Friday, February 29, 2008

Time to Accumulate and Buy SDS (Double Short S&P 500) after Breakout for a Trade?

If you look at the chart of SDS above, you might see a stock that is worth buying on the long side (profit when the stock goes up). SDS appears to have had strong resistance at around $59 and SDS has tested the resistance at least three times within the last year. Then early January 2008, SDS appears to have broken out.

As of February 28, 2008, SDS is pulling back towards the 50 day moving average. Some traders, and institutions such as Investors Business Daily, suggest to buy breakouts or if not at the breakout, to buy a stock after a breakout as it pulls back to the 50 day moving average (for a trade).

This appears to be the case now as SDS has broken out and has pulled back to the 50 day moving average with current resistance of $72.55.

Now what if you knew that SDS is really the Double Short S&P 500 ETF. On a given day, for every 1 percent that the S&P 500 index goes down, SDS goes up approximately 2 percent.

This means that there might be more downside ahead in the stock market (more upside in SDS), at least for a trade.

Today's Chart

A few days ago, Dan Fitzpatrick of appeared on CNBC's Fast Money show to show the chart of SDS. He made a point that many investors are more used to buying on the long side. So when we show the chart of SDS, the stock chart appears to be a solid buy.

Tuesday, February 26, 2008

Does your Discretionary Portfolio have Too Much Risk? Consider Alternatives

If you have established your Discretionary Portfolio (money not for retirement and money you can afford to lose), congratulations. You may have heard that over the long term, stocks and stock funds can return around 10% annually with risk and volatility.

According to research from Charles Schwab, the longer you hold stocks (based on the S&P 500 returns 1926 to 2005), the lower the volatility of your portfolio performance.

However, are you taking much risk in your (Taxable) Discretionary Portfolio?

  1. Have you established an emergency 3 to 6 month fund in safe money market funds? If you haven't, consider selling some assets in your Discretionary Portfolio to build up your 3 to 6 month emergency fund.
  2. Do you have high rate consumer debt such as car loans or credit cards? If you have credit card debt at a rate of 12%, for example, move money from your discretionary portfolio to pay off your consumer debt. In the recent example, by paying off your consumer debt, you'd be making 12% return risk-free!
  3. Do you need the money for a large purchase (for example, down payment on a home or tuition for your children) within five years? Consider moving the money to more conservative investments. Based on Schwab's Research above, are you willing to lose 12% to 27% per year before you cash out your discretionary portfolio? If you can't afford that volatility, consider moving money from your discretionary portfolio to safer investments such as money market funds and high yielding online savings accounts.
  4. Many people are speculating when the housing crisis will be over. If you do not own a home, and you think the housing bottom may be here within three to five years, then consider moving money from your discretionary portfolio to safer investments to protect your down payment.
  5. Are you sufficiently diversified?

Tuesday, February 19, 2008

The Three Year S&P 500 US Stock Market Uptrend is Over

The Three Year (or more) S&P 500 US Stock Market Uptrend is Over.

In the chart above, we overlay a RAFF Regression Channel (the three parallel uptrending blue lines) over the S&P 500 from 2005 to the present. The Raff Regression Channel shows the general trading range of the S&P 500 and it shows a clear three year uptrend. However, it is clear that the S&P 500 has gone below the three year uptrending Raff Regression Channel showing that the uptrend is over.

Other Negatives:
  1. The 200 Day Moving Average has gone down below the 50 Day Moving Average (The "Death Cross").
  2. The S&P 500 is below both the 50 day and 200 day moving average.
  3. The S&P 500 has gone below a three year trend line (the red line in the chart above)

Typically, what was once support now becomes resistance on the upside.

Re-Test 1270 Lows on S&P 500

Because V-shaped recoveries are not common, we continue to expect the S&P 500 to re-test the lows of 1270. The S&P 500 could bounce and possibly re-test a third time. Or, the S&P 500 could continue to breakdown.

We need time to determine whether we will have a sideways, but volatile trading range bound market, or whether we could establish a new downward trend or an uptrend after a lengthy bottoming process with enough successful re-tests.

Today's Chart of the S&P 500 with the Information Above

Saturday, February 16, 2008

California Home Prices Have Decreased, But Remain Unaffordable to Many

Home prices in California have Decreased, but remain unaffordable to many.

Using data from a California Budget Project Report, here is some affordability information on selected California Counties:

CountyMedian-Priced Home (Aug 2007)Income Needed to Purchase Median Priced Home
Median Household Income (2006)
Income Needed as a Percentage of Median Income
Los Angeles$549,000$133,605$51,315260.4%
Marin$899,500$218,902$81,761 267.7%
Monterey $575,000 $139,932 $55,045 254.2%
Orange $625,000 $152,100 $70,232 216.6%
Sacramento $312,250 $75,989 $53,930 140.9%
San Diego $470,000 $114,379 $59,591191.9%
San Francisco $809,000 $196,878 $65,497 300.6%
Santa Barbara $530,000 $128,981 $53,477 241.2%
Santa Clara $700,000 $170,352 $80,838 210.7%

Affordability assumes a 5 percent down payment on a 30-year conventional fixed-rate mortgage with a 6.63% interest rate.

The affordability of a home in California requires almost 2 times the median household income. So how did most Californians buy a home during this time?

Lenders loosened underwriting standards and promoted relatively risky loans including Adjustable rate mortages with short term promotional interest rates, non traditional mortgages primarily interest-only and "payment-option" loans and Subprime Loans.

In addition other factors helped Californians purchase homes during the Housing Boom including mortgage interest rates declining significantly, Californians moving to less expensive areas, Californians buying smaller homes than have previous homebuyers, and the state's welathiest residents experiencing substantial income gains.

Percent of Income on Housing

The Federal Government recommends that families spend no more than 30 percent of their incomes on housing. However, in California, 43.5% of Households are spending more than 30% of their incomes on Housing (compared to 29.1% for the Rest of the US). 18.8% of California Households say they spend 50% or more of their incomes on housing (compared to 10.9% for the Rest of US).

Mortgage Delinquencies and Foreclosures

Because of the subprime crisis and slowing economy, the mortgage delinquencies and foreclosures have increased substantially in california from 2005 to 2007.

Notices of Default
  1. 2005: 54,953
  2. 2006: 104,977
  3. 2007: 254,824

  1. 2005: 2,920
  2. 2006: 12,672
  3. 2007: 84,326

California Counties that have the highest foreclosure percentages from 3rd Quarter 2006 to 3rd Quarter 2007
  1. Merced: 1310%
  2. Monterey: 1230%
  3. San Benito: 1140%
  4. Madera: 1122%
  5. Kern: 1004%

California Counties that have the lowest foreclosure percentages from 3rd Quarter 2006 to 3rd Quarter 2007
  1. San Francisco: 200%
  2. San Luis Obispo: 257%
  3. Kings: 260%
  4. Santa Cruz: 317%
  5. San mateo: 319%
  6. San Diego: 376%
  7. Sutter: 383%

Wednesday, February 13, 2008

Bottom Indicator on S&P 500: Bull-Bear Ratio and Bullish Percentage

Bull-Bear Ratio

On the financial website, Jim Cramer mentions he watches two technical indicators. One technical indicator that is not mentioned that often is the Bull-Bear Ratio.

According to, "The bull-bear ratio is a weekly indicator that gets info from Wall Street insiders. Ratio analysts pull financial advisers to see what they're telling their clients. Bull if advisers think the market's on an upswing, bear if it's on a downturn."

Typically, there are two numbers. The Bull Percentage and the Bear Percentage. Some people like to use the Bull-Bear Ratio by taking the Bull Percentage (such as 41.6%) and the Bear Percentage (33.7%) to come up with a ratio such as 1.23.

The idea behind the Bull-Bear Ratio is that as the Bull Percentage (or Bull-Bear Ratio) goes down to a very low level, this means that the Bears (those who think the market will go down) outnumber the Bulls (those who think the market will go up). Too many bears means that a lot of money is already on the sideline, and the contrarian says that the money will go back in the market. So the Bull-Bear Ratio is used as a contrarian indicator.

Jim Cramer says the Bull Percentage is now at 36%, which is a buy signal in his book.

Finding Bull-Bear Ratio on the Web

Investors Intelligence publishes the data, and here is some recent information from Market Harmonics.

Bullish Percentage on S&P 500

Besides the Bull-Bear Ratio, alternatively, one could use the Bullish Percentage on the S&P 500 ($BPSPX) provided by

In the chart above, when the Bullish Percentage of the S&P 500 goes below 50%, start looking for an intermediate bottom. Notice, that the $BPSPX can go down much more below 50%. Today, the $BHSPX is at a low 32.80% (look at the top window of the chart above, right hand side). Definition of Bullish Percentage

According to, "The Bullish Percent Index (BPI) is a popular market breadth indicator that is calculated by dividing the number of stocks in a given group (an exchange, an industry, etc.) that are currently trading with Point and Figure buy signals, by the total number of stocks in that group. Bullish Percent levels that are above 70% are considered overbought, whereas levels below 30% are considered oversold. Strong buy signals occur when the Bullish Percent Index falls below 30% and then reverses up by at least 6%. Conversely, promising sell signals occur when it goes above 70%, and then reverses down by at least 6%. "

Other Bottom Indicators

The Bullish Percentage of the S&P 500 is just one of a collection of bottom indicators. Other bottom indicators include:
  1. Stocks Above 50 and 200 Day Moving Average
  2. Put-Call Ratio
  3. New High-Low Ratio
  4. Ratio of stocks above 200 day moving average to stocks above 50 day moving average.

There is also more information here on overbought, oversold, including the other technical indicator that Jim Cramer mentions, the S&P Oscillator.

Today's Chart with Information Above

Tuesday, February 12, 2008

The Clear Winner is Blu-Ray, not HD-DVD. The Industry has spoken.

For sometime now, there have been two competing High Definition DVD formats:
  1. HD-DVD (backed by companies such as Toshiba and Microsoft (MSFT))
  2. Blu-Ray (backed by companies such as Sony (SNE))

Studios, electronic manufacturers and other companies put their weight behind each format. Consumers were slow to adopt either format because of the format wars.

However, right now, we are starting to see a clear winner.
  1. Best Buy is backing Blu-Ray as the High Definition DVD format
  2. Blockbuster (BBI) has chosen Blu-Ray.
  3. Netflix (NFLX) will stop supporting HD-DVD in favor of Blu-Ray.

Here's part of an email Netflix sent me:

You're receiving this email because you have asked to receive high-definition movies in the HD DVD format. As you may have heard, most of the major movie studios have recently decided to release their high-definition movies exclusively in the Blu-ray format. In order to provide the best selection of high-definition titles for our members, we have decided to go exclusively with Blu-ray as well.

While we will continue to make our current selection of HD DVD titles available to you for the next several months, we will not be adding additional HD DVD titles or reordering replacements.

Toward the end of February, HD DVDs in your Saved Queue will automatically be changed to standard definition DVDs. Then toward the end of this year, all HD DVDs in your Queue will be changed to standard definition DVDs. Don't worry, we will contact you before this happens.


We're sorry for any inconvenience. If you have any questions or need further assistance, please call us at 1 (888) 638-3549.

-The Netflix Team

With the winner of the High Definition DVD wars all but chosen, now consumers can move forward and adopt Blu-Ray DVD as the standard. Those consumers who have bought High Definition Televisions can now purchase Blu-Ray DVD players (and Sony's Playstation 3). Consumers who have held back purchasing camcorders waiting for the next generation of High Definition DVDs can now start purchasing Blu-Ray based Camcorders. Consumers can start purchasing Blu-Ray DVDs in larger numbers.

Congratulations to Sony (SNE) who has finally won a major format war, many decades after losing out on the Sony Betamax vs. VHS format war.

Sunday, February 10, 2008

Historical S&P 500 Annual Return and Trading Range 1950-2007 and Volatility Ahead

From 1950 to 2007, the S&P 500 (500 of the Largest and most influential US companies) returned 9.2% annually (excluding dividends).

However, the 9.2% gain was not achieved by the S&P 500 going up in a straight line.

On any given year, from 1950 to 2007, the S&P 500 had an annual average trading range of 24.26%. This means that on average, from a year to year basis, the range from the lowest to the highest S&P 500 index value has a range of 24.26%.

The least volatile year during this period was around 10%. The most volatile, around 49%.

The Future

Over the last four years, the annual trading range was 14.1% (2004), 11.75% (2005), 16.75% (2006), and 14.97% (2007). For the last four years, the volatility has been very much under average.

Over the next several years, we expect this volatility to increase after four years of below average volatility.

S&P 500 Historical Annual Returns and Annual Trading Range

Research by:

Year S&P 500 Start Return Annual Low Annual High Trading Range
1950 16.66 22.63% 0.00% 22.63% 22.63%
1951 20.77 14.44% -0.39% 14.83% 15.21%
1952 23.8 11.64% -2.98% 11.72% 14.71%
1953 26.54 -6.52% -14.43% 0.45% 14.88%
1954 24.95 44.21% -0.60% 44.21% 44.81%
1955 36.75 23.76% -5.90% 26.29% 32.19%
1956 45.16 3.34% -4.54% 9.92% 14.46%
1957 46.2 -13.44% -15.63% 6.34% 21.97%
1958 39.99 38.06% 0.00% 38.06% 38.06%
1959 55.44 8.03% -3.35% 9.51% 12.86%
1960 59.91 -3.00% -12.87% 0.80% 13.67%
1961 57.57 24.28% 0.00% 26.18% 26.18%
1962 70.96 -11.08% -27.64% 1.41% 29.04%
1963 62.69 19.67% -0.59% 20.21% 20.80%
1964 75.43 12.36% -0.81% 15.07% 15.88%
1965 84.23 9.74% -4.16% 10.77% 14.92%
1966 92.18 -12.86% -21.59% 2.76% 24.34%
1967 80.38 20.02% -1.18% 22.31% 23.49%
1968 96.11 <8.06% -9.76% 13.80% 23.56%
1969 103.93 -11.42% -15.29% 2.70% 17.99%
1970 93 -0.91% -26.23% 1.34% 27.57%
1971 91.1512.00% -1.99% 15.85% 17.84%
1972 101.67 16.11% -0.79% 17.82% 18.61%
1973 119.1 -18.09% -23.55% 2.22% 25.77%
1974 97.68 -29.81% -37.59% 3.45% 41.04%
1975 70.23 28.42% -2.25% 37.52% 39.77%
1976 90.9 18.22% -1.20% 19.60% 20.80%
1977 107 -11.12% -15.88% 0.91% 16.79%
1978 93.82 2.44% -7.86% 15.17% 23.02%
1979 96.73 11.59% -1.56% 15.95% 17.51%
1980 105.76 28.37% -10.90% 34.23% 45.13%
1981 136.34 -10.11% -19.18% 2.92% 22.10%
1982 122.74 14.58% -16.73% 17.61% 34.35%
1983 138.34 19.22% -0.19% 24.80% 24.99%
1984 164.04 1.95% -10.23% 3.88% 14.11%
1985 165.37 27.76% -1.22% 28.85% 30.07%
1986 209.59 15.54% -3.34% 21.60% 24.94%
1987 246.45 0.26% -12.17% 37.10% 49.27%
1988 255.94 8.51% -6.16% 10.94% 17.11%
1989 275.31 28.36% -0.54% 30.92% 31.47%
1990 359.69 -8.19% -18.12% 2.81% 20.93%
1991 326.45 27.77% -5.24% 28.14% 33.38%
1992 417.26 4.42% -5.96% 6.08% 12.04%
1993 435.38 7.14% -1.95% 8.25% 10.20%
1994 465.44 -0.92% -6.36% 3.74% 10.10%
1995 459.11 34.16% -0.42% 35.67% 36.09%
1996 620.73 19.33% -3.78% 22.78% 26.55%
1997 737.01 31.67% -1.01% 33.82% 34.83%
1998 975.04 26.07% -6.38% 27.68% 34.06%
1999 1228.1 19.64% -1.84% 19.95% 21.79%
2000 1455.22 -9.27% -13.82% 6.71% 20.53%
2001 1283.27 -10.53% -26.38% 7.80% 34.18%
2002 1154.67 -23.80% -33.43% 1.93% 35.36%
2003 909.03 22.32% -13.22% 22.39% 35.60%
2004 1108.48 9.33% -4.31% 9.82% 14.13%
2005 1188.05 5.07% -4.37% 7.39% 11.75%
2006 1268.8 11.78% -3.90% 12.85% 16.75%
2007 1416.6 3.65% -3.71% 11.26% 14.97%

Average S&P 500 Annual Return (1950-2007) (excluding dividends): 9.22%

Average Annual Trading Range 24.26%
Trading Range Low 10.10%
Trading Range High 49.27%

S&P 500 PE Ratio, Dividend Yield, Total Annual Return (includes dividends)

Wednesday, February 6, 2008

We will have a Volatile Meandering Trading Range Stock Market in 2008

Are you experiencing a wild roller coaster ride in the US Stock Market in 2008? It is not over yet.

Near the end of June 2008, the S&P 500 ($SPX) formed an intermediate bottom of around 1270. As expected (this blog wrote about the re-tracement), the S&P 500 had a 38.2% to 50% Fibonacci retracement rally to around 1400. The re-test of 1270 is currently expected.

At that point, the S&P 500 could pass or fail. If it fails, we could establish new 52 week lows and go down to 1220. Or, the S&P 500 could pass and bounce off support of 1270. Potentially, during a bottoming process, the S&P 500 could re-test 1270 several times.

Depending on how things go, the S&P 500 could break resistance at about 1400 to 1424 and form a new higher trading range.

Whether up or down, the market in 2008 is expected to be a meandering, trading range bound market, with a possibility of even more breakdowns below 1270 on the S&P 500.

Today's Chart

Tuesday, February 5, 2008

Do Not Marry Your Stock, Control your Losses, Lessons from SIRF, GPS Chip Maker

Today, GPS Chip Maker SIRF Technologies (SIRF) dropped over 50% in value. They reported bad earnings, and bad guidance. SIRF says there is demand for GPS chips, but pricing has gone down over the last year, putting strain on SIRF.

There is weakness in the Personal Navigation Device Market, but in the future, GPS chips in the wireless handsets are going to be a big growth area.

Despite this long term bullishness, investors should still be careful about individual cases in the GPS area, and investors still have to control their losses. SIRF and Garmin (GRMN), another company in the Global Positioning arena, have been going down big percentages in the weeks prior, and if an investor had the discipline to sell, that investor would have saved themselves from much larger losses.

Even with long term bullish trends, you still have to control losses in individual stock positions!

Sunday, February 3, 2008

Historical S&P 500 PE Ratio and Dividend Yield 1960 to 2007

Interpreting the Chart

The Chart above puts three different metrics from 1960 to 2007:
  1. The S&P 500 (SPX) value.
  2. The PE Ratio of the S&P 500 multiplied by 100. (2007's PE Ratio x 100 in the chart above is 1677.8 which translates to a PE Ratio of 16.8)
  3. The Dividend Yield of the S&P 500 multiplied by 100. (2007's Dividend Yield x 100 in the chart above is 189, or 1.89%)


  1. According to wikipedia, the average US equity PE Ratio from 1900 to 2005 is 14 (or 16 depending on how you calculate it). The 2007 PE Ratio of 16.8 is within range of the historical norm.
  2. The Bear Market from 1972 to 1974 caused the S&P 500 to go down from around 118 to 68.5 for a decrease of around 42%. The S&P 500 during that time had its PE ratio go from 19 to 7 and the Dividend Yield increase from 2.7% to 5.4% (the dividend yield high between 1960 and 2007)
  3. During the Bubble ending around 2001, the S&P 500 PE Ratio reached a very high 32.6 in 1999. The Dividend Yield of the S&P 500 reached a low of 1.14% in 1999.
  4. The ensuing Bear Market after the Bubble corrected the stock market and the S&P 500 PE Ratio to a more reasonable PE of 16.8 today.
  5. Since 1974, the Dividend Yield has been decreasing steadily to 2007's Dividend Yield of 1.89% (hitting a bottom of around 1.14% in 1999).
  6. There appears to be an inverse relationship between Dividend Yield and PE Ratio.


Research done by and some data taken from Aswath Damoradaran at the New York Stern School of Business.

Friday, February 1, 2008

High Yield Savings Account Update as Fed Cuts Rates

As the Fed cuts rates aggressively, the yields of no (or low) minimum online savings accounts have gone down.

Here are a few sample high yield online savings accounts with no or very few fees and with no or low minimums.

  1. Amboy Direct: APY = 4.25%

  2. E*Trade Bank Complete Savings Account: APY = 4.10%

  3. FNBO Direct: APY = 3.85%

  4. Emigrant Direct: APY = 3.60%

  5. HSBC Direct: APY = 3.55%

  6. ING Direct: APY = 3.40%

Among the things to consider in choosing a high yield savings account:

  1. The Yield.
  2. The Minimum Amount Needed to Open.
  3. What are the fees (if any)
  4. How easy is it to use?
  5. Is there a minimum amount you need to keep in the account to avoid a fee?
  6. Does it have an ATM or Debit Card Feature?
  7. Are there any fees when using the ATM?
  8. Are there any fees when using a competitors ATM?
  9. Is it a reputable bank?
  10. Are they FDIC insured?
  11. Is there a check-writing service?
  12. How many times can you withdraw or transfer out of per month?
  13. How easy is it to open the account?
  14. Do you need to access the accounts online at all hours of the day? (Some sites are down for maintainance longer than others)
  15. How good is customer support?

All the accounts mentioned above generally fit in the no fees, low minimum, FDIC insured category.

If you aren't getting those high rates, consider choosing one of the accounts above.