Monday, March 31, 2014

Investing in Biotechnology Earnings Growth

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Biotechnology, easily one of the best performing sectors over the past few years, has run into a bit of a roadblock lately. Some of the big names in the space have seen worries creep in about Congressional involvement in drug pricing, while there has been a general disdain for growth stocks in recent sessions too.

Despite this, many names in the biotechnology world are still looking quite promising. Drug pipelines remain robust, while earnings estimates continue to move in the right direction as well. While many companies fit this bill, one that stands out is the large cap behemoth Amgen (AMGN - Trend Report).

AMGN in Focus

Amgen is a massive Southern California-based biotechnology company that has a market capitalization approaching $100 billion. AMGN has drugs—or is developing drugs—in a variety of areas, including oncology, inflammation, cardiovascular, nephrology, and general medicine just to name a few.

The stock has added over 80% in the past two years making it a solid performer, and one that has easily crushed the broad S&P 500 in the same time frame. However, thanks to some worries about the sector, AMGN has seen some rough trading in recent sessions, as it is pretty much flat over the past one month, underperforming the S&P 500 for the period.

Yet despite this recent bout of sluggishness, AMGN might actually be looking at some promising trends in the near term. This is particularly true if you look at recent activity on the earnings estimate revision front, as this analyst opinion has been extremely positive as of late.

AMGN Earnings Estimate Revisions

Amgen has seen very solid earnings estimate activity, as not a single estimate in our consensus has gone lower for any time period that we study (current or next quarter, as well as current year and next year). plus, there has been a decent magnitude in the movement higher, with the consensus seeing a sharp increase in just the past 30 days alone.

For the current quarter, earnings estimates have moved from $1.71/share 60 days ago to $1.81/share today, while we see a nine cent increase for the next quarter period, as this went from $1.87/share to $1.96/share. A similar trend hits AMGN for the current year too, as this consensus has moved from $7.92 a share 60 days ago to $8.10 per share today.

Now, AMGN is expected to have growth of about 7% for the current year, and 8.6% for the next year time frame. While this are admittedly not amazing growth rates, it is important to keep in mind that AMGN is a massive company that has some degree of stability, something that you can’t really say about many other, smaller biotechnology firms.

Amgen also has a very strong history when it comes to earnings season, as it has averaged a surprise of nearly 11% over the last four quarters. This suggest that AMGN has had no trouble in meeting expectations in this market environment, and that it is a solid pick for upcoming earnings in a few weeks time.

Due to these positive earnings trends, we have assigned AMGN a Zacks Rank #1 (Strong Buy). This means that we are expecting this company to outperform in the near term, and to bounce off of this recent weakness with ease.

Bottom Line

Investors should also be comforted by the fact that the biotech sector is currently ranked in the top 30% in terms of the Zacks Industry Rank. And as of right now, not a single company has a Zacks Rank #5 (Strong Sell) out of 186 companies in the segment suggesting some broad strength across the space.

But clearly one of the best positioned companies in this segment has to be Amgen. The company is currently seeing strong earnings estimate revision activity, and it is far more stable than many of the other names in the sector as well.

If that wasn’t enough, AMGN also pays out a dividend yield of over 2% to investors, a pretty big payout considering that many other names in the biotech world do not have dividends at all. So if you are looking for a safe way to tackle biotech, consider AMGN. Not only does it pay out a solid yield and have a very low beta, but its strong earnings estimate revisions suggest that growth is in its future too.

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Friday, March 28, 2014

A Guide to Investing in China

Big Trouble in Big China . . . Here’s What You’ll Need to Know by Market Authority

A few weeks ago, we discussed the QE and Abenomics programs in Japan, and the impact on the US market.

We now shift our attention to new developments in China, and the impact these events may have on the financial markets.

First, some economic history. Mao Zedong (founding father of the People’s Republic of China) established the communist party in 1949. Mao is the most well-known figure in modern Chinese history. He “ruled” China from 1945-1976.

Second to Mao, but more important to China’s current economic powerhouse status, is Deng Xiaoping, in office from 1981-1989. Deng inherited an economy plagued with issues from the Communist Revolution and enacted reforms to establish a socialist market economy.

Deng’s economic reforms had three main objectives:

1. Opening up China to global trade.

2. Attracting foreign investment.

3. A limited-amount of “private” competition. (I use the term “private” gingerly here because the government still owns a majority stake in almost all industries.)

Now why is all the Chinese-made crap we buy at Walmart so cheap?

Under Deng, China also engaged in monetary mercantilism to become the world’s largest producer of marketable goods.

How was this done? The Chinese central bank, the People’s Bank of China (PBOC), has long engaged in a campaign of artificially suppressing the price of their currency, the Yuan. This was through aggressively purchasing $’s to keep the Yuan weak and their goods more attractive, thus boosting exports.

This might sound confusing, so let me explain. Let’s say China and Germany both produce widgets at a cost of $10. If China weakens their currency by 10%, then the $ cost to buy a widget from China is now 10% cheaper or $9.

If you’re titled with a widget buying job for Walmart in the US, do you buy the widget for $10 from Germany or the $9 widget from China?

The answer should be obvious.

Now, as China sells more widgets and their economy strengthens - the value of the currency should also rise. However, the PBOC has undertaken measures (buying $’s) to keep the Yuan from rising, and the artificial weakness allows China to sell and produce more widgets than anywhere else in the world.

And let’s take a look at how this has played out for China’s economy. Look at the extreme rise in China’s economy since the early 80s.

This spike in economic output began creating jobs at a rate that humans have never witnessed. It’s estimated that 10mm rural farmers migrate to cities each year. It’s also estimated that China creates a city the size of Houston every month!

Here’s what happened to Shanghai in the past 20 years.

This dramatic landscape change happened to just about every city in China in the past 20 years - Beijing, Tianjin, Guanhzhou, Shenzhen, Chongqing, Chengdu all now rival any major city in the US.

This building binge has led to an unquenchable thirst for natural resources. China has single-handedly inflated the price of all natural resources.

Here are some of their global investments.

Next up, we’ll look at how China remained relatively unscathed through the 2008 financial crisis.

Now we've learned about the social demographic time bomb that the Chinese government faces. That is, the need to find jobs for 10mm rural farmers that migrate to cities each year. The Chinese government is well aware that a recession will lead to social unrest and political upheaval. Their concerns are reflected in the dramatic government response to the 2008 crisis.

When the 2008 financial crisis shook the very foundations of capitalism in the US, Treasury Secretary Hank Paulson famously referred to the US response as using a “bazooka.” By these qualifications, the Chinese response was a nuclear warhead.

Think of the economy as your narcoleptic uncle Danny who falls asleep on the couch after Thanksgiving dinner. How do you wake this guy up and get him out of your house? You can give him a little bit of coffee to get him going again, in the hope that he stays awake and heads home. Or you can spike his latte with an amphetamine, which will wake him up, but may lead to some further complications when he hasn’t slept for 2 days.

China went with the amphetamine. While the 2009 US stimulus package amounted to a measly 1.5% of GDP (that’s a tall latte at Starbucks), the Chinese pushed through a stimulus package that amounted to 20% of GDP (that’s a whole bottle of NoDoz).

The Chinese government effectively told the banks to open the lending spigots.

This spike in bank lending led to a revival of GDP growth.

After a spike back to the 20 year average in 2009-2011, the Uncle Danny’s amphetamines are wearing off and China GDP growth has begun to taper off.

The banks, delirious from the amphetamines, made all sorts of spurious loans in 2009. Spurious loans that helped build the infamous “ghost cities.” Here are a few examples…

Now that the Chinese economy is slowing, the loans extended (under the influence of NoDoz) are showing signs of debt service stress. Builders who borrowed money to build simply can’t find tenants to pay rent.

As we saw in 2008, the first wave of property defaults quickly morphed into a contagion. In the US, smashing your sinks and toilets with a sledgehammer and ripping the electrical out of your foreclosed house became a national past time. Thankfully, for Chinese builders, most of these properties going into default don’t have tenants.

Next week, we’ll look at the first wave of defaults about to occur and how the Chinese government will likely respond.

Monday, March 24, 2014

Investing in Forex Brokerage Earnings Growth

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Gain Capital Holdings (GCAP - Trend Report) has been posting some impressive positive earnings surprises lately and they have shown some significant revenue growth. Analysts have moved estimates higher and that makes this stock a Zacks #1 Rank (Strong Buy), and today it is the Bull of the Day.

Trading Places

There has been a healthy amount of data pointing to the return of the retail customer. The market alienated a lot of people when it imploded on itself a few years ago during the financial crisis, but they look to be coming back.

GCAP has seen some steady progress in the growth of funded customer accounts lately and is poised to see more growth. What is really key is over the last two quarters, where account growth slowed, asset growth picked up. The translation here is that the customers have been making money . . . or adding cash to their accounts.

Company Description

Gain Capital Holdings provides trading services and solutions to retail and institutional customers worldwide. It specializes in global over-the-counter (OTC) markets, including spot foreign exchange (forex), precious metals, and contracts-for-difference (CFDs). The company operates, which enables its retail customers to access global OTC financial markets, including forex, precious metals, and CFDs on commodities and indices.

GCAP Beats Estimates

Has been crushing the number lately. The last three quarters have seen positive earnings surprises of 69%, 44% and 85% respectively. Those are some solid beats of the Zacks Consensus Estimate.

What really caught my eye was the positive revenue surprises. Not only is the company beating the bottom line in impressive fashion, but they are doing the same thing on the top line too. The last three quarters have seen positive revenue surprises of 25%, 21% and 14% respectively.

The most recent quarter saw revenue of $83M and that was $10M more than the Zacks Consensus Estimate of $73M. It was also much more than double the $32M in brought in for the same quarter from a year ago. That is what I call growth!

GCAP Sees Estimates Moving Higher

Over the last few months, GCAP has seen its earnings estimates move higher. The 2014 Zacks Consensus Estimate has moved from $0.90 in November to $0.95 in January and is now $1.01.

The 2015 numbers have also started to move higher. Over the same time period described above, the 2015 Zacks Consensus Estimate moved from $1.15 to $1.19 and is now $1.24.


GCAP has a great valuation. The trailing 12 months PE is right in line with the industry average, but the more important forward PE is showing the stock trades at a discount to the industry average. The forward PE multiple for GCAP is 11.4x compared to 14.4x for the industry average. The other metrics that investors look to also show GCAP trading at a discount. Price to book of 1.9x is below the 2.1x industry average and the 1.7x price to sales multiple is well below the 3.6x industry average.

The Chart

The price and consensus chart shows how the earnings estimates have trended right along with the stock price for GCAP. This chart also shows that the estimates have recently turned higher and are pulling the stock price higher. If the patterns continue, this stock should reach a new 52 week high soon.

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Friday, March 21, 2014

Options Trading Secrets

Chance Favors the Prepared Mind!

We both know trading options is the ‘hot’ thing right now…people are making great money. But did you know that the people making the most CONSISTENT money have secrets they won’t share with you? I want to change that for you in ONE quick video…

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The real secrets that successful options traders won’t tell you!

How a one trick pony loses every-time

How to prepare and profit from ANY market condition

How easy options trading can be with the RIGHT tools

Why these FOUR (4) strategies will set you up for LIFE

How options trading can fit into YOUR schedule, not vice versa.

And one secret about volatility that could save your account

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Wednesday, March 19, 2014

Updates to The Super Trader Training Program

By Dr. Van K. Tharp Trading Education & Workshops Institute

I am continuing to fine tune the Super Trader program and have a few more changes I’d like to share with you.

We currently have over 50 people in the program – nearly double of what we have had in it previously. I believe it grew to that size for two good reasons. First, we went from a two year program at $25k/year to a six year program at $10k/year. In addition, Trading Beyond the Matrix came out and enabled potential candidates to know what to expect. Our program was closed until now (March) and we are now only accepting one new person each month. As a result we now have a waiting list.

We need to double the size of our workshop room so I have an intention to purchase the office next door, however, it’s not actually on the market. At the point we are able to increase our workshop room size, I could begin accepting 2 people per month again as I did until last year. But until that happens, people will have to wait to get into the program, 1 per month.

In the last update on the program I announced several changes to the program and we will improve some of the recent changes now that we have had a chance to use them for a time.

Change 1 — Probation

I originally made the decision to institute a probation period at the end of 2013 because I thought it would weed out non-committed people and it would improve the chances that people would graduate from the program. Our company mission, however, is transformation (not graduation) so I’m rethinking this new caveat.

When I look at any of the people in our program, even those who have taken over six months to do lesson 1 of the program, the impact of the program on their lives has been dramatic. I am concerned that a mandatory probation period might eliminate many people who have and potentially will make major personal transformations.

Thus, starting March 2014 the probation will only be used at my discretion or at the discretion of the candidate (ie., probation is your chance to get a trial period in the Super Trader program to see if it is right for you). We suspect that most candidates will want to go directly into the program. If requested, the probation period will cost $10,000 and be fully deductible from the cost of ST1. (The probation period will consist of sending weekly reports to me and doing Lesson 1a and 1b.) If you do the probation period, it will include all the VTI products that we normally give super traders and it will give you an opportunity to see if the program is right for you. For example, if you cannot get yourself to do the work, then it probably isn’t a good fit.

The probation period does not add additional time for your entry into the program because every new member is required to complete Lesson One. Hopefully, this new step will help you determine if you want to continue with the program before you have to make your first large payment. However, you will not be able to attend workshops (at no charge) or the Super Trader Summit until you have been fully accepted into the program. The amount of time required to complete Lesson 1 varies greatly in each individual. You will work at your own pace.

Change 2 — Price Increase Coming August 2014

We raised the price of the program to $15k/year (or 45k total) last August. However, the program is still inexpensive compared with the full cost for the original two year program a few years ago.

Beginning August 2014 we will be raising the price of ST1 by $2,250 to $47,250. On a three year time frame that equals $750 per year. There will also be an increase in ST2, which will vary depending on how long it takes you to complete each phase.

We are willing to fill up the remaining 2014 slots at the old rate until the end of July. If you come in on probation prior to August 1st, you will get the old rate.

If there is a price increase once you are accepted into the program, YOUR price will not increase while you are in the program, the price per year remains constant at the rate when you joined.

Click here for more details about the program.

New Workshop Coming To The Super Trader Summit

Years ago I used to present a workshop called Mental Strategies for Traders which we stopped doing in 1996. Because I have been re-emphasizing that Super Traders learn and use these mental strategies now, however, I will reintroduce this workshop this year.

Mental Strategies include:

Decision Making Strategy

Motivational Strategy

Convincer Strategy

Knowing When a System Fits You strategy

Knowing When to Trade and Not Trade a System Strategy

Knowing How to Make a Decision about what to trade when there are too many opportunities

We will resurrect this workshop as part of the 2014 ST Summit in December. Based on the feedback of the attending Super Traders, we will decide whether or not to offer the workshop on a regular basis.

New Super Trader Two Summit Possible in 2015

Based on the rate of current ST1 completions, I expect that beginning in the summer of 2015, we will offer an exclusive Super Trader II Summit. Right now there are not enough people in the Super Trader II to make such a summit feasible, but we are expecting 10-15 Super Trader 1 completions in 2014 which will make this possible. We anticipate that this will also relieve some of the capacity stress on the year end summit.

Impact of Super Trader 1

Our goal in the Super Trader program, especially ST1, is massive transformation. We really want to raise the level of consciousness of our Super Traders and we believe that the best way to do that is by monitoring and working on raising their level of happiness. David Hawkins believes there is a one to one correlation between happiness and level of consciousness. If he is right, as the graph shows, we are doing a great job. The happiness test goes from minus 55 (really depressed) to plus 85. And I consider that when people are constantly showing scores above 75, that they are “awake” or close to it.

Tuesday, March 18, 2014

Investing Wholesale Food Distribution Earnings Growth

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Spartan Stores (SPTN - Trend Report) is the Bull of the Day on St. Patrick's Day, 2014. I selected SPTN not only because of its Zacks Rank #1 (Strong Buy) but also because I can work in plenty of "green" puns and musical references. This is, after all, the day for the Irish they are identified with the color green and plenty of music!

Forty Shades of Green

Johnny Cash had a wonderful hit back in the 60's with Forty Shades of Green ... not at all to be confused with the tawdry "50 Shades of Grey", or for that matter the few shades of green that Spartan Stores uses.

Company Description

Spartan Stores, Inc. operates as a grocery distributor and retailer principally in Michigan and Indiana. The operate 375 independent grocery stores and 97 corporate-owned stores, as well as offering approximately 3,900 private brand grocery and general merchandise items. The Retail segment operates 97 retail supermarkets in Michigan under the Glen's Markets, Family Fare Supermarkets, D&W Fresh Markets, VG's Food and Pharmacy, and Valu Land names - and I have a personal favorite Glen's that is located in Charlevoix MI. The company was founded in 1917 and is headquartered in Grand Rapids, Michigan.

4 Straight Beats

Over the last year, SPTN has delivered four straight beats. In surpassing the Zacks Consensus Estimate in each quarter, the market has no done the stock any favors. "You'd think she was queen of the land" with those beats that average a positive earnings surprise of 20%. But the market barely moved the stock, and in fact sent it lower two times in the sessions immediately following earnings report.

SPTN Sees Estimates Moving Higher

When I look at how the earnings estimates for SPTN I see a great story. The 2014 Zacks Consensus Estimate has moved from $1.46 in April of 2013 to $1.50 in September to $1.56 in January of 2014 and is now at $1.65. That is excellent growth indeed.

The Zacks Consensus Estimate for 2015 is also moving higher. Estimates were as low as $1.56 in July of 2014, but then moved into the $1.60 range and are now at $1.71. This sort of positive trend in earnings estimates is a major reason why the stock is a Zacks Rank #1 (Strong Buy).

When Irish folk like myself see a company that has beaten the estimates four times in a row and has earnings estimates growing throughout the year, we get thirsty for a swig from The Jug of Punch.

Pure Michigan

I am a Buckeye by birth-rite, so Spartan Green is only attractive to me on March 17. Only in the last few years have I begun to accept Michigan for a great state and not just the home of the hated Wolverines.

SPTN does have a concentration of stores in Michigan but its also present in other Midwest states like Minnesota, Nebraska and they have two Pick'N'Save stores in the Great State of Ohio - or as I call it the "Holy Ground".


The valuation for SPTN is more than reasonable, and is, in fact showing the company trading at a discount to most metrics when compared to the industry average. A 13x trailing PE compares very favorably to the 18x industry average, while a 14x forward PE still shows the stock trading at a steep discount compared the 18x forward PE for the industry average. A more conservative measure like Price to Book show the company trading at less than 50% of the industry average. The price to sales metric of 0.2x is also well below the 0.5x industry average.

A company with a valuation like this makes me think of how rare it is to find a stock like this. It's almost like a Unicorn.

The Chart

The price and consensus chart is a great tool developed by Zacks. It shows how the stock has acted as the Zacks Consensus Estimate moves over time. The chart of SPTN shows that while estimates trended lower in 2012, there was a nice turnaround though in 2013. What really catches your eye is the recent spike in the earnings estimates. Those that believe that earnings drive stocks prices would be wise to take a closer look at SPTN.

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Wednesday, March 12, 2014

Fannie Mae, The Financial Crisis, and Who's Next

Was Fannie Mae to Blame for the Financial Crisis? By Market Authority

Bloomberg reports - Common shares of Fannie Mae and Freddie Mac experienced their biggest intraday drop in 10 months after leaders of the Senate Banking Committee announced plans to eliminate the companies in a new bill.

Fannie Mae shares tumbled as much as 44 percent, paring the losses to 31 percent to close in New York at $4.03, after Edwin Groshans, a managing director at Washington-based equity research firm Height Analytics LLC, described the proposal as holder-negative. Freddie Mac fell 27 percent to close at $4.04. Preferred shares also dropped, some by as much as 12 percent.

The bipartisan measure, drafted with input from President Barack Obama’s administration, would replace the U.S.-owned mortgage financiers with government bond insurance that would kick in only after private capital suffered losses of at least 10 percent, Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo said in a statement today. The bill would require most borrowers to make down payments of at least 5 percent. Read article here

In a nutshell, legislators are looking to reduce the role of government in mortgage lending, but still allow for a government backstop in the event of catastrophic losses. A new agency called the Federal Mortgage Insurance Corp would charge fees and provide guarantees when private investors lose more than 10%.

There are some serious misconceptions about the government’s role in creating the 2008 financial crisis. The government is an easy scapegoat for problems that aren’t readily understood. The crux of these arguments stems from widely held belief that the government forced lenders to make subprime loans and that people took out more credit due to a government backstop. Let me explain why these views are incorrect.

In regards to subprime, people who point the finger at the government blame the Community Reinvestment Act (CRA), legislation which mandated a certain percent of loans extended to subprime borrowers. But the banks subject to the the CRA weren’t the ones making the loans in the first place- it was private lenders. You can see this in the table below.

Subprime was only a small part of CRA bank lending throughout the growth years in the mortgage market. CRA banks only gained significant market share in 2007, and this was because the private lenders (non-CRA) were already imploding and cutting back on loans.

The non-CRA lenders, companies like Household Finance, New Century, and Countrywide, comprised the majority of subprime lendings. And the government wasn’t forcing these private lenders to make subprimes loans. They were lending because they were making truckloads of money on historically wide spreads between the cost of funding and the interest rate at which they were able to lend.

The next argument is that government backstop provides cover for banks to extend more loans than they normally would without a guarantee. Thus, the over-extension of credit leads to a bubble / bubble implosion scenario. They point to Canada as a country that doesn’t have government-sponsored entities like Freddie Mac and Fannie Mae making loans. Canada avoided the housing crisis, they say, so it’s government’s fault.

If you think that banks over-extended credit in the US due to the GSE’s, take a look at what’s going on in Canada now.

While the US has been reducing household debt, Canadian banks have been lending away. Debt to income levels in Canada are quickly approaching the same ratios (160%) that led to our financial collapse. When debt service costs rise to a level higher than the borrower’s ability to repay, you have a deleveraging. This is not a question of “if,” it’s a question of “when.” The fact that the Canadian government isn’t involved in the mortgage market isn’t preventing banks from lending at dangerously high levels.

As you can see, even without a government backstop in Canada, the Canadian banks keep on lending.

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Monday, March 10, 2014

Investing in Home Health Care Earnings Growth

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Face it, the country is getting older. Demographics are changing. The Mustang Sally’s are becoming little old ladies from Pasadena. Eventually there will be huge demand for nursing homes, assisted living, and adult day care. So naturally companies in this space should benefit as more and more baby boomers reach that age where they need a little extra help getting around.

Today, about 1 million Americans live in senior care facilities. That number is expected to double by 2030. Long term care facilities saw over 8 million people in 2012 alone. By any metric you measure it, demand is increasing at an impressive clip. Many companies have entered this wide open space due to the relatively low barriers to entry. Among them is our Bull of the Day.

I am usually the momentum trader that finds high flying stocks to buy high and sell higher. Today I’m going to show you another side to my trading. Today I found a stock that looks more like a turnaround story than a momentum stock. This stock was brought back to life in November and now looks like a high flier. Now the stock sets up for a conservative trade with limited downside risk as long as your stops are set properly. Given the recent volatility, this stock could also double if the earnings story continues to strengthen.

Almost Family (AFAM) is a Zacks Rank #1 (Strong Buy) that has turned things around recently. The Louisville based adult day care provider is focused on serving adults looking for alternatives to traditional nursing home placement. The company provides transportation to and from its centers which are open 7 days a week and serve about 60 patients per location. This stock once traded in the $40s but after a deteriorating earnings picture the stock has been dead money for the better part of four years now. A quick look at the Price and Consensus chart shows a stock that has struggled in the face of downward earnings pressure.

The technical picture on AFAM is really a tale of two stocks. One stock was the washout we saw from late 2009 until November 2013. An ugly chart that kept getting worse and worse by the day. The other story is the strong rally we saw from November 2013 until now. This is a great momentum story that has investors hungry for more. Whenever you see a huge jump in stock price fueled by earnings, it really helps to lean on Zacks Rank. From a technical perspective, huge jumps are great for Fibonacci analysis.

The Fibonacci levels can be used to help me determine where a stock may see support after a big run. In the case of AFAM, the important level that we are concerned with is the 50% retracement of the run from November 2013 to the high in December. This gives us a price level right around $26 as a good support level. The trick is to watch this area of potential support and wait for a buy signal from, in this case, the stochastic indicator. Well in the case of AFAM, that’s exactly what we have. The stock found support around $26 and just a few days ago showed a bullish stochastic cross while the stochastics were oversold.

This combination sets up AFAM for a good chance of rebounding from the level we are at now near $27 to retest $30. The best part about this trade is the downside risk is limited. You can put a tight stop loss just below $26, maybe even down at $25 and have a very favorable risk versus reward on this trade.

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Wednesday, March 05, 2014

The Market Tends to Repeat Itself - Part 2

By Dr Van Tharp Trading Education Institute and Training Workshops

Click Here to Read Part 1

“the vintage of history is forever repeating ~ same old vines, same old wines” — E. A. Bucchianeri, author

Last week, we dug into the market analog chart that was designed to show similarities between current markets and the price activity that lead to the 1929 crash. Since then, the broader market (S&P 500) has made a new all-time high, but the Dow Industrials are the lagging major U.S. index and are the best it could do on Monday (2/25) was get to within 233 points of its all-time high.

When we dug into those 1929 parallels based on the recently popularized chart, we put them in the interesting-but-a-bit-too-contrived category. This week, we’ll take a look at four other market analog charts and see if they can help us draw some conclusions about the state of our current bull run in U.S. equities.

Market Year Analogs — A Useful Approach

When discussing market analogs in our last article, I mentioned that there were both good and bad representations of that analysis approach. As I said last week, “The biggest problem with market analogs is that you can use any price scale and any starting point to make two curves fit each other. Put a couple of clever people in a room for a day, and they can come up with dozens.” So that gives us the prescription for the wrong way of creating market analogs. Let’s instead look at some analogs that follow a more useful approach.

These analogs are excellent resources from the folks at You’ll notice that they use very consistent protocols — they connect market lows and index both time periods 100 at the starting point. The first analog compares the run we’ve had from the market bottom in March 2009 to the explosive move made coming out of the 1932 market low culminating with a top in 1937:

The up move in the 1930’s was more volatile and much stronger than today’s current drive up, however, the current move is already 10 weeks longer than the analog. Another similarity in these two markets is the state of economic activity — the 1930’s had a very troubled recovery economically while the markets plowed ahead only to drop precipitously. Many would claim that similar recovery problems exist during our current bull market…

Now, let’s contrast the current market with the early 1960s:

Note that this chart is drawn from the low that occurred in October 2011 after the S&P debt downgrade of the U.S. and the concurrent European debt crisis. Based on this analog (which is strikingly similar in the rate and magnitude of price movement to date), our current run could carry on much longer.

Now we’ll look at the analog that Paul Tudor Jones used in 1987:

This is another analog that has some meaningful information in the duration and magnitude of price movement. A major difference in 1987 was the blow-off top the market made heading into its drop. Of course we could still get that kind of market pressure from here as well.

Lastly, let’s compare the current market to the action after the internet bubble burst:

The recent nature of the 2002—2007 bull market makes it a good one to study. We can see that the current market rise has been much steeper and more volatile that the quiet steady bull run that ended in 2007. Duration-wise, we’ve almost run the course relative to the last big bull market.

So what can we conclude from these market analogs? First of all, by most accounts this bull market has had a long run and we are certainly due for a more serious correction. The market effects of Quantitative Easing, however, are a wildcard in almost any sort of analysis. While we should be on guard for an inevitable pullback, taking money out of the market prematurely has not worked for several years. Continue to honor your stop loss points and stay the course until price tells you otherwise.

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Monday, March 03, 2014

Investing in Investment Brokerage Earnings Growth

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After a small hiccup, markets are again back on track with the S&P 500 now posting a modest gain for the first two months of the year. This quick rebound, coupled with the impressive stock market performance last year, is slowly beginning to draw more retail investors back to equities.

This is especially the case as the 30 year bond bull market ends, producing losses in bond portfolios for the first time in memory. These losses in bond funds and the strong stock market are the catalyst for more retail interest in the space, which is undoubtedly great news for the online brokerage community which caters to this group.

Companies in this space are seeing asset levels soar and trading orders rise too. This is greatly helping their bottom lines, and it is making an investment in the brokerages an intriguing idea, particularly if the current trends in the market continue. While there are a number of companies that focus on this market, one excellent option is TD Ameritrade (AMTD - Trend Report).

AMTD in Focus

TD Ameritrade is an Omaha based online broker, allowing retail investors to purchase and sell a variety of securities including stocks, preferred stock, mutual funds, ETFs, and options, just to name a few. The firm has grown into a giant in the space, as it now has close to six million funded customer accounts with client assets approaching half a trillion dollars.

As you might expect, TD Ameritrade makes a sizable amount of its revenues from commissions, and with more interest in the market, the total amount of trades are soaring. However, AMTD actually makes just over half of its revenues from items like interest revenue and insured deposit account fees, and with investors piling capital into their online accounts, these revenues look likely to increase too.

Thanks to this trend, AMTD has had an easy time in beating estimates at earnings season, beating by about 6% on average over the last four quarters. And with these trends likely to continue in the space, analysts have been raising their earnings estimates as of late, suggesting that the picture is definitely improving for AMTD.

Earnings Estimates

In the past two months, earnings estimates have been moving universally higher for AMTD. Not a single estimate in our consensus has gone lower in the time frame, including 11 estimates moving higher for the current year earnings, and eight moving higher for next year’s earnings forecast.

These revised estimates have pushed the current year consensus up from earnings of $1.34/share 60 days ago, to $1.41/share today. Thanks to these moves, AMTD is now projected to have year-over-year earnings growth of 15% for the current year, and just under 20% growth for next year, meaning that the there is still plenty left in AMTD’s growth story, and that if anything, it is only going to get better with time.

Bottom Line

Due to these factors, it is shouldn’t be too surprising to note that AMTD has a Zacks Rank #1 (Strong Buy) and that we are looking for outperformance from this company in the weeks and months ahead.

And while the broad investment broker industry is highly ranked too, AMTD clearly stands out thanks to its growth trajectory, brand name, and rising estimates, suggesting this firm is the crème of the crop in this important market segment.

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