S&P 500: Small caps diverge

The S&P 500 ($INX) remains bullish, with Trend Index holding above zero for over a year indicating tremendous buying pressure.

S&P 500

Narrow breadth is our main concern, with the Russell 2000 small caps ETF (IWM) diverging from the S&P 500 ($INX).

S&P 500 & Russell 2000 Small Caps

Conclusion

The market is growing risk-averse as the Fed starts to taper. But financial markets are still awash with cash.

M2/GDP

Buying is likely to be concentrated in the heavyweights.

Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (FB), and Microsoft (MSFT)

Small caps could possibly accelerate into a down-trend but reversal of large cap indices is unlikely with so much liquidity.

Doug Kass | 50 laws of investing

Doug Kass wrote these 50 laws, incorporating many of Bob Farrell’s 10 rules, in an article in Barron’s. Doug is founder and president of Seabreeze Partners, with more than 45 years experience in financial markets.

  1. Common sense is not so common.
  2. Greed often overcomes common sense.
  3. Greed kills.
  4. Fear and greed are stronger than long-term resolve.
  5. There is no vaccine for being over-leveraged.
  6. When you combine ignorance and leverage – you usually get some pretty scary results.
  7. Operate only in your area of competence.
  8. There is always more than one cockroach.
  9. Stocks have a gravitational pull higher – over long periods of time equities will rise in value.
  10. Long investing generates wealth.
  11. Short selling protects wealth.
  12. Be patient and learn how to sit on your hands.
  13. Try to get a little smarter every day and read as much as humanly possible – an investment in knowledge pays the best dividends.
  14. Investors sometimes think too little and calculate too much.
  15.  Read and re-read Security Analysis (1934) by Graham and Dodd – it is the most important book on investing ever published.
  16. History is a great teacher.
  17. History rhymes.
  18. What we have learned from history is that we haven’t learned from history.
  19. Investment wisdom is always 20/20 when viewed in the rearview mirror.
  20. Avoid “first-level thinking” and embrace “second-level thinking.”
  21. Think for yourself – those who can make you believe absurdities can make you commit atrocities.
  22. In investing, that what is comfortable – especially at the beginning – is most often not exceedingly profitable at the end.
  23. Avoid the odor of “group stink” – mimicking the herd and the crowd’s folly invite mediocrity.
  24. The more often a stupidity is repeated, the more it gets the appearance of wisdom.
  25. Always have more questions than answers.
  26. To be a successful investor you must have accounting/finance knowledge, you must work hard and you have to be keenly competitive.
  27. The stock market is filled with individuals who know the price of everything but the value of nothing.
  28. Directional call buying, when consumed as a steady appetite, is a “mug’s game” and is often a path to the poorhouse.
  29. Never buy the stock of a company whose CEO wears more jewelry than your mother, wife, girlfriend or sister.
  30. Avoid “the noise.”
  31. Reversion to the mean is a strong market influence.
  32. On markets and individual equities… when you reach “station success,” get off!
  33. Low stock prices are the ally of the rational buyer – high stock prices are the enemy of the rational buyer.
  34. Being right or wrong is not as important as how much you make when you are right and how much you lose when you are wrong.
  35. Too much of a good thing can be wonderful – look for compelling ideas and when you have conviction go ahead and overweight “bigly.”
  36. New paradigms are a rare occurrence.
  37. Pride goes before a fall.
  38. Consider opposing investment views and cultivate curiosity.
  39. Maintain a healthy level of skepticism as you never know when the Cossacks might be approaching.
  40. Though doubt is uncomfortable, certainty is ridiculous and sometimes dangerous.
  41. When investing and trading, never let your mind dwell on personal problems and always control your emotions.
  42. ‘Rate of change’ is the most important statistic in investing.
  43. In evaluating the attractiveness of a company always consider upside reward vs. downside risk and ‘margin of safety.’
  44. Don’t stray from your investing and trading methodologies and timeframes.
  45. “Know” what you own.
  46. Immediately sell a stock on the announcement or discovery of an accounting irregularity.
  47. Always follow the cash (flow).
  48. When new ways of earnings are developed – like EBITDA (and before stock-based compensation) – substitute them with the word… “bullshit.”

Two Bonus Rules

  1. Favor pouring over balance sheets and income statements rather than spending time on Twitter and/or wallstreetbets.
  2. Always pay attention to what David Tepper and Stanley Druckenmiller are thinking/doing. (Trade/invest against them, at your own risk). 

Recent breakouts

Our recent breakout scan returned a number of promising stocks for review.

Australia

Orica (ORI) – rising Trend Index indicates buying pressure. Follow-through above 14.50 would complete a double bottom reversal.

Orica (ORI)

Canada

Precision Drilling (PD) – Trend Index trough above zero indicates strong buying pressure.

Precision Drilling (PD)

UK

Metro Bank (MTRO) – not a conventional breakout but rising Trend Index indicates buying pressure.

Metro Bank (MTRO)

USA

Marathon Petroleum (MPC) – Trend Index troughs above zero indicate strong buying pressure.

Marathon Petroleum (MPC)

More Breakouts

Spirit of Texas Bancshares (STXB) – shallow trough is a bullish sign. Trend Index holding above zero indicates strong buying pressure. Breakout above 25.00 would signal a fresh advance.

Spirit of Texas Bancshares (STXB)

CURO Group Holdings (CURO) – Trend Index trough above zero indicates strong buying pressure.

CURO Group Holdings (CURO)

Curtiss-Wright (CW) – Trend Index trough above zero indicates strong buying pressure.

Curtiss-Wright (CW)

Acuity Brands (AYI) – Trend Index troughs above zero indicate strong buying pressure. Follow-through above 200 is bullish.

Acuity Brands (AYI)

Apollo Gloabl Management (APO) – Trend Index trough above zero indicates strong buying pressure.

Apollo Global Management (APO)

Williams Companies (WMB) – Trend Index trough above zero indicates strong buying pressure.

Williams Companies (WMB)

Home Bancorp (HBCP) – shallow trough is a bullish sign. Trend Index trough above zero indicates strong buying pressure.

Home Bancorp (HBCP)

APA Corp (APA) – Breakout above 24.00.

APA Corp (APA)

Occidental Petroleum (OXY) – Breakout above 33.00.

Occidental Petroleum (OXY)

Shallow corrections and Trend Index troughs above zero indicate healthy buying pressure.

A word of caution: the above stocks are selected on the basis of technical analysis and do not consider fundamentals like sales, earnings, debt, etc.
Please do your own research. They are not a recommendation to buy or sell.

Recent Breakouts

Our latest scan for breakouts turned up only one candidate in the ASX 300:

Computershare (CPU)

Computershare (CPU) jumped after release of its annual report on Monday. CPU has grown via global acquisition to become the world’s leading provider of share registry services, which constitutes around 60% of group EBITDA. The remaining 40% largely comprises mortgage administration services in the United States and United Kingdom.

Russell 3000

The Russell 3000 yielded a few more promising candidates, concentrated in a few sectors:

Entertainment/Recreation/Gambling

Sea World (SEAS)

MGM International (MGM)

Caesars (CZR)

Vail Resorts (MTN)

Banking

Zions Bancorp (ZION)

First Foundation (FFWM)

Level One Bancorp (LEVL)

Semiconductors

Microchip (MCHP)

Brooks Automation (BRKS)

Others

Evolution Petroleum (EPM)

Progress Software (PRGS)

Arthur J Gallagher & Company (AJG)

Nexstar Media (NXST)

Look for a strong Trend Index (or Twiggs Money Flow), holding above zero, and shallow corrections.

Please note: no evaluation has been done of fundamentals like sales, earnings, debt, etc.

Quote for the Week

The two most powerful warriors are patience and time.

~ Leo Tolstoy

Recent breakouts

Our latest scan for breakouts turned up only one candidate on the ASX:

Premier Investments (PMV)

Premier Investments is an Australian company that operates six specialty retail fashion chains in the specialty retail fashion markets in Australia & New Zealand and also operates the unique Smiggle brand, retailing children’s stationery in Australia and overseas markets.

Not your normal candidate for a growth stock but PMV has been appreciating steadily, with shallow troughs and regular breakouts since March last year. Trend Index is declining; so we would want to see an upswing, respecting the zero line.

Russell 3000

The Russell 3000 yielded a few more promising candidates:

Inspire Medical systems (INSP)

Penske Group (PAG)

SVB Financial Group (SIVB)

Texas Instruments (TXN)

Walker Dunlop (WD)

Look for a strong Trend Index, holding above zero, and shallow corrections.

Quote for the Week

No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future.

~ Ian Wilson, former GE Chairman

Nasdaq & NYSE breakouts

Our breakout of the week, Cadence Design Systems, Inc. (CDNS), is testing resistance at 150. Repeated Money Flow troughs above zero signal exceptional buying pressure. Breakout above 150 would signal an advance with a target of 1801.

Cadence Design Systems Inc. (CDNS)

Cadence Design Systems, Inc. provides software, hardware, services, and reusable integrated circuit design blocks worldwide. The company offers functional verification services, including emulation and prototyping hardware. Its functional verification offering consists of JasperGold, a formal verification platform; Xcelium, a parallel logic simulation platform; Palladium, an enterprise emulation platform; and Protium, a prototyping platform for chip verification.

Another, CDW Corporation (CDW), is testing resistance at 185. Rising Money Flow troughs again signal growing buying pressure. Breakout above 185 would signal an advance with a target of 2052.

CDW Corporation (CDW)

CDW Corporation provides integrated information technology (IT) solutions to business, government, education, and healthcare customers in the United States, the United Kingdom, and Canada. It operates through three segments: Corporate, Small Business, and Public. The company offers discrete hardware and software products, as well as integrated IT solutions, including on-premise, hybrid and cloud capabilities across data center and networking, digital workspace, security, and virtualization.

Used car retailer CarMax, Inc. (KMX), broke through resistance at 135. Rising Money Flow troughs indicate growing buyer interest. Breakout would signal an advance with a target of 1553.

CarMax Inc. (KMX)

CarMax, Inc., through its subsidiaries, operates as a retailer of used vehicles in the United States. The company operates in two segments, CarMax Sales Operations and CarMax Auto Finance. It offers customers a range of makes and models of used vehicles, including domestic, imported, and luxury vehicles; and extended protection plans to customers at the time of sale, as well as sells vehicles that are approximately 10 years old and has more than 100,000 miles through whole auctions.

A smaller breakout pattern is Medtronic plc (MDT) which is testing resistance at 132. Money Flow troughs respecting zero signal strong buying pressure. Breakout above 132 would offer a target of 1444.

Medtronic plc (MDT)

Medtronic plc develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. It operates through four segments: Cardiovascular Portfolio, Neuroscience Portfolio, Medical Surgical Portfolio, and Diabetes Operating Unit. The Cardiovascular Portfolio segment offers implantable cardiac pacemakers, cardioverter defibrillators, and cardiac resynchronization therapy devices; AF ablation products; insertable cardiac monitor systems; mechanical circulatory support; TYRX products; and remote monitoring and patient-centered software.

Wingstop Inc. (WING) broke long-term resistance at 170, signaling an advance with a target of 2255. Rising Money Flow troughs signal growing buyer interest.

Wingstop Inc. (WING)

Wingstop Inc., together with its subsidiaries, franchises and operates restaurants under the Wingstop brand name. Its restaurants offer classic wings, boneless wings, and tenders that are cooked-to-order, and hand-sauced-and-tossed in various flavors. As of December 26, 2020, the company had 1,506 franchised restaurants and 32 company-owned restaurants in 44 states and 10 countries worldwide. Wingstop Inc. was founded in 1994 and is based in Dallas, Texas.

Reminder

The above is only a technical view and does not take into account fundamental data like sales, operating margins, cash flows and debt levels. It is not a recommendation to buy or sell.

Notes

    1. Target of $180 for CDNS is calculated as the trough at 120 projected above resistance at 150.
    2. Target of $205 for CDW is calculated as the trough at 165 projected above resistance at 185.
    3. Target of $155 for KMX is calculated as the trough at 115 projected above resistance at 135.
    4. Target of $144 for MDT is calculated as the trough at 120 projected above resistance at 132.
    5. Target of $225 for WING is calculated as support at 115 projected above resistance at 170.

Acknowledgement

  1. Hat tip to SeekingAlpha.com for the company profiles.

A Tesla in the coal mine

All five US technology behemoths — Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Facebook (FB) and Microsoft (MSFT) — show strong up-trends over the past 6 months, boosted by strong inflows from international investors who are giving the bond market a wide berth.

AAPL, AMZN, GOOGL, MSFT, FB

But the canary in the coal mine is Tesla (TSLA), the darling of retail investors and the largest holding in Cathy Wood’s ARK Innovation Fund (ARKK). TSLA encountered resistance at 700 and looks ready for another test of primary support. Breach of 550 would signal a primary down-trend.

Tesla (TSLA)

Trading at more than 17 times sales (TTM Q1 FY21), Tesla shows spectacular exponential growth in revenues over the past ten years. But investors should be wary of extrapolating that growth as heavyweights like Volkswagen, Ford and GM invest heavily in the EV space.

Tesla (TSLA)

Also, free cash flow is patchy, reaching $3.4 billion in FY20 on a levered basis.

Tesla (TSLA)

That starts to look anemic when one takes into account stock compensation of $1.7 billion — which does not affect cash flow but dilutes existing stockholders. Adjusted free cash flow, net of stock compensation, is $1.7bn. Against market cap of $621bn that gives an earnings multiple of 365 times!

Tesla (TSLA)

If we take adjusted free cash flow for the trailing 12 months to March 2021, of $1.4bn, that gives an even higher multiple of 443 times.

Conclusion

Valuations of stocks like Tesla (TSLA) are precarious and breach of primary support levels could spark a flurry of margin calls.

Notes

  1. Revenue and cash flows are from SeekingAlpha

Stock breakouts

This is just a view of stock market activity, based on technical analysis. It does not take into account fundamentals — like sales growth, margins, return on invested capital, debt and expected dividend streams — and is not a recommendation to buy/sell.

There were two notable breakouts this week in the Russell 3000:

Amazon (AMZN) was the clear winner, breaking resistance at 3500 after forming a solid base (between 3000 and 3500) over the past 10 months. Rising Money Flow troughs signal increased interest from buyers as Jeff Bezos handed over as CEO to Andy Jassy.

Amazon Inc (AMZN)

RGC Resources (RGCO) was runner up, breaking resistance at 25 at end of the June quarter. The base is not as well-defined as for Amazon, with penetration of support at 22.50 in April ’21 before a strong recovery. Respect of support at 25, however, would confirm the bull signal.

RGC Resources (RGCO)

The closest we have to a breakout this week on the ASX 300 is Rural Funds Group (RFF). After breaking resistance at 2.40 RFF formed a loose “cup and handle” pattern1, with a sharp pullback to test support at 2.30 followed by a rally to test resistance at 2.65/2.70. Divergence on Twiggs Money Flow, with a lower TMF peak, however warns of stubborn resistance and another test of support is likely.

Rural Funds Group (RFF)

Notes

  1. The “cup” on RFF runs from August ’19 to October ’20, the “handle” from November ’20 to the present.

ASX: Financials suffer, A-REITs advance on lower rates

The ASX 200 advance is tentative, with a short doji candle signaling hesitancy, and we expect retracement to test support at 7000.  The Trend Index trough above zero indicates longer-term buying pressure. Respect of support is likely and would signal a fresh advance.

ASX 200

Financial Markets

Bond ETFs broke through resistance, signaling falling long-term interest rates.

Australian Bond ETFs

A-REITs advanced on the prospect of lower long-term interest rates.

ASX 200 Property

Bank net interest margins, however, are squeezed when interest rates fall.

Bank Net Interest Margins

ASX 200 Financials retreated to test support at 6500. The trend is unaffected and Trend Index troughs above zero indicate long-term buying pressure.

ASX 200 Financials

Mining

Mining continues to benefit from the infrastructure boom, with iron ore respecting support at $200/ton1. Troughs above zero, flag buying pressure, and respect of support both signal another advance.

Iron Ore

The ASX 300 Metals & Mining index is again testing resistance at 6000. Breakout would signal another advance, with a target of 65002.

ASX 300 Metals & Mining

Health Care & Technology

Health Care respected its new support level and is advancing strongly. Expect resistance between 45000 and 46000.

ASX 200 Health Care

Information Technology recovered above former resistance at 2000, warning of a bear trap. Expect resistance at 2250; breakout would signal a new advance.

ASX 200 Information Technology
Gold

The All Ordinaries Gold Index (XGD) is testing resistance at 7500. Breakout would signal a fresh advance, with a target of 9000.

All Ordinaries Gold Index

The Gold price is retracing to test the new support level at A$2400 per ounce. Respect of support is likely and breakout above A$2500 would be a strong bull signal for Aussie gold miners.

Gold in AUD

Conclusion

We expect A-REITs and Bond ETFs to advance on the back of lower long-term interest rates.

Financials are expected to undergo a correction as interest margins are squeezed.

Metals & Mining are in a strong up-trend because of record iron ore prices.

Health Care is recovering well and expected to test resistance.

Technology had a strong week but the outlook is still uncertain.

We expect the ASX 200 to retrace to test support at 7000 as its largest sector (Financials) undergoes a correction.

Notes

  1. Tons are metric tons unless otherwise stated.
  2. Target for Metals & Mining is calculated as support at 5000 extended above resistance at 5750.

ASX Technology stocks fall

The ASX 200 continues to test its February 2020 high at 7200. Narrow consolidation below resistance is a bullish sign but we need to keep a weather eye on the US and China.

ASX 200

Financial Markets

Bond ETFs, in a sideways consolidation, indicate that long-term interest rates are holding steady. Inflation remains muted and the RBA is following through on their stated intention to suppress long-term yields.

Australian Bond ETFs

A-REITs are testing resistance at 1500. Reversal below 1340 is unlikely but would warn of a double-top reversal.

ASX 200 REITs

Financials are testing resistance at 6500. A rising 13-week Trend Index — with troughs above zero — flags buying pressure, suggesting that a breakout is likely.

ASX 200 Financials

Health Care, Discretionary & Technology

Health Care is testing resistance at 42500. The rising Trend Index is bullish but failure to cross above zero would confirm long-term selling pressure. Breach of 40000 would complete a bull-trap (a bear signal for investors) and warn of another test of primary support at 37500.

ASX 200 Health Care

Technology broke support at 1900 to signal a primary down-trend, imitating the pattern in US markets. Breach offers a medium-term target of 14001.

ASX 200 IT

Consumer Discretionary is testing its rising trendline. We expect a test of support at 2900 as the impact of government stimulus fades.

ASX 200 Discretionary

Mining

Iron ore retreated slightly, to $210/metric ton. Chinese steel mills are stockpiling — due to rising tensions with Australia and anticipated production curbs in China (to reduce pollution levels). The boom is only expected to last as long as stockpiling continues. Then prices are likely to fall steeply as mills run down stockpiles. Reversal below support at $175-$180 would warn of a sharp decline.

Iron Ore

The ASX 300 Metals & Mining found resistance at 6000. A tall shadow on this week’s candle warns of short-term selling pressure. Another test of support at 5000 is likely.

ASX 300 Metals & Mining

The All Ordinaries Gold Index (XGD) continues to test its new support level at 7000. Follow-through below recent lows would warn of another test of 6000, while recovery above 7300 would signal a fresh advance. Breakout above the long-term descending trendline would strengthen the bull signal. Gold bullishness is fueled by rising inflation fears.

All Ordinaries Gold Index

The Gold price, in Australian Dollars, is testing its descending trendline and resistance at 2400. Breakout above the two would deliver a strong bull signal.

Gold in AUD

Conclusion

Technology stocks have commenced a primary down-trend. Metals & Mining look highly-priced and susceptible to a sharp reversal. They have looked that way for months but sooner or later we are bound to see a rapid re-pricing.

Steady long-term interest rates and a buoyant housing market are lifting REITs and Financials respectively. Health Care and Consumer Discretionary look hesitant, while Gold stocks are making a tentative rally.

Notes

  1. Target for XIJ is its 2400 peak extended below 1900.