Technical Analysis

  • 10 Aug
    TRI: short-term bullish strength, interesting value potential. How should you play it?

    TRI: short-term bullish strength, interesting value potential. How should you play it?

    The search for bargains in the stock market is an ongoing challenge for any investor. Sometimes the challenge is harder than at other times; when the market is at or near historical highs, as it is right now for example, finding stocks that offer a legitimate value at their current price takes a little more work and effort. It also often means going against the grain of the broader market, since the best values are usually found in stocks that are trading at or near historical lows.

    Thomson Reuters Corp (TRI) is a stock that offers a somewhat different profile. As of this writing, the stock is only about $6, or 12.5% below its all-time high price at around $48 per share, but still well above its 52-week low price, which is around $34 per share. That certainly puts the stock in correction territory; but perhaps not yet at quite the level a strict value investor might generally look for to believe the stock is deeply discounted enough to warrant a more serious look. I think there are some really interesting elements to look at, however, that at least make TRI a stock that long-term investors should be putting on their watchlists; you may even decide that the stock is worth a serious look as a good value investment right now.

    Thomson Reuters is a multinational company, based in Toronto, Ontario, Canada that has been in existence since the 1850’s. The company deals in news and information services, including financial market, legal, and tax and accounting data. As you’ll see below, the company is a cash flow machine, with healthy operating profits, manageable debt, and a global footprint. Their latest quarterly earnings report was two days ago, and along with a generally positive financial report, also disclosed that they expect to complete a sale of a 55% stake in their Financial & Risk unit – the segment of their business that provides data and news primarily to financial customers, including brokerages and investment banks – to private equity firm Blackstone Group LP for $20 billion. A portion of those proceeds will be used to pursue expansion opportunities in their legal and accounting businesses.



    Fundamental and Value Profile

    Thomson Reuters Corp (Thomson Reuters) is a Canada-based provider of news and information for professional markets. The Company is organized in three business units: Financial & Risk, Legal, and Tax & Accounting. The Financial & Risk unit is a provider of critical news, information and analytics, enabling transactions and connecting communities of trading, investment, financial and corporate professionals. The Legal unit is a provider of critical online and print information, decision tools, software and services that support legal, investigation, business and government professionals around the world. The Tax & Accounting unit is a provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government. The Company also operates Reuters, Global Growth Organization (GGO) and Enterprise Technology & Operations (ET&O). Thomson Reuters operates in over 100 countries. TRI’s current market cap is $29.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and revenues both declined. This is a trend that has been typical of companies in the Capital Markets industry, and TRI’s performance was better than the industry average. TRI operates with a healthy margin profile, however, with Net Income a little more than 14% of Revenues over the last twelve months. This number also improved to nearly 50% in the most recent quarter.
    • Free Cash Flow: TRI’s free cash flow is very healthy, at $1.9 billion at the end of the first quarter of the year. This number also increased dramatically from the beginning of the year, at around $1.1 billion, but declined about $25 million in the second quarter. The decline was attributed primarily to costs related to the Blackstone transaction.
    • Debt to Equity: TRI has a debt/equity ratio of .40. Their balance sheet indicates their operating profits are more than adequate to repay their debt. The Blackstone sale, which should be completed by the end of the year will infuse even more cash (about $500 million in the last quarter) onto their balance sheet. Besides financing acquisitions as already observed, it will also give them the flexibility, if they choose to do so, to practically wipe out their long-term debt, which amounted to a little less than $5 billion.
    • Dividend: TRI pays an annual dividend of $1.38 per share, which translates to a yield of about 3.28% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TRI is $18.86 and translates to a Price/Book ratio of 2.22 at the stock’s current price. Their historical average Price/Book ratio is 2.28. That suggests the stock is fairly valued right now, which at first blush doesn’t imply a “screaming deal for a value-oriented investor. However, the Price/Cash Flow suggests a little different story, since it is trading almost 20% below its historical average.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock bounced off of trend support at around $36.50 to push up to its current price. Along the way, it has shown an almost picture-perfect, upward “stair step” pattern to establish its short-term upward trend. The stock has seen resistance around $42.50, which coincides with the 50% retracement line. A break above that level could see the stock push quickly to $44, with its 52-week high in the $48 range not far off from that point. The 38.2% retracement line, which is sitting at around $41, should act as a strong support level if the short-term trend has any chance of extending into an intermediate time period. A break below that level could see the stock drop back to its 52-week lows around $36 per share.
    • Near-term Keys: If you prefer to wait for a more cut-and-dried value proposition on this stock, it might be safer to wait and see if the stock can reverse its short-term upward trend and push near to its yearly lows, or even to extend them a little more; that would put the stock’s Price/Book ratio significantly below its historical average and make the value argument more compelling than it may be today. If its bullish momentum, continues and the stock pushes above $42.50, a good short-term momentum trade could lie in buying call options, or the stock outright, with a short-term target price around $44 or $45 per share. If the stock breaks down, and you want to work with the bearish side, a good put option or short selling set up would come below $41, with a target price at around $36 per share.


  • 08 Aug
    The S&P 500 is about to hit a new all-time high. How much upside can you expect?

    The S&P 500 is about to hit a new all-time high. How much upside can you expect?

    Since the beginning of July, the market has shown quite a bit of bullish momentum. As of this writing, the S&P 500 (SPY) has rallied more than 150 points from a pivot low in late June in the 2,700 area – a total gain in a little over a month of 9%. The index is now poised to match, and quite possibly exceed the highs it reached in late January. For most technical traders, a new high marks a break above resistance that should give the market momentum to keep pushing even higher. If you’re not the type of person, however to simply “leap before you look,” then like me, you want to try to figure out how much room is left.

    How much upside remains in the market isn’t an easy question to answer, simply because nobody can make anything more than a semi-educated guess about future events – or the way the investing world will interpret them. The same technical traders who look for new all-time highs to extend trends even further also like to use historical price action to come up with estimates. Economists and fundamental investors try to use geopolitical and macroeconomic data and events to identify keys and trends. I hesitate to say that any one approach is better than another. Instead, I like to consider a combination of a couple of different technical techniques, along with economic and, yes, even geopolitical conditions to try to come to my own opinion.

    I spent some time this morning going over some of that data, and here’s what my early conclusions are. Keep in mind, these are just a few of my own best attempts to make a semi-educated guess, so you can take it or leave it as you wish.



    Some Fuzzy Math

    I’ll start by giving you a look at a technical chart of the S&P 500.

     

    There are a couple of elements of this chart that I think are useful right now. The first is the Relative Strength (RSI) indicator shown in the lower portion of the chart. RSI is a sentiment and momentum indicator that oscillates between upper and lower extremes to gauge a trend’s strength and give traders a way to estimate the likelihood the trend will continue or reverse. At the upper extremes (above 70), reversal risk to the downside is increased, while at the lower extremes (below 30), the opposite is true. The other element that comes into play about RSI is that stocks will often continue to follow their current trend even as RSI hovers near, or even beyond extreme levels. That reality is what makes RSI interesting to me right now. Even as the S&P 500 is pushing near to the all-time high it set in January of this year, RSI remains just a little below its uppermost extreme. It has also managed to oscillate within its upper and lower extremes since that high was reached in January, with its general pattern of highs and lows since April closely approximating the pattern of the index. That is a confirmation of the market’s trend over the last four months, and the fact that the indicator still hasn’t pierced its upper extreme band suggests there could be more room to run.

    At this point, it’s worth taking a moment to discuss a basic tenet of trend-based analysis. Trends tend to move in what I like to think of as stages. Typically speaking, most long-term trends can be broken into three different stages. Stage 1 is the earliest portion of a trend, when the market begins to reverse from an extreme or high or low. That’s the hardest stage to recognize, simply because it moves against the grain of the current longer trend, when most people will simply see that counter move as a minor correction or pullback within that trend. Stage 2 is the longest portion of a trend, and the area where the most money is likely to be made. It’s where the new trend is easiest to identify, and so more and more investors jump on board in that direction, making it easier and simpler to maintain. Stage 3 is the latest stage of the trend, and what I like of as the “last gasp” stage of that long-term trend. There is often still quite a bit of room to move along the trend in this stage, and so this stage can still yield very profitable results; but it also means that reversal risk is greatly heightened during this stage.



    The challenge about the stages of a trend is predicting how long any given stage will last. Stage 2 can last 4 to 5 years in many cases, while Stages 1 and 3 are usually considerably shorter. The problem is that word – usually. I’ve been saying the market is in Stage 3 of its long-term upward trend for more than two years, which is undoubtedly longer than that stage should last. I maintain that attitude, however, simply because I think it is smarter to estimate conservatively; plan for the best, but be prepared for the worst. That means that I want to recognize and take advantage of upside opportunity when it’s there, but be ready and positioned to react quickly and effectively when the market reverses back the other way.

    If you operate on the idea that the market is in Stage 3, any upside that remains should be somewhat limited. That is where the “291.78 Total Distance” estimate I highlighted on the chart comes into play. Some people will take the total distance of the last market correction to estimate how far the market’s new opportunity will be after a new high is reached. I think it’s reasonable to use the total distance as a reference point, but I prefer to think in somewhat more conservative terms.

    Another technical method of market analysis that I have learned to appreciate over the course of my years in the market is Fibonacci analysis. It’s pretty fascinating to see how market trends, and their swings from high to low correspond with Fibonacci mathematics. Those calculations can also be used to estimate a market’s extension of a trend. Here’s what we get if we apply the .618 Fibonacci ratio to the total distance of the market’s correction from January to April of this year:

    291.78 X .618 = 180.32

    We can add this number (roughly 62% of the total size of the correction) to the last market high to get an estimate of how much further the market could run if the resistance from that high is broken.

    2,872.87 + 180.32 = 3,052.87

    180.32 / 2,872.87 = 6.27% total upside

    Forecasting broad market upside of about 6% if the market makes a new high seems like a pretty conservative estimate; if it is even remotely close to correct, that should translate to some pretty healthy gains on individual stocks. How long that kind of a run will take is anybody’s guess. I decided to look back at the last two bull markets to gauge how long Stage 3 of their respective long-term trends lasted.



    The bull market that ran from 2002 to 2007 hit a high point in October 2007 before beginning its reversal; the “last gasp”, final stage of that five-year trend began in August, meaning that Stage 3 in that case covered about a two-month period of time. Prior to that, the March 2000 high that marked the end of the “dot-com boom” started its “last gasp” push in February of the same year. Saying the market could move about 6% in one to two months isn’t unreasonable given the increased level of volatility we’ve seen from the market this year; but I also think it’s useful to think about how long it has taken the market to recover from its latest correction (assuming, of course, that a new high is actually made). The bottom came in April, so a conservative estimate could suggest that it may take between 2 to 4 months. That certainly implies the market’s trend could last through the rest of the year, or possibly even longer since my estimate intentionally errs on the conservative side.

    There are some important elements from a fundamental and economic view that I think support the idea the market has some room and reason to run a little longer. Earnings continue to come in generally strong, and most economic reports (jobs, housing etc.) are also showing pretty broad-based strength. A healthy economy should generally lend itself well to continued strength in the stock market. While interest rates are rising, the Fed has maintained a conservative pace and degree of those increases, and the economy seems to following that lead pretty well. As they currently stand, interest rates remain historically low despite the increases we’ve seen so far. That is also a positive, bullish indicator.



    There are risks to my forecast. Frankly, many come from the geopolitical arena at this stage. Trade war concerns are still on everybody’s mind, and the Trump administration’s reimposition of economic sanctions on Iran could put a cap on oil supply that could drive oil prices near to their historical highs. While corporate earnings have yet to really show a negative impact from tariffs between the U.S. and its trading partners, more and more CEO’s are starting to cite tariffs as a risk. If that risk starts to manifest itself in an actual deterioration of revenues, and of earnings, the market can be expected to react negatively. Increased oil prices, at the extreme, could have the net effect of muting demand for a wide range of goods all over the globe. Real estate prices in many parts of the U.S. have also been showing some remarkable increases over the last year or so as well, while wage gains have generally been quite muted; at some point, those increases, along with increasing interest rates could very well put home ownership – a big indicator of broad economic strength – out of the reach of the average working person.

    Is there good upside left in the market? I think there is. I also think we have to be careful to factor risk into our evaluation and our investment decisions. Be conservative and selective about how you jump into a new opportunity, and plan ahead about how long you intend to stay or how much gain you want to chase. Put a plan in place to limit your downside risk if you’re proven wrong and the market turns against you, and limit the size of the new positions you take.


  • 31 May
    U.S.-China tensions could force AMAT much lower

    U.S.-China tensions could force AMAT much lower

    Over the last several weeks, the threat of a trade war between the United States and China has put a lot of pressure on the broad market. Virtually every sector of the economy could be affected by U.S. tariffs More →

  • 30 May
    CVS looks poised for a big break out – here’s why

    CVS looks poised for a big break out – here’s why

    Looking for a new investment to make can be an intimidating process, no matter how experienced you may be as an investor. There are so many ways to go about doing it, how are you really supposed to know what method works best? More →

  • 13 Aug
    Sunday Edition: Wearing A Polo? You’ll Like This Buying Opportunity

    Sunday Edition: Wearing A Polo? You’ll Like This Buying Opportunity

    When reading about the fraught retail sector, I usually find myself wondering about how iconic American brands are doing. Those longstanding brands that really embody and define American style.

    This week had me thinking about Ralph Lauren (NYSE: RL).

    For several years, it has seemed that Ralph Lauren has been in the same boat with Michael Kors and Coach, with their products being found mostly at outlet malls and on discount racks at departments stores. More →

  • 06 Aug
    Sunday Edition: Starbucks Addict? Don’t Buy The Dip

    Sunday Edition: Starbucks Addict? Don’t Buy The Dip

    I have a confession to make. I used to be a Starbucks addict.

    A few years ago, I was never without my venti iced non-fat 16-pump chai tea latte with extra extra ice. The baristas at my local store knew me by name and even went so far as to ask if I was ok if I showed up late or if I showed up more than twice a day. They even followed my dog on Instagram.

    I was addicted to a point that when there was a forest fire one summer that stopped my preferred Starbucks store from getting its chai concentrate delivered, I went online and bought all of the chai concentrate I could afford from starbucks.com with delivery by next day air. More →

  • 23 Jul
    Sunday Edition: Don’t Fear The Reaper. It’s Not Coming For This Retailer.

    Sunday Edition: Don’t Fear The Reaper. It’s Not Coming For This Retailer.

    Looking at the retail sector over the last couple of years, it’s not difficult to imagine the grim reaper (or maybe just Amazon) coming for what remains of shopping mall staples and other brick-and-mortar retailers.

    The number of bankruptcies and closures is astounding. So far this year, more than 300 retailers have filed for bankruptcy, up 31% since this time last year. While most of those filings were from small Mom & Pop stores, there are some pretty big household names on the list too.

    Gymboree. Payless ShoeSource. Gordman’s. RadioShack. Teen clothing retailer Wet Seal. Women’s retailers The Limited and Bebe. More →

  • 02 Jul
    Sunday Edition: Things Are Looking Bright For Solar Stocks

    Sunday Edition: Things Are Looking Bright For Solar Stocks

    On occasion, I like to take a look back over the stocks I’ve written about to see how the technical patterns I’ve identified in their charts have played out.

    In early January of this year, I wrote a piece for our sister publication, Direction Alerts, about Canadian Solar (NASDAQ: CSIQ). In the article, which you can find here, I discussed how CSIQ was nearing a breakout from a falling wedge pattern and could soon be beginning a new uptrend that could see its price potentially rising 100% or higher.

    So where is CSIQ today? More →

  • 25 Jun
    Sunday Edition: This Could Be Your Next 10-Bagger

    Sunday Edition: This Could Be Your Next 10-Bagger

    If you’re like me, you’ve looked at more than a few charts and wished you had invested when a stock was coming off a bottom and was on its way up rather than looking for clues that tell you if there’s another buying opportunity on the horizon so that you can get in on the uptrend too.

    Lucky for us, there are ways to spot a bottom. And once you do spot one, it only takes the courage of your convictions to buy in even with sentiment at its worst.

    This week, I believe I have spotted a bottom in Teekay Corporation (NYSE: TK). More →

  • 18 Jun
    Sunday Edition: Dark Skies Ahead? This Bearish Signal Spells Trouble For One Tech Stock

    Sunday Edition: Dark Skies Ahead? This Bearish Signal Spells Trouble For One Tech Stock

    Last week I wrote about a bearish pattern on China’s Google, Baidu (NASDAQ: BIDU). At the end of that article, I made mention that when one market leader starts to turn bearish, others may soon follow.

    Sure enough, last Friday, the technology sector experienced a sell-off that extended its losses on Monday and sent some big names—Netflix to name one—into near-correction territory.

    It’s not clear what started the sell-off, and it remains to be seen if it was all just a short-term correction or a sign of something more ominous from the group of stocks that has been at the heart of Wall Street’s bull run in equities in the last several months.

    One stock in particular that I want to discuss today is Nvidia (NASDAQ: NVDA). More →

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