Posted by barkand on March 5, 2013 under Market sentiment, Relative strength | 
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.
Posted by barkand on December 30, 2012 under Relative strength |
There is a popular investment strategy based on annually buying the ten stocks in the Dow Jones Industrial Average with the highest dividend yields. These ten stocks are known as the “dogs of the Dow”. Actually, the term “popular” is probably wrong. I don’t know of anyone who really uses this method. But it is well known.
Anyway, the basic idea behind it is that these ten stocks are relatively unloved by the market. Their dividend yield is high because their stock price is low. And they all are, theoretically speaking, large and stable companies or they would not be included in the DJIA. Like nearly all strategies of this kind, there are times when it works well, and times when it doesn’t. However, that is not what we are interested in today.
Hewlett-Packard (HPQ) will be joining the dog club for 2013. That’s what happens when your share price sinks by about 70% over a period of three years. The somewhat naked chart below plots Hewlett-Packard’s share price versus the Dow during that time period. Yep, it has been that bad for HPQ. But should you buy it now, close your eyes, and then sell at the end of the year?
Usually, after a long period of underperformance it takes some time to get a big move in the opposite direction under way. In HPQ’s case, it first needs to simply break out of its downtrend range relative to the Dow. It does not have to immediately begin outperforming the Dow, or even match it. Just underperforming less would do the trick.. It may start to do that in the near future. More importantly, when – or if – HPQ comes back to life, the first meaningful rally will almost certainly be met with skepticism and eager sellers. There will be a second chance to get in near, or even below current prices. Even if you pay a little more later, you will have a higher probability of success.
Posted by barkand on December 5, 2012 under Commodities, Relative strength |
Even among those who are bullish on gold, there is often a debate about whether it is better to buy the metal itself or to buy shares of the miners who dig it out of the ground. Or if there are times when one is better than the other. Today we will provide another way of looking at it by comparing the SPDR Gold Trust ETF, better known by its ticker symbol GLD, and the Direxion Gold Miners bullish ETF with symbol NUGT.
What we are doing on the chart below is to divide the value of NUGT by the value of GLD. (The two ETFs are also plotted individually below the relative strength line.) When the resulting line is rising it means the gold miners ETF is outperforming the metal, and when the line is falling it is underperforming. The gold miners ETF is triple leveraged while the gold bullion ETF is unleveraged. But that is not important for this exercise. What we are interested in right now is the interplay between the relative strength line and the lower Bollinger band. And because the leveraging of NUGT is fixed at 3X, it is possible to compare the number of standard deviations from the mean at different points in (recent) time.
Specifically, what we see here is the classic pattern of the thing being measured making a series of lows below or near the lower band and then another low point comfortably within the bands. It is premature to say for sure that a turning point in NUGT versus GLD is at hand. But if it is going to happen, this is a likely place for it. One way to play it is to take a small position now and then add to it if/when the ratio goes above its 20-day average for two consecutive days.
Posted by barkand on November 27, 2012 under Relative strength, Volume |
The recent rebound in the equity markets over the last week or so has possibly given holders of some weak names a false sense of security. Take, for example, JAKKS Pacific (JAKK). The shares are up 5 days in a row and counting. But a closer look reveals just how feeble the rally in JAKK shares has been.
Consider the following on the chart below:
1) The 5-day rally has not even brought prices up to the level of 6 days ago.
2) Low volume during the last week tells us there is little interest from new buyers.
3) Relative strength versus the S&P 500 (shown in the bottom panel) shows that JAKK has actually continued to get weaker compared to the broader market.
In our opinion, JAKK will be lucky just to tag its 20-day average. And even if it does, it may be because the average is coming down to meet prices and not the other way around. We expect lower prices ahead.
Posted by barkand on September 28, 2012 under Relative strength, Support / Resistance, Volume |
Shares of PNC Financial Services, the mid-sized bank and asset management firm, are up 50% from the lows reached just over a year ago. We will give you a moment to peruse the chart and then we will give you four reasons why we are technically bearish on PNC.
1) The shares failed earlier this month to overcome resistance at around $67. This was the third time the bulls retreated after reaching these heights.
2) For whatever reason, bullish phases in PNC tend to commence on a 10-month cycle. We are still a good 5 months or so away from the start of the next one.
3) This summer’s rally up to long-term resistance was achieved with low volume. It seems that even the bulls did not really believe they could break through $67.
4) Comparing the relative strength of PNC to BKX, an index of banking shares, shows that PNC has actually been underperforming its peers since this spring.
Long-term, it is very possible that PNC will make a run to new highs. But first the bulls need to regroup and perhaps they will try again in early 2013. Until then, we expect shares of PNC to be “dead money”. Use your cash for other opportunities.
Posted by barkand on March 21, 2012 under Relative strength |
The chart below is an interesting Rorschach test for technical analysts. It plots the relative strength of the Russell 2000 compared to the Russell 1000 and dates back to the market bottom in March 2009. When the line is moving up, the Russell 2000 – which is to say small cap stocks – is outperforming. Converseley, when the line is heading down, small cap stocks are lagging.
What do you see here? We’ll suggest 3 possibilities.
1) First, of course, is the general uptrend coming out of the 2009 meltdown. As time has passed, the market has slowly become more comfortable with getting into the “more risky” small cap stocks. Our relative strength line is dipping down towards a trendline, so perhaps a burst in the 2000 is coming.
2) You might also see a series of three distinct pulses higher, followed by a lower high. This would clearly be a negative for small-caps, especially if the ratio makes a lower low here.
3) And then there is that rather complex top that developed on that third, and highest, pulse. In fact, is that a head-and-shoulders pattern? If so, the neckline was broken in late July of last year. This would also be negative for small-caps, though it possible most of the damage has already been done.
