The Stock Blog Today

They say it’s the stronger dollar but don’t kid yourself. The stock market has run too far too fast. Today, investors are all of a sudden worried that the stock prices rise might be overdone. Huh? It has been overdone for about 1-2 months already!

With interest rates rising and the housing market in limbo, the S&P managed to rise as much as 40% from the early March bottom. The reason? Over optimism that the recovery is in place.

Just look at the New York Federal Reserve Empire State Manufacturing Survey index. It feel 5 points in June to a negative 9.4. Negative! It may look better but no one is buying. I was at the mall last weekend and although traffic was picking up, no one was lining up at the stores. People may be looking but they aren’t buying.

In the meantime, the dollar is rallying, sending the only trade that worked, the commodities trade, diving. Freeport McMoran (FCX) is down another 4.5% to 55.92 after Friday’s 4% pull back. Oil is down below $72 as well.

If you haven’t been selling into the rally these last few weeks, you are trading wrong.

As of writing, the Dow is down 207 points. It looks like the choppy trading will continue, until we get a positive (or negative) catalyst that will push the market one way or another.

It’s hard to tell why the U.S. consumer is so confident when unemployment continues to rise and home values continue to shrink. However, the U.S. consumer sentiment is at its strongest level in nine months, just below the levels in September 2008.

Remember that during that time in 2008, Lehman Brothers went bankrupt and sent the world financial, and thus economies into a big mess. To think that consumers feel almost as good now as they did before the collapse is insane. Yet, this is what the numbers are telling us.

What’s even more interesting is that the index still came in under expectation. Economist on average was expecting a reading of 69.5 even though the index came in at 69.0. Fortunately, the number is still up from May’s reading of 68.5 so while the market dove immediately after the report came out, it’s paired back much of its gains.

Not all is crazy though. People are worried about the economic outlook and isn’t totally drunk in kool aid. The consumers’ assessment of the economic outlook for the next year fell from a gauge of 61 from 75.

Also, everyone is expecting inflation to come. The one-year inflation expectation rose to 3.1%, the highest level since October of last year.

We lost a lot of our wealth and now inflation is back. Awesome!

Investing online only became popular in recent years, before there was no such choice. Online trading is an offshoot of the popularity of the Internet. If once can shop clothes, books or what-have-you online, why can’t one buy or invest on stocks as well? Now online trading is one of the most popular activities done over the Internet.

Before one can invest in stocks online, one should first open a brokerage account, which allows a person to purchase stocks, bonds, mutual funds, and other investment tools. Then the next step is to find a stock broker that could handle your investing requirements. Be prepared to pay fees for both steps. The fee you pay the stock broker is called commission, the amount depends on the type of brokers you choose, traditional or discount broker. Once you have done both steps, you are ready to begin investing in stocks online.

The online stock investor is no different from any stock investor, except of course that the former is doing the investing with a click of a mouse or by pressing a computer key while the latter does it in person in the office of his/her stock broker or on the trading floor itself. Thus the same set of principles that other stock investors follow also apply to an online stock broker, who needs to apply the same amount of prudence, due diligence and, sound investment strategy.

Online stock trading or investing offers a lot of advantages, foremost of which is convenience. Online trading websites allow the investor to monitor or keep track of his/her potential investments and analyse their performance. These websites also have features that allow traders to actually watch how stocks are being traded and how the share prices are fluctuating as well as calculate losses and gains. Most online trading sites also allow the user to view the detailed profile of a company and compare its performance against other companies within the same industry.

There are disadvantages in online stock trading also. One of which is that since it is done via the Internet, it is highly dependent to technology. There would be instances when the server of the stock brokerage firm would be down or cannot be accessed. In instances such as these, the investor can call the firm’s phone number (usually toll-free), so there will be no disruption in the stock investment transaction. This phoned-in trade usually comes with a minimal fee. Online traders should also be careful since they are transacting online, once you have keyed in or emails your transaction, it is hard to undo or un-transact it.

Online stock investors usually deposit funds into a so-called share account, which are use to make the investments. The online trading website or the stock broker, upon the instruction of the investor, can either buy or sell a stock. Some of the costs that go with investing online include site tariffs or commission, capital gains taxes and stamp duty. A stock investor should make sure that there are no hidden charges and that all transactions costs or fees are transparent.

There are more than 100 indicators in a technical analyst’s arsenal. These can be divided into a few categories. Some send clear signals of a change in trend when stocks reach a designated range. Others are useful only when they hit extreme degrees. Most must be used in conjunction with others. Moreover, certain indicators are most telling over shorter periods, while others are most useful in reading secular trends. Following are some of the indicators used in stock technical analysis.

Cyclical Technical Analysis Indicators

One stock market cycle, normally four to five years. Cash and cash flow indicators work particularly well on a cyclical basis. During this most recent cycle, the most important indicator has been cash flow from the public indirectly buying equities through mutual funds.

You see, there are two conditions necessary for a bull market to end:

1) The public stops buying; and

2) fund managers decide not to invest the cash coming in from investors.

In the past, the market has gone up because the public has bought mutual funds and fund managers have immediately put that money into equities.

Each month, the Investment Company Institute (ICI) reports the net fund sales to the public, the cash positions of mutual funds, transactions by portfolio managers, and switches between fixed-income and equity funds by the public.

Watching these figures over a number of months would enable a technical analyst to spot a major trend reversal.

Mutual fund cash under 5% is considered low or bullish and above 12% high or bearish.

Cash flows give you a picture of the demand for equities. New equity financing gives you a picture of supply.

Initial public offerings and secondary offerings, less corporate share repurchases, are referred to as net equity financing. The figure is reported in the Federal Reserve Flow of Funds numbers. A contracting supply is bullish, and a growing supply is bearish.

Foreign buying and selling of U.S. stocks and U.S. buying and selling of foreign stocks is another cyclical supply/demand indicator. The technical analyst is interested in whether U.S. investors are spending more money abroad than foreigners are spending here, and if the fundamentals stack up. If they are, it would be negative for the U.S. market. This information is available from the Securities Industry Association.

Secular Technical Analysis Indicators

Two or more economic or stock market cycles, normally lasting 20-30 years. Secular technical analysis indicators measure the long term. In general, they can only tell you how old a cycle is, rather than when it might change. Thus, a bearish reading in a secular indicator alone would not cause the technical analyst to become bearish on stocks in general.

Secular technical analysis indicators can be classified into two groups:

Asset allocation technical analysis indicators

Asset allocation technical analysis indicators look at the way in which individuals and institutions are structuring their portfolios.

At the beginning of a secular uptrend, people generally own very little stock and have most of their money in bonds and cash. Over time, money will flow into equities.

Thus, the more money in equities, the older the trend.

Data on asset allocation is obtained from the Federal Reserve’s Flow of Funds statistics.

Valuation technical analysis indicators

Valuation technical analysis indicators measure people’s confidence in stocks.

Among the most popular valuation measures are multiples and yields.

For example, when people are willing to buy and hold equities with historically low yields or with very high P/E multiples, it tells us they are very bullish on the appreciation prospects for stocks. Payout ratios are also important. The optimism implied by low yields would be diluted somewhat if payout ratios were also low.

Medium Term Technical Analysis Indicators

Three to six months. The medium-term horizon is the most important time frame in technical analysis, since it is the one in which most investors operate. Performance by professional fund managers is measured quarterly, and most mutual fund investors receive statements quarterly.

Measures of psychology, or sentiment indicators, are the best indicators for the medium term. They tell you how bullish and bearish different market participants are.

There are three keys to keep in mind with sentiment indicators:

Sentiment indicators are only useful when they reach extremes. You can’t use sentiment indicators without considering what the market is doing. You need to see three components to signal a bottom in the market:

1) traders liquidating;

2) investors buying; and

3) stability after a decline.

Sentiment indicators can signal a final top in the market three or four months ahead. However, they usually lead bottoms by only a few weeks. There are many kinds of sentiment indicators, including polls and transactional indicators. Polls tell us whether people are bullish or bearish. Transactional indicators tell us what investors are actually doing in the market.

Fundamental analysis is a critical part of analyzing stocks, along with technical analysis. Nowadays, there are many software programs to help you analyze stock trends. Fundamental and technical analysis are two most basic types of stock analysis. Some stock software makes the job very easy for investors. Investools is an example of a stock fundamental analysis software that pre-input the results of fundamentals for investors. Using fundamental analysis to trade futures proves to be much more accurate than just using technical analysis and charts.

Fundamental Analysis Explained

In fundamental analysis, the analyst assumes that every stock has an ‘intrinsic value’. If you can find that intrinsic value of the stock the it is easy to see if you should buy or sell that stock. You will often hear the term intrinsic value in stock analysis as well as analysis for commodities, futures and options. We will discuss intrinsic value in a later section.

Stock fundamental analysis deals with earnings of companies. So analysts will analyse numbers in the financial statements as well as what is going on in the company. In technical analysis, however, analysts will look at charts primarily and calculate probabilities using advanced mathematics.

Another fundamentals research ration is ROI. Return of investments is an easy way to gauge whether an investment is good or not. When doing stock analysis, one of the first thing to do is calculate return on investment. Return on investment calculation is easy and there is a simple return on investment formula for calculating return on investment. So, what is a return on investments?

What is a Return on Investments?

A total return on investments is a combination of the dividend income and price appreciation or decline over a period of time. Therefore, the return on investment formula is:

Return on investments

=

Capital appreciation or depreciation

+

Dividend income

What is a dividend?

Dividends are used to calculate return on investment. Dividends are distributions of a company’s profits to its stockholders. Investors who invest in a stock will receive dividend income whenever the company declares it. Dividends are automatically sent to investors’ brokerage accounts. There are two types of dividends: cash dividends and stock dividends.

Current yield

Current yield is also used in calculating return on investment. The current yield or dividend yield is the annual dividend divided by the current market value of the stock. Dividends are often paid quarterly, if at all. The current yield formula is:

Current yield (dividend yield)

=

Annual Dividend ————— Current market value of stock