A correction coming?

It looks like the market is headed for a pullback. So far, the volume is not scary - meaning that the pullback isn't a major down day on big volume. Such a day would signal "distribution", meaning that the markets' major players are selling their stock heavily causing prices to fall. (More supply than demand)

"Hottest 100 Growth Companies"

The list of the 100 best or hottest small growth companies for 2005 has been published by BusinessWeek (Biz Week is a rankings crazy magazine because rankings sell).

There are some interesting plays here, but as always, you should perform your own due diligence. Some of the companies have been seeing stock price run up, some have gone south. I have traded a few of the ones in the list.

For BW's "Top 10", you can go here.

Q&A - Church and Dwight (CHD)

A co-worker talked about potentially "going long" CHD (buying shares of Church and Dwight stock). (I will continually use this lingo so that everyone who reads my blog gets used to it).

So, I thought that I would give a brief description of some of the things I would look at. Since I am primarily a "growth" minded investor (see growth stock, I would pay more attention to the company's annual revenue growth, and quarterly earnings per share (EPS) growth. I would also look to make sure that there is a somewhat linear relationship between the two - meaning that if the top line (revenue growth aka total sales) is increasing at a significantly different rate than earnings per share, I would be skeptical of the companies longer-term prospects. Here's why:
Imagine XYZ company growing sales at 25% - let's say our hypothetical company sold $1 billion of widgets two years ago, and $1.25 billion last year - I like 25% because for a "growth stock", it's a good ballpark figure for a bare minimum of revenue growth. Anyhow, imagine if the company is growing earnings per share at a much higher rate, say 100%. So let's say last year they earned $1 per share and this year the co. earned $2 per share. The question is, how is the company doubling their overall earnings, without increasing sales as much? What's the company doing? The simple answer is that productivity is basically responsible for the 100% EPS growth. The thing about productivity is that it typically is not sustainable forever. Remember, "growth" means that we like to see EPS continually increasing and accelerating. If the company increased EPS 100% last year, I'd like to see MORE than 100% this year! But, for the company to continue to grow at a 100% EPS growth rate the company has to either start increasing sales while maintaining the same level of productivity, OR increase the productivity even more! That would be tough to do, although many companies are able to do it.

Back to Church and Dwight. CHD is in the "soap and cleanings" industry group in the Investor's Business Daily. For example, one of the flagship products the company has is the "Arm and Hammer" line of products. The stock is the leader in its group. Fundamentally the stock is sound in some regards, however, last december's EPS checked in at 17 cents versus 24 cents the year before. June saw a similar decrease. Year over year, revenue was up last year 36% compared to the year before, but EPS was up only 6%. Some investigation would be necessary to see if there was a reason for such a discrepancy (like a one-time charge or something like that). This doesn't automatically raise a flag, but some further investigation may be necessary. The first quarter reported this year showed a 42% revenue increase and 20% EPS increase over last year. That's good news. The dividend decrease is NOT good news, however. Notice that last year's dividend paid was only 17 cents, versus 21 cents the year before. For a look at the numbers, the Nasdaq is a good reference (EPS/Revenue Table) The stock chopped wildly on the earnings announcement on May 10th (Chart)

Technically (looking at the charts), the stock is basing, though the longer term trend is definitely up. Since the stock isn't doing much now, one could wait for the stock to break the base, and decide then. For example, if the stock traded above the high of 37.50, one could argue that the stock has made up its mind to move higher (it has broken out, and be bought at, say, 37.60. Then, if it is a "fakeout", one could sell it if it fell back near the $35 or $36 range - depending on your investing style. This is probably what I would do, because the company's industry group is not really in favor right now, despite the fact that the stock is considered the leader in its group.

This is a start. Remember, I'm not recommending to buy or sell CHD, just showing how I might start to look at the company. More questions could be asked, or less, depending on your style.

WOW!

Yesterday's market was HOT. As in "I just touched a stove burner" hot. The rallies were broad (across almost all sectors) and powerful (lots of above average trading volume). Perhaps the volume was due to people who were short the market finally gave in and started buying to cover their profitable positions. Who is to know?

Regardless, there are lots of stocks out there that are beginning to lead the market. I don't think yesterday is an "all clear" signal to go aggressively long...but I still believe that there are some big "defensive" winners out there. As for the more risky stocks - I still think we need to stay away from some of those things. CRAI looks good on paper, but I made the decision to pass on this trade. If we were in a definitive bull or bear market, the more speculative names would be more playable.

Shopping list: ACGL, PEP, PRU, MET, NNI, CMX, ANT, BHS, and XTO, VLO, SWN (Once oil prices rebound)

My bearish fund (not linked yet) has only one short position in Hurco (HURC) and it is already at a slight loss. My other funds have found some positions run to some nice wins in RAVN, AMTD, and ADSK. I'll continue to manage these positions and perhaps take a few profits here and there. I really like today's action in RAVN - I think this stock can double this year.

LEARN: What is "money management"?

What is this concept called "money management"? Some of you may have never heard of such a topic, and that's ok, but this is THE SINGLE MOST IMPORTANT CONCEPT IN INVESTING. Period.

To understand the concept let's imagine a simple game. Here are the rules: You flip a coin. Every time the coin comes up heads, you get 2 dollars. Every time it comes up tails you get 1. Would you play this game?

You should answer "Absolutely!" Why? Well, because you can expect to make a dollar for every flip of the coin. For anyone who has taken a statistics course, this is known as expected value.

So, you may have heard people say "always protect your capital" or "don't lose money". What they really mean is that if you sell your losers quickly, you have a chance to allow your money to go to work for you. Much like a good defensive team in football, if you give up 8 yards every 3 plays, you're going to be very successful. So, you need to come up with some kind of "Money Management" scheme that allows for success. There are many ways out there to manage money, and they are beyond the scope of this article, but I will give a very simple example of just one:

-Always predefine a price at which you determine your position is "wrong" and you will automatically exit
-Set a target price for your position
-Divide your potential profit by your at-risk dollars. Never enter a position unless your expected reward is more than 3 times your expected risk
-Never risk more than 2% of your account on any position (known as an "Oh $h**" clause)

In theory with the above rules, you will still make money even if you are only right 40% of the time. Can you live with something like that?

Stay Away!

The market has rallied slightly the past two days, but on meager volume. There are long setups out there that have potential, but the risk right now is too high to enter. Bottom line - stay away and watch for now.

Indicator Check

I'm still bullish, but with caution. The $NASI is slowing already, and that can't be good. Generally I'd like to see it run up with much more acceleration than it has. It's not time to get out of everything, but I will probably lighten my long shares a little bit tomorrow.

Proceed with caution!

What a day!

Oil, oil, oil. Holy cow. Valero down 7%. XTO down 6%. Exxon down 4.3%! Yikes. Are we finally breaking down on oil prices? I was getting excited about the pullback in oil, looking to get long (that means to buy a stock) some of the oil stocks. But, today marks MAJOR distribution - lots of volume with huge price declines. That means that the selling of these stocks was large...people saying "get me out of oil - at any price." So, now I'm not so sure about these oil stocks. I still think we need to buy 'em. But it doesn't look like just yet is the time.

A few stocks whipsawed. ISSC had broken out but whipsawed right back into its trading range.

On the other hand, this could be a great buy opportunity for something like Brookfield Homes. The stock was down today on pretty low volume. Overall, some damage was done, particularly in oils and metal stocks. The hospitals held up VERY well today. Lifepoint and Triad were actually UP. Pepsi fell slightly but held up nicely as well, as volume was quite low just one day after hitting a new all-time high. This is the place to be right now: boring stocks that are still growing.

The Nasdaq held up fairly well. The S&P and Dow were punished on some above average volume. Overall, today doesn't mark a new downtrend - remember - the markets have a history of doing the most obvious thing in the most unobvious way. What does that mean? To go up, sometimes the weaker hands get shaken out by first moving downward. Time will tell, but in the meantime, here's a watchlist of stocks to buy:
PEP, ROL, CYH, LPNT, TRI, USPI, BHS, PRU, PHLY, MGM

Pretty Volatile Day

Today was pretty volatile, with the indices down through most of the day, but volume buying came in late in the day and the indices finished up, although not by alot and not on convincing volume overall. Volume was up during the decline, but a major spike on volume occurred at the turning point for the day.

Overall, much like the previous two days, not much was learned or accomplished. The indices are bumping up against resistance, so right now we are at a crossroads.

LEARN: What is selling short?

There are zillions of places you can find info out there on this. The concept is simple. You borrow something (stock), and actually sell it. Then, later on, you buy a replacement (stock), and give that replacement back to the person you borrowed it from.

So imagine this scenario: You borrow your friend's coffee maker, because it's just sitting there anyways. He won't even know it's gone. Then you sell it. A week or two later (or whatever timeframe you choose) you go to Wal-Mart and buy a new coffee maker, exactly like the one you borrowed. Then, you go put it back. That's basically what short selling is.

This is a strategy that attempts to profit from a fall in a stock's price. It can be very risky, depending on how much attention one pays to the position. This is because the lowest price a stock can have is zero. The highest price is infinity, therefore, there is no maximum loss. For more: Investopedia's definition of short selling. There are many things to consider when attempting to short a stock, which is why this is considered an advanced tactic.

A new blog is born!

Welcome to my Market Musings site. I tried to use a blog to detail my funds on marketocracy.com, but it was too much. I will come here to post my market thoughts on a frequent basis. Feel free to ask questions!

Today the markets were down. This was expected since they have run up on low volume recently. The downtrending trendlines are still in tact, however, sentiment indicators show that this "rally" still likely has some steam left. This could be a good opportunity to pick up a long position, or add to one.

Not much has been learned in the past two days. This week isn't likely to make any new yearly lows at this point. If we reached that point at any time this week, I'd be a buyer. To see a chart of what I'm talking about - look at the latest low of the dow. The latest low looks to be in tact for at least this week. http://stockcharts.com/h-sc/ui?symbol=$INDU&period=DAILY&bar=3&gap=0&id=p98862279186