ONLY an ESTIMATE. Lots could happen in between now and 2 years from now.
Take a look at the daily chart of VOYA. It looks just like many of the index charts. It had a brutal sell-off rallied, waffled a bit to the downside, and then rallied last week. The neural nets DID NOT like the statistics provided by the model, but it did indicate the possibility of a buy point very near the close (something I am NOT advising, based on statistics, and one other reason). Why would I not trade this?
1) The statistics did not meet the bare minimum of a profit ratio of 1.6/1 and a win percentage of 60%. The model did produce 66% winners, but, as many models so, the losers lost more than winners, given the limited restriction to stop loss these models operate under.
2) Next weeks economic data is likely to affect interest rate sensitive stocks, of which this is one! On Tuesday, U.S. retail sales, U.S. Industrial Production, and U.S. Consumer Price Index will be announced. Jobless claims, housing starts, U.S. Current Accounts Balance, and Leading Economic Indicators will be out at the end of the week, along with a lot of U.S. Treasury auction data for bonds and notes. You can find that information daily right here.
If it were to work, it is possible that VOYA could break above 45.15 to fill the gap at 46.50 or possibly, if price symmetry is met, go to roughly the 49.30. Because you selected a stock that is relatively fairly valued or undervalued, it can have all the more of a technical reason to rally after a large sell-off. It is by NO MEANS guaranteed, but the odds of recovery are more in your favor if that happens.
Stock sectors that still see strength include some financial services, biotechnology, and even a few home builders (though that sector is interest-rate-sensitive too). If I do see other set-ups similar to this, assuming we can sustain a longer-than-one-week rally, I will do my best to post them here. Seasonality is beginning to favor the bulls again, but we will have to see what the U.S. Federal Reserve does to manage interest rates. One thing is for certain, the risk-free rate of money interest is NOT zero, and that very fact can shake the value foundations of riskier assets like stocks. We are going to have to get used to this going forward.
If you are patient and prudent with your value analysis, you can make some good buying decisions as the equity markets begin to find their footing again, in the landmine-laced field of investing in times of rising interest rates.
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