The number 7 is widely associated with good luck. It might not seem that way for Isle Of Capri (ISLE) shareholders, however. Three times in the last year, shares of ISLE have rallied to and, briefly, through $7 only to get knocked back down. Certainly, if you were a buyer at that level, you would not consider the purchase to have been fortuitous.
The first two failed rallies were characterized by long upper shadows on the weekly candlestick chart below. In this circumstance, those shadows are a symptom of a tired rally. The bulls had run out of energy, or there were many sellers eager to get a price above $7 for their shares, or both. The latest rally failed to even produce those short-lived upward spikes. The shares briefly edged above $7 and immediately turned back. It is interesting to note also that back in 2011 a bit of an air pocked developed between $7.00 and $7.75. It is not a surprise that the market would run into trouble in that region.
So far, prices have not completely collapsed, as they did after the first two pushes to $7 (though there is still plenty of time for that). And, generally, we are seeing high trading volume where we would want to see it. Maybe the third time’s a charm? If you don’t want to gamble, then wait for two consecutive weekly closes above $7 before taking a long position here.
Last August, we wrote about the extremes in market sentiment for two stocks at extreme ends of the alphabet – AAPL and ZNGA. Back then, it seemed that apple was going to take over the world, and perhaps a few neighboring planets as well. And we all were thrilled by that possibility. Meanwhile, Zynga could have rescued some puppies from a burning building and the blogosphere would have found something negative in it. Zynga was losing money, losing talent, plagiarizing game ideas, and they were closely linked to Facebook. Bad. Bad. Bad. Bad.
A classic contrarian play would have been to buy ZNGA and short AAPL. At the time, the ratio of Apple’s share price to Zynga’s was 218 to 1. You would have needed 218 shares of ZNGA to buy just one share of AAPL.
The trouble with guaging sentiment is that things can continue going to even greater extremes before finally correcting. That is what happened here. For another two months, the ratio kept tilting more and more in AAPL’s direction, reaching a peak of 286 to 1 (the chart above is smoothed slightly with a 3-day EMA). It took until January of this year for the ratio to decisively sink below where it was when we initially wrote about it.
And now? The ratio sits at 115 to 1. Apple’s shares have just made a 52-week low and some people are questioning whether the company has lost its mojo. At the same time, some are getting excited about Zynga becoming a player in online gaming. Does this mean it is time to reverse and go long AAPL while shorting ZNGA? We would not go that far. Remember, a year ago the AAPL:ZNGA ratio was a mere 40 to 1.
One of our favorite indicators has flashed a “Buy” signal.
Gold, along with most other precious metals, has been getting clobbered during the past couple of weeks. Not coincidentally, our indicator of the gold market has dipped down to a level typically seen just before a moderate to good rally in gold prices. This trade can play out over a period of just a few weeks if there is a sudden jolt higher in the price of gold. But the more profitable trades usually come from a slow bubbling up of prices over a handful of months.
The indicator – as well as the price of gold – can continue pushing even further into “oversold” territory before reaching its final bottom. That might be what happens this time around. The market is all atwitter about a “death cross” in gold. The death cross nonsense will only add to the panic in the market, providing even better prices for the more clever traders. Yesterday’s close at $1588 should prove to be an advantageous entry point, however.
And don’t forget about silver. Being more volatile, silver often is the better performer when gold is advancing.
The most prominent feature on the weekly chart of Starbucks is the large W pattern covering most of the second half of 2012. It should come as no surprise that the shares continued higher after completing the W. It is rare for prices to roll over in that situation, and it usually does not matter if the second bottom is higher or lower than the first.
But where does SBUX go from here? The answer is not so clear.
First, the negatives:
1) Looking at the trends in volume during the various up and down phases of the W pattern, it was not quite what we would hope to see. But it was ok.
2) The bottom panel of the chart compares the performance of SBUX to the S&P 500. For the last several months SBUX has been treading water. All of the rise in shares of Starbucks has been matched by increases in the overall market.
3) A couple days ago, we spotted an article on Motley Fool proclaiming that Starbucks Is Steaming Hot! The contrarian in us wants to run away from Starbucks as fast as we can, except that we would naturally be running toward yet another Starbucks.
Still, we are not terribly bearish on the shares. Bidders have been coming in to the market recently whenever the price dips toward $55. And of course the trend is your friend. Maybe the shares simply form a base here before another move higher.
Twice within the past week, and for entirely unrelated reasons, we happened to find items related to the usefulness of forecasting. First, we read an article from Advisor Perspectives written a year ago by Adam Butler and Mike Philbrick (Predicting Markets, or Marketing Predictions). This was a review of the somewhat well-known phenomenon of “gurus” gaining notoriety more for outlier predictions than for accuracy. Nobody calls City Hall just to report that the street lights are all working. And nobody gets invited on CNBC for making moderate, boring forecasts.
But the fun does not end there. It turns out that your favorite Wall Street analysts are really great at predicting what has already happened. The authors cited a series of charts which show that expert forecasts tend to mimic reality, but with a lag. The gem of a chart below was originally published in the book Behavioural Investing.
Then we stumbled upon some research by CXO Advisory, which does alot of research on the accuracy of predictions. CXO had done a detailed assessment of the Hulbert Stock Newsletter Sentiment Index (HSNSI). This index purportedly can be used as a contrary indicator: when the surveyed newsletter writers are most bearish it should be a good time to buy, and vice versa.
They concluded, with some caveats, that the correlation between newsletter sentiment and short-term stock market returns was weak at best. Moreover, they observed that “HSNSI is, in fact, more strongly related to past than future stock returns”. So investment newsletter opinions are often more about what already happened than what will happen next. It is also quite possible, as the study noted, that any predictive power in Hulbert’s index could be confused with a simple reversion to the mean.
[ Note: This is the second time in little more than a month that we have written negatively about Mark Hulbert. We have nothing against the man. Never met him personally. It really is just a coincidence.]
On Friday, Royal Dutch Shell (RDS/A) was downgraded by UBS based on “valuation and absence of near term momentum”. That downgrade was based on fundamental analysis, but the technical picture tells a different story.
A check of the chart suggests an ascending triangle stretching back two and a half years. In fact, you could make a case that the lower part of the triangle goes all the way back to the lows made in the dark days in Spring of 2009. The upper, flat, part of the triangle can be somewhat loosely defined as the $72-73 range. The shares reached this area in April 2011. After retreating, they tried again the following winter and yet again last September. Last week, the market once more probed this resistance zone before pulling back.
These psychological concepts of support and resistance never last forever, regardless of whether the trendline is supporting or repelling prices. But which one will break first for Royal Dutch Shell? Usually, an ascending triangle resolves itself by pushing through the upper bound of the triangle.
Besides, it is often best to be wary of valuation downgrades on Wall Street.