Baseline Analytics Market Tour

A technical review of the financial markets

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During a strong trend, such as seen with the bull market following the 2009 lows, the returns on timing systems have been inferior to "buy and hold" strategies. Baseline Analytics' technical research has confirmed, as expected by many market technicians, that traditional timing systems, such as moving average cross-overs or overbought/oversold indicators, have failed versus a buy and hold strategy. In addition to falling short of the annualized returns of such systems, buy and hold results in lower transaction costs plus the added benefit of dividends.

Here is a simple example of a failed timing system for QQQ, based on considering several market timframes and a popular moving average cross-over system:

b2ap3_thumbnail_QQQ.JPG

 

Timing systems have much better luck in volatile markets. One such index that has failed to follow the bullish trend lately, has been small cap stocks, particularly as represented by the Russell 2000.

Though its partnership with Metastock, Baseline Analytics has collaborated on several timing systems studies, and has identified several that will be offered to subscribers.

The first is a timing system based on the Russell 2000 ETF, IWM. A moving average crossover system based on behavior of the index over the last six months, has generated an annualized return of 11.4% vs. a 6.9% loss in IWM. This timing system takes advantage of the volatility in IWM and its resistance to the firm uptrend seen with other market indices.

Subscribers can see our current signal and follow the IWM timing system, as we will report its signal regularly on the Baseline Analytics website, and announce signal changes as they occur.

The bull market in equities is five years old and counting.  With growing concerns about interest rate risk as well as geopolitical factors, we may see other indices begin to behave in a range-bound, more volatile fashion, as in the case of the Russell 2000. Should that happen, Baseline Analytics will provide additional timing systems based on its Metastock system tester technology.

We have begun to identify several profitable systems for a collection of ETF's that beat buy and hold over several market timeframes (i.e. 10, 5, 2 and 1 year timeframes). Some such ETF's include BKF (iShares BRIC ETF index) as well as a handful of commodity ETN's. New timing system products will be announced as they are proven with superior back-tested results versus "buy and hold."

A new FLASH report has been added to our home page. Pay us a visit!

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I'm normally not one for reading too much into one day's market action, but Tuesday presented a few noteworthy concerns on the technical health of the stock market.

The recent short-term topping action in the S&P 500 was accompanied by higher volume (no doubt in part as summer vacations come to a close) and decidedly weaker market breadth.

As the chart below shows, the S&P 500 has seen higher volume days on the downside.

(Click here to enlarge)

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The 1975 level represents initial support.  I believe that if RSI can hold to a low in the 30 area, we will see a modest pullback and nothing too serious.  Watch that RSI closely; it has remained bullish (30-ish as a low) during setbacks in the S&P 500. Any pronounced dip below 30 will correspond with a more serious correction.

Market breadth has takes a sour turn of late.  The chart below shows the NYSE Advance/Decline ratio, New Highs vs. New Lows, and the Summation Index, which we use to gauge market momentum.

(Click here to enlarge)

b2ap3_thumbnail_breadth09092014.png

Note that the high/low ratio is approaching 0, not far from where it settled at the trough of the prior market setback in early August.  The summation index in particular looks rather limp.  Note how it bounced from bearish territory in early August as the S&P 500 headed to new highs.  But the summation index was unable to return to barely half its level at the prior peak as the S&P 500 topped.

These indicators suggest waning momentum and a lack of any exciting catalysts to push the market decidedly higher.  Caution and capital preservation are key; protect gains and seek hedges to long positions (and add to shorts selectively) as the short to intermediate-term character of the market takes a breather.

Visit our Home Page for the latest free Flash Report: stocks that had a bit of a breakdown (and more to go?) on Tuesday.

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A new FLASH UPDATE has been posted at Baseline Analytics.  Today's post is the result of a stock screening that selects stocks that have generated a buy or sell signal based on directional movement. Check our Home Page for today's FLASH UPDATE and visit regularly for more free reports.

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Posted by on in News

A new FLASH UPDATE has been posted at Baseline Analytics.  Today's post is the result of a stock screening that selects stocks that have generated a buy or sell signal based on directional movement. Check our Home Page for today's FLASH UPDATE and visit regularly for more free reports.

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Posted by on in News

Each week, Baseline Analytics scans thousands of stocks to identify companies whose stock prices are rising on strong volume and meeting bullish technical criteria.  In addition, stocks need to represent companies with attractive fundamentals (some even pay dividends), with respectable revenue and earnings growth momentum.

Here is a list of stocks that fit that criteria following Wednesday's market close.  Check them out, I hope you find a winner and don't hesitate to visit Baseline Analytics and our StockStash selections posted each week.

Here's today's report (click here to enlarge)

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Following August's modest setback in the stock indices, it is time for a review of key technical market indicators.

The small correction we have seen in the S&P 500 since the end of July has been followed by a feeble, low volume, late summer bounce.  Technical damage has been done on the short to intermediate-term trend, while the longer-term trend retains its bullish character.

click here to enlarge chart

b2ap3_thumbnail_SPX081414.png

The top of the chart show the Relative Strength Index, or RSI, of the S&P 500.  A bullish trend is marked by support near 30 for lows in RSI.  Note that those lows have held up during several setbacks in the index.  RSI is now approaching 50 (it closed Wednesday at 49.43); we will see if it can muster continued strength into the 50+ bullish area.

Known Sure Thing (KST) has turned negative for the first time since the previous 5% correction in the S&P 500 in late January through February of 2014. It is interesting to note that all technical indicators expressed at that correction are almost identical to the indicators seen today: RSI and KST hit almost identical lows and the market resumed its uptrend.  The difference this time is the weak volume in this recent bounce.

Seeking near-term bottoms in the stock market, look no further than extremes printed in VIX and Put/Call ratio. As noted in this blog in the past, high readings in VIX and Put/Call relative to their moving averages tend to precede a bounce in the market, and vice-versa.  Note the spikes in those readings, and how they foreshadowed a turnaround in the S&P 500.

The most negative aspect of this correction is the break in the UP trendline.  Resistance is just about where we closed today, in the 1950-1960 area.

What do we do?  I have been using my trading account to hold short S&P 500 e-mini futures, the sole objective of which is to partially hedge a portfolio that is about 60% equities, 20% bonds and 20% cash.

Our Baseline Analytics TrendFlex Signals helop anticipate turns in the market trend.  More information about our family of TrendFlex Market Trend signals and how to subscribe can be found at Baseline Analytics.

 

 

 

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Equities appear to be biding their time as they settle back from an overbought condition.

The chart below draws several trendlines to "keep up" with the strong long-term uptrend. The S&P 500 initial support levels are in the 1900-1925 range, which suggests some further sideways action as the overbought RSI (top of chart) finds likely support near 50.

(click here to enlarge)

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"Known Sure Thing," reflecting a series of moving averages and their derivatives from Martin Pring, is approaching recent highs near 40, underscoring the age of this uptrend. Sentiment readings in VIX and Put/Call are neutral to slightly bearish for equities.

The 30-year Treasury bond continue to flirt with resistance at 137.50, as seen on the chart below:

(click here to enlarge)

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A significant break below resistance would suggest a more bullish expectation in rates and will likely support a continued uptrend in equities.  Until bonds decide which way they want to move in a more assertive demeanor, expect this tentativeness to manifest itself in an equally-tentative stock market.

Baseline Analytics TrendFlex signals assess the risk of a shift in market trend.  Visit our website for more information and subscription details.

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On Friday, I sold a portion of my long positions in stocks.  Not too much, mind you.  All I did was to make the market pay me for my efforts in successfully identifying opportunities to profit from the market uptrend.

When the market hands you profits, take them.  At least take some of them.

Complacency is a condition that evolves typically over a timeline of several months.  It tends to manifest itself in repeated, consecutive market highs or, minimally, in a multitude of up days sprinkled with an occasional, small pullback.  When your friends start discussing stocks at casual gatherings, when margin levels start to build, when the DOW hitting new highs populates the front page of your local newspaper, complacency is starting to set in.

Earlier this week, as the Baseline Analytics TrendFlex Classic signal and the TrendFlex Score suggested a high risk to a trend change shift to "down," I added two S&P 500 e-Mini short contracts to hedge my portfolio, which was slightly on margin (invested long 103%, albeit in a blend of stocks, bonds, commodities).

I closed my e-Mini future positions with a loss.  When I sold some long stock positions on Friday, I added another e-Mini short contract (also under water).  I will set a stop loss on that short position. Or I may add another short contract early next week.  I am invested 100% long in my trading accounts, and a net 68% long in a variety of mutual funds, including retirement accounts.  Handing some cash back to the market in a losing short position is OK.  I know that a market rout to the downside will not be protected effectively with this modest short position. But with the strength of this bull market, I don't want to heavily bet against the rising tide.

Today I also reviewed all of my long trading positions, and I started to set stops.  The stops are set at technical base points, such as the 50-day moving average, or levels that secure some profit or minimized loss.  As the market moves higher, I will raise those stops.  Each day, another $0.10 or $0.30 raise in a stop will give me the confidence that I am managing my portfolio responsibly, and not succumbing to complacency and greed.  Will I add any new long positions? Perhaps I will establish partial positions in stocks representing reasonable value, that pay dividends, or that have lagged the indices but have reason to recover based on company fundamentals.

Analyst consensus is forming that the S&P 500 has another 5% to 10% upside in 2014 (including a possible correction before then, of course). Many of us have sold in the past (i.e. stops triggered in a correction), only to miss a portion of the eventual recovery and new highs.  But I would rather jump into a bull trend in the middle, rather than try to identify and participate at the bottom. So even if most of my positions are closed out in a market rout, I will be building my buy list and look to participate should the market recover and suggest another bullish run.

Would I ever go fully short in a market correction? Probably not. My preference would be to keep a modest (50%?) position in stocks in my trading account, the balance in cash, and to short the market partially only if any short-term bounces are technically considered as such.  I will start building a buy list.

Major bull runs correlate positively with key economic variables such as growth in corporate profits, increasing employment, manufacturing output, stronger consumer confidence and spending, and housing starts. The market is a leading indicator, suggesting that improvements eventually materializing in these indicators presaged the stock market's rise from the ashes of 2009.  As long as the economic data remain supportive of the market, I will be long in stocks.

So what prompted me to lighten up on my long positions?  I am not bearish, I just want to hedge my long exposure.

Below is a chart of the Baseline Analytics TrendFlex Score.  The TrendFlex Score is a measure comprising 12 indicators that are weighted weekly.  The indicators cover macro-economic data, stock market breadth and momentum, market sentiment, bond risk premiums and technical support and resistance levels in the market averages. The TrendFlex Score identifies market extremes, serving as a warning sign of a potential shift in the market trend.

(Click here for an enlarged version)

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The TrendFlex Score ranges between 1,0 (extreme bullishness) to 3.0 (extreme bearishness). When the TrendFlex Score descends to the 1.30 to 1.40 area, chances are ripe for a pullback in the market.  The dates in the chart start in April, 2011, and end as of this Friday.  Note extreme lows in May 2013 (score of 1.20) and November 2013 (score of 1.32), which preceded short-term market corrections.  Friday, the TrendFlex Score settled at 1.38, near its historic lows.

Conversely, high scores (around 2.0 and higher) tend to suggest that a market correction is about to end.  Note extreme scores in May 2012 (score of 2.64) and January 31, 2014 (score of 1.96), among other extreme highs, that preceded market rallies.

I use the TrendFlex Score in my personal money management as well as managing client funds at The Absolute Return. For example, as the TrendFlex Score descends toward extreme lows, I look for opportunities to go long in sector ETF's with low correlation to stocks (such as bonds at most times), I will set stops, sell calls on long positions (not much money in that business today with a low VIX) and take some money off the table by pruning back long positions.

As a long-term investor (but occasional trader), I will use the TrendFlex Score to monitor risk in my portfolio, and to calibrate my weightings across stocks, ETF's, bonds, and cash, accordingly.  I would like to remain ahead of the curve and not succumb to a sudden market meltdown by remaining complacent as the averages reach new highs.

Ignoring vigilant portfolio management can have disastrous consequences.  Witness the years 2000 and 2008.  But admittedly, being over-zealous in adjusting portfolio allocations can likewise cause under-performance as well as accumulating transaction costs. Those long-term investors fortunate (and prescient) enough to have built long positions in 2009 and 2010, and simply ignored their long holdings, have done quite well.

At the end of the day, however, maintaining a long-term perspective supported by positive macro-economic trends is a suitable recipe for successful investing.

Click here for a video overview of the TrendFlex Score.  Click on the following links for Product and Subscription details.

 

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Posted by on in News

Baseline Analytics is launching a new service focused on dividend-paying stocks.  Over the long-term, dividends have accounted for a significant portion of total equity returns (to see an excellent paper on this subject by Guinness Atkinson Funds, click here).

On a weekly basis, Baseline Analytics will feature a list of equities that turn ex-dividend in the upcoming week (investors owning the stock at the ex-dividend date will receive the next dividend, which is typically paid within the upcoming 30 days). A minimum 1.0% yield is required to make the initial cut.

To further refine the list of ex-dividend stocks, Baseline Analytics runs its screening technology to identify those stocks that are technically-attractive.  Such indicators include whether the stock is trading above its 50-day moving average, and whether the stock is showing signs of a short-term breakout (i.e. price increasing on higher volume, or an upside crossing of short-term moving averages over longer-term moving averages).  In addition, we filtered the list to represent stocks with average daily trading volume of 50,000 shares or more (to avoid thinly-traded stocks with typically-wide bid/ask spreads). These technical indicator filters will help to identify those ex-dividend stocks best poised for further gains.

Click on the link below to enlarge this week's list.  For subscribers, an updated StockStash Ex-Dividend list will present the most technically-attractive candidates from this week's list.  This list is being offered at no cost to our Blog readers for this week and next week's picks, after which time it will be offered to subscribers only.  To subscribe to our TrendFlex, StockStash and ETF-Zone content, click here.

 

(Click here to enlarge list)

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Posted by on in News

The S&P 500 was barely changed on the week, despite Friday's swoon.  Revisiting the more significant technical indicators reviewed by Baseline Analytics, the market's general demeanor remains positive despite weakness in momentum, small cap and Nasdaq stocks in general.

A few highlights (also noted on the chart below):

  1. The major uptrend remains intact; RSI held above the mid-30's (top of chart below), reinforcing the bull market.
  2. KST is neutral to slightly negative; not a significant concern at this time.
  3. VIX is neutral however Put/Call ratio is near a point that would suggest a reversal in this short downtrend.

b2ap3_thumbnail_BLA042714.png

Our sentiment chart (below) highlights a few interesting developments:

  1. Advances vs. declines remain near their highs.
  2. New Highs vs. New Lows remain positive
  3. The Summation Index (a momentum indicator) remains in bullish territory.

(click here to enlarge)

b2ap3_thumbnail_BLAsent042714.png

So while the markets have shown increased volatility and headline reaction, it appears that sector rotation is shifting funds from momentum and small-cap high-fliers and seeking the alternative sectors (larger-cap, dividend-paying, lower beta, more reasonable value equities) in this aging bull market.

Visit Baseline Analytics TrendFlex for more information about our TrendFlex indicators.

 

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Several Market Technicians have been rather vociferous of late in characterizing the chart action as a gradual topping pattern in the equity indices.  Clearly, the NASDAQ index is in worse technical shape than that depicted in the S&P 500 chart below. It feels like tough going for the S&P 500 until it can break out of the 1890-1895 range to a new high.  A pickup in volume on the upside would be further encouraging.

(click here to enlarge)

b2ap3_thumbnail_SPX04192014.png

A positive sign after reviewing all of the setbacks during the last year, has been the ability of the Relative Strength Line (RSI, at the top portion of the chart) to maintain support at the low end near 30.  This has historically been a signal of a strong uptrend in that the RSI has repeatedly failed to sink to lower levels that would denote a more serious setback.

The middle of the chart shows Martin Pring's KST (which stands for "Known Sure Thing"), another technical tool in Baseline Analytics' arsenal.  During uptrends, when KST crosses below zero, that point typically coincides with a short-term low. Note the several instances when KST crossed below the zero line over the last eleven months depicted in the chart. Those points represented buying opportunities.  A trader would have generally profited by going short when the blue (faster) KST line crossed below the slower red KST line.

As for measures of market sentiment, Baseline Analytics favors VIX and the Put/Call Ratio, tracking those indicators relative to historic extreme points as well as their moving averages. VIX has entered a neutral stage (neither suggesting complacency nor worry), and the Put/Call Ratio also has settled back from a near-extreme reading approaching 1.2 at the height of the early-April swoon in the market.

So what's our take?  Clearly the market is resilient.  It wants to maintain its uptrend but it faces occasional headwinds that encourage dumping of momentum plays and calls for a deeper correction.  Add to that the mid-term election year fear and exasperation that the bull market is five years old (old age for such a trend) and you have a solid dose of fear and caution, just what we need to push the market higher.

This is the time for sensible portfolio allocation.  A mix of large cap, dividend-paying stocks, a prudent partial allocation to bonds, some emerging market ETF's and perhaps a little small-cap spice, as well as a cash reserve for future buying opportunities, would be a reasonable approach to this fickle market.

Baseline Analytics TrendFlex market signal use several indicators (including those in the chart above) to help investors stay on the right side of the market.  Visit our website for more information.

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I am not one to predict targets for the equity indices.  But reviewing the monthly chart of the S&P 500 below, one can't help but wonder if the index is setting up for an aggressive bull run not unlike that of the early 1990's.  I want to draw your attention to the Relative Strength Index (RSI) at the top of the chart below:

(click to enlarge)

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Note how "overbought" the index got in 1995, preceding a tripling of the index to its high near 1500 at the height of the Internet bubble in 2000. Since then, despite RSI highs prior to the financial crisis in 2008-2009, the S&P 500's Relative Strength Index has barely touched upon an overbought level in the monthly charts. Given the severity of the 2008-2009 downturn, one would expect new highs to make up lost ground, and then some, as it meanders in "overbought" territory. The daily chart view of the S&P 500, as well as key market indicators that comprise the Baseline Analytics TrendFlex market trend indicators, show a robust bull market but with early signs short-term topping action.

The chart below depicts the daily view of the S&P 500, along with some of our key TrendFlex indicators, such as RSI, Martin Pring's "Known Sure Thing (KST)," and sentiment gauges as measured by VIX (the CBOE volatility index) and the CBOE Put-to-Call ratio.  As for the S&P 500, its emphatic uptrend is denoted by no less than five touches of its uptrend line from May, 2013.

(click to enlarge)

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Near term support of the S&P 500 is at 1850, with the next level of support at the 50-day moving average near 1825.  Some noteworthy indicators include KST (bullish since the 1825 level) and neutral-to-slightly negative reading in VIX and Put/Call (low level as such indicate modest complacency, which has been, in the past, a forewarning of a potential setback in the stock market). Other key indicators of our TrendFlex Score include several measure of market breadth, namely the extent to which there is broad participation of stocks in the market uptrend, including more new highs and higher prices coupled with higher volume.

The chart below shows some of these indicators:

(click to enlarge)

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It is worth noting that the surge in the Advance-Decline ratio of the New York Stock Exchange (NYSE) since early February, is very similar to the surge experienced in April-May 2013 (see circle). The 2013 surge was quickly followed by a correction in the S&P 500 of about 8% (a similar correction this month would take the S&P 500 to about 1727). The Summation Index, show at the bottom of the chart above, similarly appears to have reached a near-crescendo at its 1050 close on Friday March 7th. Likewise, the NYSI reached 1200 in May 2013, prior to its 8% correction.

As our subscribers are aware, the Baseline Analytics TrendFlex Score measures the RISK of a change to the current trend.  Complacency and a "this time is different" attitude can hypnotize traders and investors to join the trend at the very point of an impending reversal. A balanced portfolio, protected with adequate capital preservation, will prepare traders and investors to weather corrections as well as provide the capital necessary to continue to participate in the longer-term uptrend.

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Posted by on in News

Each week, Baseline Analytics follows key charts and technical indicators to obtain a read on the direction of the markets, especially the various intermarket sectors (bonds, commodities, stocks) as well as macro-economic developments.

Several charts are affirming signs of a pickup in economic growth as well as potential signs of inflation.  The first chart is the CRB index basket of commodities.  It has been no secret that commodities have strengthened this year, with Natural Gas, Coffee, precious metals and others (have your checked out DBA lately?).

click to enlarge

b2ap3_thumbnail_crb0221.png

Our next chart depicts the relative performance of the Financial ETF (XLF) compared to the S&P 500. Financials have been underperforming the S&P 500 since mid-January. Anticipation of rising interest rates (consistent with the pickup in commodities and potential inflation) could be driving this underperformance.  Financials and Technology have been viewed as necessary sectors to support a bull market.  Although financials are not showing leadership, technology is showing decent relative strength.

click to enlarge

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The chart below depicts the Nasdaq market, which broke its 2014 high this week. Nasdaq leadership is a bullish indicator, and we would look for other indices to likewise reach new highs.  See the chart below:

click to enlarge

b2ap3_thumbnail_NAZ0221.png

Finally, one of our favorite charts is the relationship between Staples and Discretionary stocks, as shown by a comparison of SPCC (discretionaries) and SPST (staples).  Outperformance in discretionary stocks is a harbinger of economic growth and consumer confidence.  Sure enough, discretionaries (purple line on chart below) recently printed a higher low relative to the S&P 500, and have outperformed staples, since early February.

click to enlarge

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These sector indices suggest that investors would be rewarded to favor growth and inflation-driven opportunities, and lighten up on interest-sensitive sectors (financials, bonds) as well as defensives (staples).

Baseline Analytics market tour follows intermarket activity each week, and utilizes several indicators as part of its TrendFlex Score system.  ETF Zone (for subscribers) selects timely sector ETF's consistent with economic signals and intermarket relationships. Subscribe to our TrendFlex market trend signals, ETF Zone and StockStash, for timely trading and investment selections.

 

 

 

 

 

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Today's 0.76% bounce in the S&P 500 occurred at another critical support level.  As seen in the chart below, the 1750 area (the index closed at 1755 today) represents trendline support going back to June, 2013. RSI has held above 30, avoiding a dip into a more bearish, trend-reversal situation.

click to enlarge

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Reviewing a weekly chart of the S&P 500, the uptrend is comfortably intact.  On the chart below, 1690 represents trendline support at the 50-period moving average.  Also note that RSI has hugged the 50-level repeatedly during past setbacks.

(click to enlarge)

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The exception was the more serious correction in July and August 2012, when RSI slipped to the 30-level and the S&P 500 fell 250 points from peak to trough.  A similar scenario today would take the index to 1600, representing a 13.5% correction.

In the near-term, holding 1750 support will be key to a resumption in the uptrend.  Should support fail, the 1700 level is a likely stopping ground before we should once again review the technical state of the S&P 500.

The TrendFlex Score from Baseline Analytics assesses the risk of a change in the market trend. Our subscribers receive timely notices of a trend change based on the TrendFlex Score.  Learn more by visiting Baseline Analytics.

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Each week, Baseline Analytics screens over 6,000 equities to identify compelling price and volume patterns.  Depending on what these patterns say, traders and investors can benefit by establishing long or short positions in the stocks.

The SURGE Report identifies equities in our 6,000+ database that have exhibited volume surges over the past 1,5,10 and 20-day period, compared to several moving averages.  In this list, you may find stocks that have broken out and based, representing an attractive entry point.  Alternatively, stocks that have sold-off and are bouncing may represent attractive short opportunities.

Baseline Analytics StockStash equity selections is a subscription-only service that hones stock screens such as the SURGE Report to identify those particularly-attractive long or short opportunities. Subscribers also receive the TrendFlex Market Trend risk-assessment signals as well as our ETF Zone ETF screener service.  

Click on the link below to see the results of today's SURGE report. The report is an Excel list and will open as a separate download.  Online charting services such as StockCharts.com and finance sites such as Zack's and Yahoo Finance can then be used to review the list for further due diligence. The SURGE report is published every two weeks, so check back again.

Baseline Analytics SURGE Report.

 

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We are back to our familiar chart of the S&P 500.  As previously noted, a bounce was likely when the index touched the 1775 level on Monday. A bounce on Tuesday, which took the S&P 500 to a close of 1792.50, reversed to test the lows of Monday and has once again settled near 1775 support.  See the chart below:

click to enlarge

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This appears to be a critical juncture for the index.  A close below 1775 would suggest next level of support at the trendline, near 1750.  RSI has held at about 35, a level which has marked the low point for RSI in this uptrend.  Also, a close at the 1750 level would classify this setback as a technical downtrend, by forming a low that is lower than the previous low that can be seen near 1775, in December.

A tentative bounce on light-to-modest volume from current levels would suggest continued technical weakness.

For our subscribers, an update to the TrendFlex Score will be published this evening.

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Just a quick update on the S&P 500.  The chart below shows today's low touching a support line drawn at 1775, which marked the low in December as well as broken resistance in November.  A pattern such as this tends to generate a little short-term support, if not a bounce in the index. Failure at this support level suggests the next support point at the trendline, around 1750.

We try not to read too much into short-term chart patterns, but just in case you were wondering what we are thinking, there you have it!

click to enlarge

b2ap3_thumbnail_SPX01272014V2.png

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Every so often, the high-beta, growth-oriented momentum portfolio needs a little peace and quiet via a prudent diversification into lower-beta equities.  A mix of varying beta stocks can provide diversification within a 100% stock allocation, whether it consists of consumer staples, healthcare, energy, telecom, etc.

Baseline Analytics ran a stock screener selecting equities with the following characteristics:

  • Below market beta of 0.8 or lower
  • Return on equity of 10% or higher
  • Price Earnings Ratio under 15
  • Dividend yield of 1.5% or higher
The attached stock screen has not been combed for timely trades or other fundamental or technical indicators that might suggest a high reward-to-risk ratio.  We leave that work up to our StockStash service.  Click on the link below and it will open an Excel file with our low beta selections.

 

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By observing the chart below, you can tell when Cisco Systems reports its earnings. Euphoria and fear following earnings reports and the company conference call has driven gaps up and down in Cisco's stock price. Cisco Systems is due to report earnings again on February 12th.  See the chart below:

click to enlarge

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The compelling fact regarding Cisco is its cheap valuation.  Cisco Systems holds over $9 in cash per share.  Reducinng Friday's closing price of $22.74 by the cash per share, results in a price of $13.74. At its trailing full year earnings of $1.84, Cisco's PE ratio is 7.5, or less than half of the S&P 500's PE multiple.  At next year's 2.08 EPS estimate, that is a PE of 6.6.

Now there is reason why value stocks can remain value stocks for a long time.  Shifting industry dynamics (think Sun Microsystems, Microsoft) can catch a large company off-guard, unable to or unaware of the need to make a change. Cisco Systems traditionally focused on network hardware, while startups shifted the network solution to software (not dependent on legacy hardware as Cisco was dependent upon).  However, as Barron's recently noted, Cisco's "Application Centric Infrastructure consists of a software-based controller that works with a new line of Cisco switches. Cisco says it will offer the agility and programmability that software-defined networks promise, with reduced complexity."

Being the first (or the early technology leader) is not necessarily the best for a technology company.  With Cisco's successful track record, excellent management, depth of talent, and cash, the odds are in favor of Cisco Systems ratcheting up its revenue growth in the coming years as it introduces its software-based solution.

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Cisco Systems also sports a 3.0% dividend yield (the next ex-dividend date will be early April). A breakout above the $23.75-$24.0 area would suggest a potential trend reversal for Cisco (26 and higher would break its 2010 peak, and 32 would take Cisco above its 2008 peak).

As the chart below shows, Cisco is a long way from returning to its 2000 peak, and has quite a way to catch-up with the Nasdaq (the blue line), which is closing in on historic high.

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Each week, Baseline Analytics screens over 6,000 equities to identify compelling price and volume patterns.  Depending on what these patterns say, traders and investors can benefit by establishing long or short positions in the stocks.

The SURGE Report identifies equities in our 6,000+ database that have exhibited volume surges over the past 1,5,10 and 20-day period, compared to several moving averages.  In this list, you may find stocks that have broken out and based, representing an attractive entry point.  Alternatively, stocks that have sold-off and are bouncing may represent attractive short opportunities.

Baseline Analytics StockStash equity selections is a subscription-only service that hones stock screens such as the SURGE Report to identify those particularly-attractive long or short opportunities. Subscribers also receive the TrendFlex Market Trend risk-assessment signals as well as our ETF Zone ETF screener service.  Click here for our subscription offerings.

Click on the link below to see the results of today's SURGE report. The report is an Excel list and will open as a separate download.  Online charting services such as StockCharts.com and finance sites such as Zack's and Yahoo Finance can then be used to review the list for further due diligence. The SURGE report is published every two weeks, so check back again.

Baseline Analytics SURGE Report.

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