Monday, July 30, 2012

US Markets To Drop Like a Rock?

SP500 Hitting Major Resistance

The SP500 last Friday closed up at major resistance of 1386.03. Many of the world's global equity indicies have already been going down for quite some time. The SP500 from here to the downside is wide open long-term and a long way down to find major support if it does start selling off.

Will the US Fed do more quantitative easing to help stocks? If they do will it even help and lift stock prices beyond this point with average to disappointing earnings reports lately, and slowing GDP growth around the world? The risk reward ratio currently favors far more reward to the downside with equities than the upside.

If you don't want to sell stocks short, we suggest trading long and short in the forex, gold, and oil markets to make money in the markets for the time being.

See below for this weeks four short-sell stock candidates.

The Drop Like a Rock Scenario for U.S. Markets and Third waves are "wonders to behold" By Elliott Wave International

Financial markets always have and always will pose two basic questions that investors seek to answer:

What's the direction of the main trend?

How far will it go?

Systematic approaches to these questions commonly belong to either fundamental or technical analysis. Let's consider each one briefly.

Fundamental analysis studies how a market behaves in response to external influences such as earnings, sales, competitive outlook, economic outlook and the like.

Technical analysis studies a market's internal behavior -- mainly price, but also internal measures like volume.

Elliott wave analysis is a branch of technical analysis, specifically pattern recognition.

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns . . . Elliott isolated five such patterns, or "waves," that recur in market price data.

Elliott Wave Principle: Key to Market Behavior (p. 19)

In a five-wave progression, the third wave is the most powerful.

Third waves unfold in bull and bear markets alike. Elliott Wave Principle (p. 80) describes a third wave in a bull market:

Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable...Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series. It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence.

Third waves can be more powerful during market declines because fear is a stronger emotion than greed.

Look at the third wave on this S&P 500 chart which published in the January 2009 Elliott Wave Financial Forecast. Notice that prices dropped like a rock, plunging well over 600 points in less than a year. (The third wave starts where the chart shows (2) and ends at (3)):

You can see on the chart that the S&P 500 had rebounded after the third wave had bottomed. Even so, the chart's title states that there was "Room for a New Low." Indeed, after the rebound which was wave (4), wave (5) took prices to a March 6, 2009 intraday low of 666.79.

How about now?

That depends on who you ask.

On July 10, CNBC reported on the sentiment of a chief market strategist of a capital management firm:

Ever the optimist, he is holding to his market call this year for the S&P 500 to hit 1,500.

A principal of a financial advisory firm and guest columnist for Marketwatch wrote a July 10 article titled "Stock charts don't lie: the trend is up." The article says:

Shares continue their winning ways, technically. The averages show a stair-step series of higher highs and higher lows, the definition of an uptrend.

By contrast, the latest Financial Forecast flat out says:

The stock market is nowhere near a lasting low.

Why does the Financial Forecast differ from the two opinions above?

Because Elliott analysts know that during a market downtrend, second waves can convince investors that the rally is a new bull market.

That can be a financially dangerous mind-set.

Optimism precedes third waves lower. Then, seemingly out of nowhere, a third wave can commence with unrelenting violence and speed.

In the chart above, you saw the optimism-driven rebound just before prices plunged.

Do not expect the financial media to provide you with advance warning of a third wave. The crowd is almost always on the wrong side of the market. Third waves arrive unannounced.

Short-Sell Stock Picks This Week

Below is a list of short-sell stock candidates from Zacks Investment Research. This is group of stocks that are currently members of the exclusive Zacks #5 Rank List – Stocks to Sell Now. These stocks are currently rated as a Zacks Rank #5 (Strong Sell): Biglari Holdings Inc (BH) and Systemax Inc. (SYX). Further, Zacks announced #4 Rankings (Sell) on two other widely held stocks: Dr Pepper Snapple Group Inc. (DPS) and Leggett & Platt, Inc. (LEG).

Since inception in 1988, the S&P 500 has outperformed the Zacks #5 Rank List of Stocks to Sell Now by 80% annually (+2% vs. +10%). While the rest of Wall Street continued to tout stocks during the market declines of the last few years, Zacks told investors which stocks to sell or avoid.

Here is a synopsis of why BH and SYX have a Zacks Rank of #5 (Strong Sell) and should most likely be sold or avoided for the next one to three months. Note that a #5 Strong Sell rating is applied to 5% of all the stocks in the Zacks Rank universe:

Biglari Holdings Inc (BH) announced second -quarter profit of $3.39 per share on May 18 which came behind the Zacks Consensus Estimate by $1.74. However, the diluted earnings per share fell by 17.32 on a year-over-year basis. The Zacks Consensus Estimate for the current year slipped $3.7 per share to $23.41 in the last 60 days. Next year’s estimate also dipped $2.43 per share to $26.57 per share in that time span.

Systemax Inc. (SYX) posted a first -quarter profit of 22 cents per share on May 8, which came in 16 cents wider than the average forecast. The Zacks Consensus Estimate for 2012 fell to a profit of $1.28 per share from $1.35 over the past month with 1 out of 2 covering analysts slashing forecasts. Next year’s forecasts slipped 16 cents to $1.72 per share in the same time span.

Here is a synopsis of why DPS and LEG have a Zacks Rank of 4 (Sell) and should also most likely be sold or avoided for the next one to three months. Note that a #4 Sell rating is applied to 15% of all the stocks ranked by Zacks;

Dr Pepper Snapple Group Inc. (DPS) first-quarter profit of 46 cents per share, posted on April 25, lagged analysts projections by nearly 4.17%.For 2012, the Zacks Consensus Estimate moved down 1 cent in the last 30 days as 1 of the 12 covering analysts cut back on forecasts. The forecast for next year slid 1 cent to $3.18 per share in the same time span.

Leggett & Platt, Inc. (LEG) reported a first-quarter profit of 30 cents per share on April 26, that fell 6.52% short of the Zacks Consensus Estimate. The full-year average forecast is currently pegged at $1.31 per share, compared with the projection of $1.32 in 60 days ago. Next year’s forecast dropped 2 cents per share in the same period.

Click here for more short-selling information and resources.