Stock Market Concern: S&P 500 at risk?

Currently, the S&P 500 (using index $SPX) has traded the last few days underneath the 50 day moving average, which is bearish. However, it has not gone below support of around 1488. Just by looking at these two levels, the S&P 500 could trade between resistance and support.

However, there are some things to be concerned about.

• As the S&P 500 hit both recent tops, the number of S&P 500 stocks that are above their 50 day moving average has decreased. Currently, only 40% of the stocks are above the 50 day moving average. All of these are not good signs. (In a later post, we can discuss in more detail using the $SPXA50R as a contrarian indicator. If the $SPXA50R goes too low, that might be a bottom). In the chart above, the $SPXA50R is listed in upper window.
  
• Williams ADX is a technical indicator to evaluate the strength of the current trend. In the chart above, the Williams ADX is in the lower window. The Black ADX line says whether the stock is trending or not. Readings below 20 mean there is a weak trend, and ADX above 40 is a strong trend. In the case above, the ADX line is rising up from under 20 and is moving above 20, suggesting a strengthening trend.
  
• Using William's ADX, when the Red -DI line goes above the Green +DI line, that is generally a sell signal. Of course, this line should not be used by itself. There are many systems which use the +DI/-DI crossover, and many try to keep the trader from getting whipsawed in and out of an index or stock. The crossover often is used in conjunction with the ADX line. In the chart above, we do see the -DI line going above the +DI line, and the ADX line looks to be rising to the 20 level, which suggests a bearish trend may be strengthening.
  

In conclusion, the S&P 500 is stuck between the 1488 level and resistance is the 50 day moving average. Trading underneath the 50 day moving average for several days is negative in itself. While the $SPX has not breached the resistance level with good volume, there are still different concerns with the market based on the negative divergence using Stocks Over the 50 Day Moving average, and Williams ADX.

If the levels don't hold, then maybe the predicted ABC correction may still occur.

Current Chart Update

To look at the chart on a day to day basis, use this link.

Drink and Soda Stocks By the Numbers

In this article, we look at different Drink and Soda Stocks and look purely at the raw numbers. (Data taken from Yahoo Finance on Thursday, June 21, 2007):

Symbol	Stock Name	MyPEG	Forward PE	5 yr growth	Yield
HANS	Hansen Natural	0.77	22.80	28.60%	0%
CEDC	Central European Distribution	0.96	18.10	17.50%	0%
STZ	Constellation Brands	1.25	14.48	11.50%	0%
JSDA	Jones Soda	1.27	46.88	34.00%	0%
DEO	Diageo	1.30	17.22	10.50%	2.30
PEP	Pepsi	1.32	17.85	11.00%	2.30
BUD	Anheuser-Busch	1.52	17.13	9.00%	2.20%
KO	Coca Cola	1.58	18.15	8.50%	2.60%

In order to understand the chart, we have to understand the different elements.

MyPEG

MyPEG is my own variation of the PEG Ratio. A MyPEG of less than one means the stock is cheap relative to its growth. A MyPEG of greater than two means the stock is very expensive relative to its growth. More info on MyPEG in this link.

Forward PE

Forward PE is the Price divided by Forward estimated earnings. When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred.

5 Yr Growth

5 Yr Growth is an estimate by the analysts. As I discussed earlier, the higher the better, though some people such as the legendary Peter Lynch have suggested that buying fast stocks, but not too fast, might be a good idea (from Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market).

Yield

The higher yield, the better. If you have a high yield, high growth, and low PE, that's a good combination.

Symbol	Stock Name	EV/EBITDA	%Short	%Inst. Own
HANS	Hansen Natural	23.89	14.70%	60.70%
CEDC	Central European Distribution	16.51	10.20%	62.30%
STZ	Constellation Brands	9.81	11.40%	83.90%
JSDA	Jones Soda	105.68	26.30%	27.30%
DEO	Diageo	13.42	0%	18.70%
PEP	Pepsi	12.59	0.60%	68.50%
BUD	Anheuser-Busch	11.17	0.90%	63.00%
KO	Coca Cola	15.35	1.30%	64.50%

EV/EBITDA

Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization. It is another measure of valuation. The lower the Better. A value of 8 or less is very good.

% Short

The higher the percentage, the higher number of people who believe the stock should go down. However, the higher the percentage, the better for those who go long because if good news is to hit a stock, not only does the price go up, but all those people who are shorting have to "cover" (Buy a stock to fulfill their loan obligation to the broker) their short position further fueling the gains. This is often called a "short squeeze".

% Institutional Ownership

People have different theories on this. Some people, like Peter Lynch, prefer a stock without that much institutional ownership. Because once the big mutual funds discover the stock, this could propel the stock to multibagger (make many times your money on your original investment) heights. However, some prefer a higher institutional ownership because that means that mutual funds and other institutional investors are already buying the stock (and may have them in their approved to buy list), and when more money comes in, they may add to their position.

Conclusion

Based on all this and based on just the numbers, Hansen Natural (HANS) and Central European Distribution Corp (CEDC) seem to have the best Growth at a Reasonable Price ratings.

Note that there are other companies that were not looked at including AmBev (ABV), a South American Drink Company, and National Beverage Corp (FIZZ), because there was some missing information. They could still be very good investments, however.

Improved Version of the PEG Ratio

In a previous article, we used the PEG ratio to evaluate a stock. While the PEG ratio is a good method, I've decided to create my own variation of the PEG ratio which I'll call MyPEG.

The Formula is this:

MyPEG = ((Current Price - Cash Per Share) / Forward Earnings) /
(Yield + 5 Yr Estimated Growth Rate).

What this does is take into consideration the dividend yield of a stock. It also takes into consideration how much cash is in the stock. As legendary investor Peter Lynch said, by taking cash per share into the equation, we might be able to find great bargains out there.

We will still use MyPEG the same way as PEG. A MyPEG < 1 means the stock is cheap, while a MyPEG > 2 is very expensive. We can compare stocks using MyPEG, but it's better to compare stocks in the same industry.

How to find the numbers through Finance.Yahoo.com

Go to Finance.yahoo.com and enter your stock symbol. You get a nice summary page with basic information and news. A very useful page is the Key Statistics Tab.

You can find this information there:

1. Market Cap: Top Part of Page
   
2. Trailing PE: Top Part of Page
   
3. Forward PE: Top Part of Page
   
4. Price: Very Top of Page
   
5. Cash per Share: Bottom Left side under Balance Sheet.
   
6. Yield: Lower right corner under Dividends and Splits
   

Another useful tab is the Analysts Estimates Tab.

You can find this information there:

1. Trailing 12 months Earnings: Top part of Page, look at Year Ago EPS under Current Year (Dec-07).
   
2. Current Year Earnings: Top part of Page, look at Avg. Estimate under Current Year (Dec-07).
   
3. Future Earnings: Top part of Page, look at next Year, Avg. Estimate
   

So to calculate the MyPEG of General Electric (GE):

MyPEG = ((Current Price - Cash Per Share) / Forward Earnings) /
(Yield + 5 Yr Estimated Growth Rate).

1. Current Price (June 22, 2007): 38.24
   
2. Cash Per Share: 1.872
   
3. Forward Earnings: 2.49
   
4. Forward Yield: 2.90%
   
5. 5 Yr. Estimated Growth: 10%
   

MyPEG = ((38.24 - 1.872) / 2.49) / (2.9 + 10)
= 1.13

Note regarding Banks and Brokers

You shouldn't use items like Cash Per Share in companies such as Banks or Brokers. It won't be accurate. Just see the Cash Per Share of Goldman Sachs (GS): 1,769. Not a valid number to use in the MyPEG formula.

Credits

I came up with adding Yield to the 5 Yr. Growth Rate by myself. I was inspired to use the cash per share method by reading Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market, an excellent book. I definitely recommend it. (Other Book Recommendations in the link or to the section to the right).

I combined both methods and created the MyPEG.

Note on PEG and Growth Rates

In other posts such as this analysis of Computer and Video Game Stocks, I often put in this section regarding PEG and Growth Rates because Growth Rates are estimates and may not be as reliable:

"When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred."

Evaluating stock using the PEG Ratio.

P/E Ratios

In evaluating stocks, many people look at the P/E multiple, or the Price to Earnings multiple. This is found by dividing the stock's current price by a companies trailing or expected future earnings.

For example, if we look at the stock of General Electric (GE) as of June 22, 2007, we see the trailing P/E ratio is 18.95, and the forward or estimated P/E ratio is 15.36.

Difference between Trailing and Forward PE

You might ask, what is the difference between the Trailing and Forward PE ratio? The trailing PE ratio refers to the price divided by the previous twelve months earnings. Those earnings were already reported, so the trailing PE can't be debated. Trailing PE is a way to see how the company did in the last twelve months.

Now the Forward PE ratio is calculated by dividing the current stock price by the estimated 12 months future earnings. There are analysts out there who predict how much a company will make in the next twelve months. Using the Forward PE is a way of seeing how a company will do in the future.

I personally prefer looking at Forward PE because I prefer looking at where a company will be going more than where a company's been in the last 12 months.

Is it better to buy a stock with a low PE or high PE?

Looking at the PE multiple by itself, it is hard to judge whether it is better to buy the stock. A company with a high PE might be justified in having a high PE because it is growing at a very fast rate. A company with a low PE might be priced correctly because it is growing at a very slow rate. However, what if a company has a high PE but the company is growing at a very slow rate? Or what if a company has a low PE but the company is growing at a very fast rate? With the former, you would say that the company is greatly overvalued. With the latter, you would say that this is a bargain!

PEG Ratio

Based on this, we can't look at the PE ratio to judge a company. We want to buy a company that is reasonably priced with respect to its growth rate. So that's where we come up with the PEG ratio, or the PE ratio divided by the companies growth rate.

Using GE again, we find, that GE has a forward PE of 15.36, and the 5 yr growth rate of 10%. So that means the PEG of GE is: 15.36/10 = 1.536.

So how do we use this number?

In general, if the PEG of a company is less than 1, the company is considered a very good value. If the company has a PEG greater than two, the stock is considered very expensive and it is best that it be avoided. With GE above having a PEG of 1.53, it is reasonable, but not extremely cheap.

Comparing PEGs

We could compare stocks and compare PEGs and choose the lower ones, but we could do better. It's better to compare the PEG of a company with its competitors or its industry because each sector might have a different range of good PEGs. You can use the PEG to choose the best stock in a sector.

Finding the information through Yahoo Finance

Now, you might want to know how to find the information in Yahoo finance. Go to finance.yahoo.com and enter your stock. You can see a nice summary page and find news stories about the stock, a companies market cap, and the Trailing PE ratio.

To find more details about the stocks, go to the Key Statistics tab. You can find the Trailing PE and the Forward PE. The PEG Ratio is also mentioned, but I prefer to calculate the PEG ratio myself.

If you want to manually calculate the PEG ratio yourself, you can find the forward PE, and then find the 5 yr estimated growth rate through the Analysts Estimates Tab. Go to the bottom part of the page and look for the 5 yr Estimated Growth. The Growth Rate of GE in this page is 10%.

So Forward PE = 15.36, Growth = 10%, so PEG is 1.536.

This investing style (by using PEG ratio) is called Growth At a Reasonable Price or GARP.

Improved Version of PEG incorporating Yield and Cash Per Share

The PEG ratio above is biased against slower growers with lots of cash and a good yield. So in order to incorporate this fact, I've developed the MyPEG. More information in this link.

Stock Chart: NYX (NYSE-Euronext) Next Support Levels (June 21, 2007)

This site has been discussing the NYX stock (New York Stock Exchange-Euronext). Previous posts here (June 19, 2007) and here (June 6, 2007).

Now the chart above looks at the next support areas. I've determined the resistance based on previous horizontal resistance and my version of Fibonacci Estimates. I have confidence in the Fibonacci Grid I created above because the Fibonacci lines also coincides with other resistance areas.

So the next levels of support (Approximates) are $76, $72, and $70.

Investing Book Recommendations

There are so many investing books out there, so how does someone new to the market start investing?

Books are a good way to learn. If you want a broad overview, you should start with the infamous Dummies series, and get Investing For Dummies, 4th Edition (Eric Tyson). Investors have to start somewhere, and the Investing For Dummies is a good start. (Alternatively, you can also buy and read "Personal Finance For Dummies" by Eric Tyson).

Okay, if you now know the basics, and know about 401ks/IRAs, stocks, ETFs, mutual funds, and have a general idea about the market, what should you read next?

Right now, there are many investing styles ranging from Growth to Value to everything in between. Some of these styles are very different from each other, and each philosophy may have very different rules. So where do we start?

I believe to get a good overview of the different styles, you should read these four books and decide for yourself what kind of investor you can become:

1. GROWTH: How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition (William O'Neil)
   
2. ?: Jim Cramer's Real Money: Sane Investing in an Insane World (Jim Cramer)
   
3. ?: One Up On Wall Street : How To Use What You Already Know To Make Money In The Market (Peter Lynch)
   
4. VALUE: The Essays of Warren Buffett : Lessons for Corporate America (Warren Buffett)
   

To start out, I would recommend reading both Jim Cramer's "Real Money: Sane Investing in an Insane World" and Peter Lynch's "One Up On WallStreet", Millenium edition.

Jim Cramer's book is a more contemporary look at investing, and goes into detail about the basics of stock investing, rules, cycles, stock sectors, creating a discretionary portfolio, spotting bottoms, and spotting tops, just to give a small sample.

Peter Lynch is the Legendary investor who managed Fidelity's Magellan to outstanding performance. Invest in what you know. He groups stocks into six categories such as "Slow Growers", "Stalwarts", "The Fast Growers", "The Cyclicals", "Turnarounds", and "Asset Plays". He helps investors in the process of choosing great stocks, and even multibaggers (make many times your original investment). Even if the book was written in 1989, this book is still a timeless classic. The Millenium edition has an interesting introduction by Peter Lynch himself in 2000, during the height of the dot-com bubble.

To get two very different takes on investing, you should read both William O'Neil's book (founder of Investors Business Daily , and a die hard growth investor who likes strong earnings growth and great charts), and Warren Buffett's book (Value Investor extraordinaire who made people rich through Berkshire Hathaway (BRK.B)). You'll see how two legendary investors look at investing in two different ways. But both succeed!

There are other recommendations to the right as well, but you may want to first try the books above first.

Stock Chart: NYX (NYSE-Euronext) is in a downtrend? (June 19, 2007)

On June 6, 2007, this site analyzed the NYX (New York Stock Exchange-Euronext) Chart, and said that the NYX stock was in a holding pattern.

So how is it doing now?

Let us start with a 2.5 Year Chart:



Looking at this chart, we see that the NYX stock has been on a good 2.5 year uptrend. But if we draw a trend line (see note below on Trend Lines), we notice that the stock may have recently gone below the uptrend, though it has not done it with good volume.

Looking at the this time frame, we also notice that the Bollinger Band Width is under 10 (for this stock), a low value. Everytime the BB Width goes below Ten, we often have a move (either up or down). Some people would call this a volatility squeeze.

Now, the 10 month chart of NYX:



There is a lot of information on this chart, so let us examine each part.

The Negatives:

1. NYX stock has gone below horizontal resistance of around $79.31.
   
2. Once Support has been broken, Support becomes resistance.
   
3. Stock is below both the 50 day and 200 day moving average.
   
4. Based on the 2.5 year chart, the 2.5 year uptrend line may have been broken.
   
5. Stock's 50 day moving average has gone down below the 200 day moving average, also known as the Death Cross.
   
6. If you look to the left, you'll see the volume of stock activity by price. Around the $80-$88 range, we have a lot of congestion and lots of buying and selling. However, below that we see that buying and selling volume is much lower. Will buyers be supporting this stock at lower levels?
   
7. If the stock continues to drift down, the stock will have difficulty moving up again because of all the overhead supply. Look at all the volume at the $80-$88 level and above. Investors who have held the stock at higher levels want to desperately sell the stock as it gets closer to their cost basis, pushing the stock down.
   
8. Notice that from March 2007 to June 2007, we notice an inverse cup and handle, which is a bearish pattern.
   
9. Since December 2006, the stock has formed a series of Lower Highs and Lower Lows, or in other words, the stock is in a 7 month downtrend.
   

The Positives:

1. Stock has not gone down with good volume. However, stocks can still drift down without volume confirmation.
   
2. In the lower window, we have a MACD (Moving Average Convergence/Divergence) indicator. There's a possibility that we may have some positive divergence with the NYX stock and the MACD indicator. The NYX stock has recently been going down, but the MACD indicator seems to be suggesting higher lows, a positive divergence.
   

Conclusion:

So what do we make of the NYX Stock Chart? Many indicators would point to a breakdown in the stock. There are some positives we can look at but at this point, the negatives outweigh the positives.

From the sentiment perspective, there are many holders of the stock from $80 and above. Many investors may even be accumulating more shares at the $80 level. If the stock starts to trend downwards, there will be many investors who will be holding the stock at a loss. Their patience and conviction could be tested. If NYX continues to go downwards, many holders at higher levels will finally give up, and we will finally hit the bottom as former holders capitulate. This could then start a slow and arduous climb back up. But we are not at those levels yet.

Track NYX Stock Chart Now

2.5 Year Current Chart of NYX

Ten Month Current Chart of NYX


Note on Trend Lines:

Yes, give a chart to several chartists, and they may draw trend lines a bit differently. However, in the case above, the trend line looks correct, as the line is validated by seven different points along the line. The Trend line also nicely approximates the 200 day moving average.

Finisar (FNSR), a speculative under $4 stock looks like it was forgotten, but may now be poised to move upwards.

FNSR's 50 day moving average has gone above the 200 day moving average, the Golden Cross, and is a Bullish sign. FNSR is both above the 50 and 200 day moving average, and is currently in an ascending right triangle, a normally bullish formation. This pattern suggests accumulation by people as the stock moves lower, and the buying support increases each time, forming higher lows. Before the end of the triangle approaches, the stock may breakout with good volume above resistance. This would be an ideal Buy Point.

Other clues include a Bollinger Band Width of less than 0.5 which, in the past, has predicted a move in the stock (whether up or down).

The lower technical indicator is the Williams ADX Directional Movement Index. This is a trend following indictator. The Black line through the middle is the ADX. If the ADX is rising upwards, that means the stock is starting to trend. When the green line (+DI) goes above the red line (-DI), and when the green line is rising, and the red line is falling, that would be one of the buy signals. Note that great care has to be taken using this technical indicator. If the stock is not trending, using the red and green line crossover by itself could cause a lot of stock whipsaws. That's why the black ADX line is important in the system. There are many modifications to this system to reduce whipsaws.

In other words, watch out for the speculative stock Finisar (FNSR) as it may be ready to make a move upwards.

To see a real life example of a breakout of an Ascending Right Triangle, see the Chart of Hansen (HANS).

To monitor FNSR using the same metrics as my chart above, you can use this link.

Stock Chart: AMTD, Ameritrade, Nice Turnaround (June 18, 2007)

Ameritrade ( AMTD ), has come back nicely after a 1 year downtrend. We recently see the Golden Cross, where the 50 day Moving Average goes above the 200 day Moving Average. The stock also broke above the $19.69 resistance, and the stock is both above the 50 day and 200 day moving average. The turnaround looks intact, though some might argue that the stock may be overextended above the 50 day and 200 day moving average.

To check the status of AMTD on a daily basis, here's a specially formulated stock chart of AMTD.

Turnaround Stock Patterns

If you've been following this blog , you may have noticed that there are many other stocks with similar turnaround patterns. The general idea is that you can draw a downtrend line on the a semi-log chart pattern and see if there is a breakout on good volume. It would also be nice if this breakout coincides with the stock going above either the 50 or 200 day moving average.

Yes, you can't always catch the optimal buy point, but you can still buy a stock if it remains in an uptrend, and if it is above both the 50 and 200 day moving average.

Other Stock Examples

1. GLW (Corning) Chart

2. DELL (Dell) Chart

3. BTU (Peabody Energy) Chart, a Coal Company.

Stock Chart: PFE, Pfizer (June 15, 2007)

PFE, Pfizer, appears to be in the middle of an ascending right triangle, a bullish formation. The stock does not have the strength to break upper resistance. However, as the stock goes lower, at each stage, buyers support the stock at higher levels, creating higher lows. As the stock trades closer to the end of the triangle, buying pressure may be so strong, that the stock could breakout possibly on good volume.

Many technical buyers would like to buy the breakout above the triangle, ideally when the breakout is accompanied by good volume.

However, some could argue that the patient investor (who cares more about fundamentals than technicals or charts) can invest within the triangle. The justification of this is that a stock like Pfizer (PFE) pays a good dividend yield (currently at 4.30%). While waiting for the stock to breakout, the patient investor can reinvest dividends at lower prices.

For a real life example of a breakout off an ascending triangle, see Hansen Natural (HANS) example right here.

Here's a current day stock chart of Pfizer with the aid of the tools at StockCharts.com .

Stock Chart: Hansen Natural (HANS) has Broken Out! (June 15, 2007)

Hansen Natural ( HANS ) has just broken out of an ascending triangle on Good Volume. This is bullish!

Previously, HANS had formed an ascending right triangle with the hypotenuse increasing in slope from left to right. Ascending Triangles have a bullish bias. The stock has no strength to break past resistance. However, as the stock tries to go lower, there are buyers who start supporting the stock at higher levels, creating higher lows. Soon, all this buying pressure gets stored in the tip of the triangle, and the only thing a stock can do is Breakout upwards with Good Volume.

This is what is happening to HANS right now, and HANS has a bullish bias.

Stock Chart: LVLT (Level 3 Communications) has broken uptrend line? (June 15, 2007)

Level 3 Communications (LVLT), has been on a nice 2 year uptrend. However, recently, it looks like it has gone below the two year uptrend.

Looking closer at a 5 month chart:



We see that LVLT is underneath both the 50 and 200 day moving average, a bearish sign. Another bearish sign is that the 50 day moving average looks like it is about to go under the 200 day moving average (The Death Cross ).

The only positive I can see is that the stock has not breached the $5.20 support yet.


Note on Trend Lines:

Yes, give a chart to several chartists, and they may draw trend lines a bit differently. However, in the case above, the trend line looks correct, as the line is validated by six different points along the line. The Trend line also nicely supports the 200 day moving average.

Alternate Plays/Charts

Alternatively, Corning Incorporated (GLW), might be a good Alternative Play (Annotated Chart)

Stock Chart: BTU, Peabody Energy, Coal Company is Coming Back

Peabody Energy (BTU) is a Coal Company. For one year, from around May 2006 to early April 2007, BTU had been on a downtrend. Then on April 2007, it spiked up on good volume, breaking the one year downtrend line, and has gone above the 50 and 200 day moving average. This would have been a great Buy Point.

This jump in Peabody Energy (BTU) also coincided with the time that Warren Buffett had been buying the rails. Jim Cramer has said suggested that this play is an indication that Coal is not over .

Even if you didn't catch that point, the 50 day moving average has moved above the 200 day moving average, which is a bullish sign. BTU is also above previous resistance of $48.46, and has broken out of a Dec 2006 to April 2007 Bullish Cup and Handle pattern. BTU is also above both the 50 and 200 day moving average.

Even if you didn't catch BTU at the ideal buy point, you still may be able to catch BTU's run, as the new uptrend is still intact.

Stock Chart: DELL, Comeback Story, June 13, 2007

Dell (DELL) appears to be coming back. The stock has recently cleared a 2 year downtrend. The stock is currently above both its 50 and 200 day moving average, and recently, the 50 day moving average crossed above the 200 day moving average, a bullish sign.

It is approaching resistance at the $27.89 level, and most likely stronger resistance around the $30 level (you can see greater congestion and selling volume there).

If the stock can form a nice handle on low volume, this may setup a nice base off of a bullish cup and handle formation (December 2006 to Present), and the stock could breakout on good volume on its way up. This is the optimistic view. Of course, the stock could behave very differently at resistance levels, and the stock could fail and go beneath the 50 day moving average.

Prediction Correct: S&P 500 bounces then re-tests lows.

Here is the Prediction of the S&P 500 Bounce and Re-Test of Lows on June 8, 2007:



Now here is the actual behavior of the market during this period:




The prediction looks to be correct. Right now, the market is re-testing the lows. It is finding support in the area between the previous lows and the 50 day moving average. We have to wait and see if the support area holds, or else we will get some variation of this ABC Correction Prediction.

Investor Sentiment During the 4% Market Correction

Stockpickr.com brings social networking to the investing world. It is now currently owned by the Financial site TheStreet.com . Stockpickr has many features, but one of its interesting features is the Answers Section where any member can post questions, and anyone can answer, including Jim Cramer or James Altucher, the main founder of the site.

We can also use it to gauge what the average investor is thinking.

Recently, we had a 3.5% drop in the S&P 500. I've selectively chosen a few Answer Threads from Stockpickr to illustrate what the average person is thinking during this drop:

Ordered in Reverse time order:

1. "All right, now that we've had the weekend to step away from the markets and allow for last
week's action to digest ... anyone have any
thoughts on what's in store for tomorrow
morning?" Asked by Thomas Nunn

2. "Thursday am I sold off 95% of my stocks and
locked in my gains. I did nothing Friday 6/8,
only to see the DOW jump 130 pts. Do you think
we've hit bottom yet, or will there be another
substantial pullback?" Asked by John Kuhnemund

3. "Jim,
What did I do wrong in not knowing ahead of
time that a correction in the market was ready
to hit? I know there were warnings on TV (CNBC
of course) and in the papers. I also know the
momentum in the market could not go on forever.
I know investors need to "Expect corrections..."
What technical indicators do you look at and
keep a close eye on to show the market is ready
to head south? Thanks." Asked by cnyguy

4. "Do you guys think we are out of the woods yet
with this correction?" Asked by gtz550

5. " Hey Jim and James,
More so then ever I am scared of staying in the
game. I lost a big % in the past few days. How
much longer do you predict that this ugliness
will continue? Is this the summer selloff?
You've always been my cheerleader Jim. I could
sure use a morale boost. Frank from Philly" --
Asked by Francesco the kid


There's more of this. Maybe in another post.

S&P 500 Target Estimate based on Ten Year Bond Yield

I recently read an interesting article by Frederic Ruffy of optionetics.com . One of the interesting parts of the article is a way to estimate the S&P 500 based on the yield of the ten year bond. Full Article Here

Currently, the Ten Year Yield (based on $TNX ) is approximately 5.137%. On an S&P 500 Earnings basis as Reported (estimates top down) as of 6/4/2007:

2006 Estimate: 81.51
2007 Estimates: 88.74
2008 Estimates: 96.40

With the formula:
S&P 500 Estimate = [1/(Ten Year Yield)] * (S&P 500 Earnings)

2006 S&P Target = [1/(.05137)] * 81.51 = 1586.7
2007 S&P Target = [1/(.05137)] * 88.74 = 1727.5
2008 S&P Target = [1/(.05137)] * 96.40 = 1876.6

With the current S&P 1509.12, is the 2006 S&P 500 5% undervalued?

And if we look at the 2007 estimate, the S&P 500 is 14.4% undervalued, and based on 2008 estimates, the S&P 500 is 24% undervalued.

Are these target prices reasonable?

Short Term S&P 500 Bounce and Re-Test (06/08/2007)

From a short term perspective, the S&P 500 should continue to bounce to the 50% (1514) or 61% (1520) retracement levels and then retest the 50 day moving average lows. This 50 day moving average (speculation) may not hold.

The tools at StockCharts.com were used.

Prediction: ABC Correction on S&P 500 (6/7/07)

Prediction: Current S&P 500 Market will Correct and undergo an ABC Correction. Current resistance is the 50 day moving average at 1487. But based on market behavior, this resistance might not hold. There is a lot of buying volume between 1430 and 1460, and those who bought during that time might get worried and start taking profits now or on any rally.

The 50 day moving average should get taken out, and maybe hesitate at the 38.2% retracement price of 1477. However, better support will probably be at around 1457-1460 since previous buyers used to be at that level. This is the A-wave.

Buyers at the 1460 bring the price up back to the 38.2% retracement price of 1477, the B wave.

Then we finally get the C wave, and go down all the way to the 61.8% retracement level at 1437-1440. Sellers will be exhausted, and there is previous buying interest at these levels and we near the bottom.

In addition, I'll be watching another indicator, the $SPXA50R, the percent of S&P 500 stocks that are ABOVE (chart annotation says below. The chart annotation is wrong) the 50 day moving average. Previous history has shown that when this amount goes below around 30%, we are near the bottom. We are not there yet.

I used the tools at StockCharts.com

The idea of using $SPXA50R is thanks to Matthew Frailey at www.breakpointtrades.com .

Current S&P 500 Correction (June 7, 2007)

The US Stock Market seems to be in correction mode. The S&P 500 Index, through the $SPX index, appears to be just above the 50 day moving average. The way the index has behaved, I wouldn't be surprised if the stocks go below the 50 day moving average.

Some support zones:
1487: 50 day moving average.
1476: 38.2% Retracement (using Fibonacci Grid)
1457: 50% Retracement (using Fibonacci Grid)

I would not be surprised if the "correction" tests some of these levels and bounce at least once off one of these resistance levels.

(I used the tools at StockCharts.com )

NYX Stock in a Holding Pattern (June 6, 2007)

The New York Stock Exchange-Euronext Stock seems to be in a holding pattern. The multi year uptrend remains intact, but there has also been a 7 month downtrend, forming a symmetrical triangle. With this pattern, a stock normally trades within this triangle, and near the end, the stock may break out (up or down) on good volume. We can determine which way to trade/invest based on the direction of this breakout.

Currently, stock is stuck between support at around $79 and resistance at the 50 and 200 day moving average above. The stock is also being restrained by the symmetrical triangle described in the chart.

In the lower indicator window of the chart, there is a Bollinger Band Width indicator. Based on previous history, when the Bollinger Band Width is 5 or lower (on this stock), the stock normally has a large change in price (either up or down). Right now, Bollinger Band Width is around 6. So we are almost there.

Overall, NYX is in a holding pattern, but a big move to the upside or downside could be coming within the near to intermediate term future.

The New Four Horsemen of Tech

In CNBC's Mad Money show on June 6, 2007, Jim Cramer chooses the Four NEW Horsemen of Tech:
1. Google (GOOG)
2. Amazon (AMZN)
3. Apple (AAPL)
4. Research in Motion (RIMM)

Google and Apple are two obvious choices. At the minimum, those two selections will definitely lead the Tech Market over the next decade or so.

Very interesting discussion on Stockpickr.com : Tech Corner

I like the Idea of AmazonBay, the merger of Amazon (AMZN) and Ebay (EBAY). Ebay has a monopoly on the internet used product and collectible market. Amazon has a monopoly on the new and commodized internet retailing market such as books and DVDs. Together, they would create a monster of an internet retailing dominating almost all segments of internet retailing. Amazon can get rid of their Used Amazon Marketplace in place of Ebay. Amazon can also get rid of their customer rating system in favor of Ebay's. Ebay even comes with Paypal. AmazonBay would be a very exciting company to own stock in.

Next Generation Apple iPhone will have GPS chips

According to AppleTech TV news, the next generation of Apple iPhone may have GPS chips.

This makes sense as Location Based Services are going to increasingly integrated into anything that moves from cars, to cell phones, to cameras.

SIRF, the Leading maker of GPS Chips looks to benefit from this trend and it is very cheap here. Using information from Yahoo Finance:

Price: 22.98
Forward PE: 17.28 (yesterday, it was 16.39)
5 Year Estimated Growth: 30%
PE/G: .57

A PEG ratio of .57 (less than 1 is dirt cheap) for great growth is a bargain. GPS chips will be everywhere, and SIRF is a leader in this area. Global Locate, a private company, is a competitor, but I see SIRF remaining dominant in this area.

When you compare other companies in the location based service area by looking at their forward PE:
Garmin (GRMN): 19.98
Navteq (NVT): 27.60

SIRF looks cheap here for its growth.

Lenny Dykstra of TheStreet.com also had some good things to write about SIRF.

For the long term, SIRF looks like a buy here, but be aware of the volatility and keep your eye out for any real competitors which I do not see right now.

Video on Demand Trade; Death of DVD

Video on Demand Plays

CNBC's show Fast Money on June 5, 2007, featured a segment on playing the Video-on-Demand trend in the Digital Living Room. They started the segment saying that when DVDs come out, movie studios will send the movies direct to Video-On-Demand Systems as well.

1. Jeff Macke one of the traders suggests:
Releasing DVD and VOD (Video on Demand at the same time) helps the studios capture more of the margin. The rental business isn't that great for the studios. So the trade becomes: Long Disney (DIS) or any movie studio. Also, good plays are Comcast (CMCSA) because VOD is good for them. Companies like Blockbluster (BBI) and Netflix (NFLX) will get killed by this.

2. Eric Bolling:
Short BBI. Winner is Comcast (CMCSA) and other Content Distributors.

3. Guy Adami:
Long Lions Gate (LGF)


Joost Plays

Joost and internet video on Fast Money: There is a trend towards peer-to-peer model vs. a central server model (like YouTube). With the peer-to-peer model (from big players), downloads can be faster and legal. Get content direct from a CBS (CBS), Time Warner (TWX), or Viacom (VIA) or some other big player. There is also an advertising aspect, as Joost might be able to use this information to do targeted (more effective) ads.

Associated with this company are two publicly traded companies, CBS, and Viacom (VIA). One of the reporters speculates that it might be a good takeover target for one of the media players.

1. Eric Bolling:
Doesn't like it because it is not user generated. There are too many ways to get non user generated videos.

GLW, Corning Glassware, Good Chart, June 5, 2007

GLW, Corning Glassware looks to have a good chart. Several months ago, it broke out of a year long downtrend. It is currently above both the 50 and 200 day moving average, and has broken out of the old $25.57 resistance. Volume on breakout is not impressive, but GLW's chart is still looking good.

FCX, Freeport McMoran initial resistance

Freeport McMoran (FCX) is breaking out. When a stock is breaking out (with no prior history at that level) it's not obvious finding a resistance level. I am using a Fibonacci Estimation Method to determine initial resistance.

Based on this, looks like FCX might have initial resistance (and go sideways) at $83.

Tivo Experience

Not everyone may know about Tivo. But for those people who do have Tivo, they will swear by the product and proclaim that Tivo has truly changed their life.

What is Tivo?

Tivo is the leader and innovator of a category of products called DVRs, Digital Video Recorders. Essentially, a DVR is similar to the old VCR, but shows are saved in a digital format in the DVR's internal hard drive (and with a capacity normally much better than a VHS tape). But the features of DVRs go beyond that.

In the Tivo (which I consider the best of all the DVRs, since I am a user of Tivo), there is a channel guide with program information which is updated on a regular basis. Users of Tivo can select programs through the guide, or they can search for the program. Once they find the program, a user could just press the button to record. No more having to manually set up Start Time, End Time, Channel. (No more Blinking 00:00 time lights either.) You just tell Tivo what program to record (even in the future), and it records it.

Tivo users also have the option to choose to record an entire season called "Season Pass". A Tivo user could select taping all reruns of "Friends", and the system automatically tapes the entire series.

When Tivo users want to watch a program, they simply go through a listing of all taped programs (with proper labels and episode information) and choose which program they wish to watch. They can fast forward to the parts they want, and they can even program a button to skip 30 seconds, very useful for fast forwarding commercials).

When watching Live TV, the Tivo users can even rewind Live TV to replay any part they missed. They can also pause Live TV during a Big Game so you can go to the door and pay the pizza delivery person.

Some Tivo's have a Dual Tuner Feature where you can record two shows in parallel. Tivo Series 3 supports High Definition. (Once you use Tivo Series 3 to record HD programs, you'll realize that you won't want to watch standard definition anymore.)

The Tivo is an easy to use standalone box which doesn't require a PC. The Tivo box is the size of a DVD player, and downloads program information either through a home network (wired, or wireless) or through a dialup phone number. Obviously, Tivo will require a connection to the content (Cable, satellite, or over the air).

Some Tivos even have a DVD writer built in (not Tivo Series 3).

If a Tivo user connects through the PC, that user will be able to access some information on the PC, including displaying photos. This Tivo Server feature will most likely be able to support many value added features similar to a Window Media Server or Apple iTV. You can access some Yahoo (YHOO) functionality from the Tivo interface as well.

Tivo and Amazon have also teamed up with Amazon Unbox. This will allow users of Tivo to purchase shows from Amazon and have them downloaded direct to the Tivo box to be watched later.

With Tivo Series 3, you don't even need a cable box. Typically, with older Tivos, a cable box may be connected to the Tivo. But Tivo Series 3 allows Cable Cards to be inserted into the Tivo instead of a Cable set-top box. The cable card essentially replaces the Set-Top Box (you won't get video on demand, however). This removes clutter from the entertainment system and simplifies things.

Users of Tivo pay a monthly subscription fee. Sometime ago, users were offered a lifetime subscription, but this offer is no longer offered. Some people go to Ebay to buy a Tivo with Lifetime subscription attached.

Tivo's Effect

Tivo and the DVR has truly changed the way people live. Before, people would reschedule their life so they can try to catch their favorite show. A lucky few may have planned in advance and setup their VCR to record a few programs here and there.

But now, Tivo users can live their life without being attached to the broadcast TV schedule. Tivo users can watch what they want, anytime they want. Those who have Tivo never watch Live TV again.

For parents, it can be very helpful too. Parents can tell their children to not watch any television during school nights, and on the weekend, they can watch shows they missed on Tivo.

Tivo users save a lot of time too as they learn to fastforward shows or fast forward commercials.

And Tivo, if you don't need the TivoServer feature, doesn't require a PC. And the Tivo looks to be much easier to setup than a Windows Media Server or even an Apple TV.

Adoption

If Tivo is so good, then why don't more people use it?

Good question and this is a challenge for Tivo (as well as all the players in the Digital Living Room). As I discussed in a previous post, many companies are fighting for market share in the Digital Living Room. One person even wished that some Tivo functionality can be combined with Apple TV (who has a near monopoly with iTunes, and has a deal with YouTube to show YouTube videos.

The industry still has ways to go and may require consolidation and partnership and interoperability. But as my description of Tivo above shows, we are getting closer to a life changing digital living room. Tivo certainly has already changed many peoples lives.

Current HDTV Cycle

Before we look far into the future, let us not forget the current HDTV cycle. People have been adopting HDTV High Definition sets for sometime now.

Current beneficiaries include:
1. GLW -- Corning Glassware
They are involved in Display Technologies.
2. BBY -- Best Buy
Popular Retailer of Electronic equipment including HDTV sets.
3. SNE -- Sony, producer of BluRay products (BluRay is a High Definition DVD)
4. TOSBF -- Toshiba is a maker of more affordable HD-DVD DVD players.
5. NFLX -- Netflix. DVDs by mail company suppotrs BluRay and HD-DVD dvds.

Near term HDTV upgrade cycle:

For those who have experienced HDTV for the first time, you know it is hard to go back to standard definition TV. More and more content will be in High Definition and customers will start to demand it. Those with DVRs will want to be able to play HDTV content (TIVO and Cable and Satellite DVRs have models which support HDTV recordings). People will demand internet video be in high definition video. Consumers will start retiring their old standard definition camcorders for High Definition Camcorders. Consumers will want the Blu-Ray vs. HD-DVD debate to settle down so consumers will be able to finally buy a BluRay or HD-DVD player to enjoy the movies.

There's an HDTV upgrade cycle coming, and let us pay attention to this trend.

No More Analog TV Broadcasts in 2009

Did you know that by 2009, there will be No More Analog TV Broadcasts?

Can you imagine a world where people can no longer can get over the air analog TV broadcasts? This may mean a service disruption to many people with older Analog Sets. Cable companies may convert the digital signals back into analog for those with older sets. There is also a program where government subsidizes the purchase of special set-top boxes.

I see some investment opportunities in the future. People have been moving to HDTV some time, and for all those who have not upgraded, the 2009 deadline could help spur people to upgrade to HDTV.

Also, companies may use this opportunity to offer their "Digital Living Room" set-top box/computer at an inexpensive price. Companies may view this as an opportunity to get market share and lock in their customers.

But the changes will still be several years away. Let us look at this issue as 2009 gets closer.