Trend Analysis LLC: First Confirmation

This model gave us a confirmation of today being the first day of an impending correction in price.

Although the hourly chart is calling for some type of snap back rally on Wednesday, this strength should be used by short and intermediate term traders to lighten their speculative positions put in place to capitalize on the most recent rally.

Any strength from here should also be used to either sell some speculative issues short or purchase put options on the SPY.

For those who remain nervous about the health of this market you might want to consider purchasing puts against your long stock positions in order to synthetically decrease your allocation to equities.

This potential correction is going to tell us much about what phase the market is currently in.

Even if the market remains in a bear market I do not believe that we have seen all of the counter trend rally with this most recent move higher. There simply remains far to much bearishness to expect another leg down of magnitude.

Do's and Do Nots of Successful Investing

1) Buy and Hold Doesn't Always Work.
2) Cut your losers, and let your winners ride.
3) Don't fall in love with your stock; it won't fall in love with you.
4) Don't fight "the tape" (the trend).
5) Don't have more than 5% at risk in any one position.
6) Don't miss a good one by being too concerned with the exact price you pay.
7) Have patience and stick with your discipline.
8) Neglected sectors often turn out to offer good values.
9) Not selling a stock for a gain, simply because the taxes, is a bad idea.
10) Real estate cycles are not the same as stock market cycles.
11) There's usually only one reason corporate insiders buy stock.
12) Try to buy a stock when it has few friends.
13) When a stock hits a new high, it's not time to sell. Something is going right.
14) When all you're left with is hope, get out.
15) You can learn more from your bad moves than your good.

One of My Favorite Fundamental Tools

***Lets talk a little about the value measurement of earnings yield.While this measurement is being more widely followed, it remains a very key tool in obtaining the true value of a security.
***The earnings yield is nothing more that the opposite or reciprocal of the P/E ratio.It helps to put value in a more easily understandable light as it can be measured againstthe prevailing 10 year note yield.The premise is that if the earnings yield on the market or whatever stock you wish to measure is greater than the 10 year note yield then the security is undervalued.
***Now this is a gross simplification of the theory, but it gives you a reference point.Don't forget also that the 10 year T- note yield is a before tax measurement and the earnings yield is an after tax measurement. Therefore even if the earnings yield is less that the 10 year note yield, there is still a possibility of a security being undervalued.
***This gives you a very strong starting point as to where to go from here with the tool. Especially the after tax aspect of the earnings yield.Here is an example of the calculation for the earnings yield on a stock.Let us suppose a stock has a P/E ratio of 12. In order to get the earnings yield we just invert the 12/1 fraction to 1/12 and the yield comes to 8.33%. Compare this to the 4.5% 10 year note yield and you have quite the undervalued security. Maybe even more so than the 8.33% dictates as this is the after tax yield. To convert it to the before tax yield simply multiply the 8.33% by 1.33 for the 33% corporate tax bracket. The before tax yield becomes 11.08% which makes this security very undervalued.
***You can also use the earnings yield of an entire index such as the S&P 500 to get a feel for the current state of value in the market. Above this post you will see a visual of the current earnings yield model that shows the S&P 500 to be quite undervalued. This does not take into account the after tax effect which would move the target for the S&P 500 even higher.
***The earnings yield is a great tool and should be in every good investors toolbox.

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Tuesday, April 22, 2008

First Confirmation - Red Flag

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