Christmas rally?

I feel like haven't been writing for a long time.... Anyway.

People are still arguing about will there be a Christmas rally. Of course they mean a broad base rally. Well my take is if there is a rally it probably will only be limited to a few stocks, but not the broad market.

The market generally takes only the combination of the following 2 sets of conditions. {no news, good news, bad news} and {trends up, trends down}. So you see there are mainly 6 scenarios. Over the last week or so I believe we were experiencing the combinations of bad news/trends down and no news/trends down.

Let me use a few ETFs to check how are we going from here. Let's start with SPY.


SPY was once about $155 back in mid-July, of course it crashed down to around $145 due to sub-prime news with extremely high volume. After that it went back up to as high as $157.52 by end of September, with volume back to normal. And then since end of September it started crashed back down again to currently $141. So, SPY did not make a higher high compared to mid-July, as well not with a significant volume. Currently the 100-week EMA (about $140) is a testing point (I don't want to say support level because it may not support it), and the 20-week EMA is the first resistance (currently about $149). If it cannot get support at the 100-week EMA, not good for the short term my friend.

QQQQ is a bit better, but given the broad market is not doing good, it's hard for QQQQ to go up by itself.

DIA has very similar experience like SPY in the second half of 2007, so I don't repeat in here.

IWM is even worse as it already dipped below the 100-week EMA. Testing the 200-week EMA here is quite possible (which is currently about $68.50).

FXI is fighting to stay above the 20-week EMA, but given the Chinese government wants to slow the stock market a bit, it's hard for FXI to go up much in the meantime.

EEM as well is fighting against 20-week EMA, it dipped below that by the end of today with quite an amount of volume, so testing the 50-week EMA of about $131 is possible.

XLF already dropped below the 200-week EMA, with many US banks keep making new lows, even if XLF is not going to go down by much from here, it doesn't seem to have any steam to go up much. In the near term it may try to break through the 200-week EMA of about $31.80. My guess is it will fail and stay below the 200-week EMA for a while, until there is obvious good news in this sector.

XHB is no better. Back from the beginning of June this year, XHB actually dropped faster than XLF. If you use a daily graph you'll see it started to drop below all 4 major daily EMAs. From then on, it never crossed back up above the 50-day EMA. Over the last 6 months or so it dropped about 50%. This drop is pretty significant as we are talking about a sector here, not one individual stock. I don't think it will keep dropping in this kind of speed, but it will need quite a long time to confirm the bottom.

XLU, on the other hand, is near its yearly high. Well this is understandable as when market gets weak, people go to sectors that are defensive, and utilities is one of those.

Finally GLD. It took off nicely from about $65 back in August to recently above $80. People always think gold is a good hedge of inflation. I personally don't think it is that simple. As the gold itself does not produce more value for you, so to fight inflation I believe the better way is to bet on good companies and keep switching to good companies. Or on the other hand target on good and stable companies that consistently increase their dividends.

What may rally from here to Christmas and the beginning of 2008? Well I cannot tell. I can only say, in the meantime, most stocks would go down more often than go up. Therefore, the probability that you correctly pick a poor stock that will go down is higher than to correctly pick a good stock that will go up. So for now I'll stay with my strategy of, making use of different ETFs, specially the Ultra and Ultrashort ETFs but not individual stock.

sold my SVA

Yes, I sold my SVA at a loss of about 20% at $4.83. I ran against my original thinking because the markets don't look right. And when markets don't look right smaller stocks can get kill much faster. So to be safe I rather take a loss now and wait for better timing to get back in strong stocks.

So in the meantime I have no trading position.

These days I think a safer way to play with it is to go long and short ETFs. Too bad I missed the UltraShort Financials (SKF) totally due to the fact that I had experience of couldn't trade it due to the very low daily volume. Anyway, a miss is a miss. But I'll keep an eye on any ETF I can play with.

Articles here and there are still arguing recession or not. I don't know if there will be recession in US, I only know investors placed their votes in the markets. Look at all the 4 major ETFs (QQQQ, DIA, SPY and IWM), all of them are below 100-day EMA, except QQQQ all of the other 3 are below the 200-day EMA. Even today they rebounced a bit with high volume, it doesn't help them to get back above a meaningful support at all. So how can I believe we are not in trouble here?

Remember I said I'll keep an eye on NTES? Its rival GA reported earnings last night and got slaughter today by 25%. NCTY and SNDA in the meantime are not looking very good too. Just that NTES holds the 100-day EMA. Interesting, it seemed to me it finds the support above the 100-day EMA, which is pretty good under this market condition.

Other than ETFs, still waiting for chance to get some AAPL, RIMM, BIDU or even CTRP. I'm almost thinking buy and hold them for a while and at the same time, go in and out with the ETFs of long and short to take the advantage of any decline. Anyway, will see.

FXP and TWM

They increased as I expected on Friday, just that not by a lot and since the market rebounded to closed higher, I sold my two positions.

Bought FXP on Wednesday at $74.24 and sold on Friday at $82.51.
Bought TWM on Wednesday at $67.98 and sold on Friday at $72.51.

Not a lot but I'm still satisfied.

Market these days can turn around very quickly, although I think there are still a bit more downside from here, but these ETFs can still whipsaw by a lot. At least as I said, I never think of holding them for long term, no way you want to bet on an index that goes to zero on a long term.

Previous strong stocks held up pretty well on Friday to the end, except BIDU and the several shipping stocks. BIDU seems like doesn't want to go too low, as I said before, I am still looking for opportunity to get back in, unless I see another Chinese search engine really haunts BIDU's leading market share in China. In this case, will NTES be that engine? well I don't know, but I'm surprise that NTES holding above 20-week EMA pretty well after unimpressive earnings report, massive sell off throughout last week and bad earnings from competitor NCTY on Friday (note that NCTY is another Chinese online gaming stock that dropped 30% on Friday). I'll keep an eye on NTES for now.

Let me screen through stocks that I'm watching on this weekend and see which may come out as the strong stocks in the next wave.

Market swings

Well I have to acknowledge that I don't remember I have seen such a big swing up and down of stock indices since tech bubble burst in 2000/2001. If you are brave and very skillful or lucky to catch the swing you probably have earned a lot only over a few days.

There are diverge opinions on where market is heading. One opinion from bulls is tech stocks usually are strong by end of year, however, what do you mean by usually? What about I tell you "usually money market fund provides positive returns", and only to see that GE told investors that they can liquidate their money from the money market fund for 96 cents of a dollar. Usually doesn't mean always. History may not repeat.

People don't get it wrong. Technical analysis is not to confirm will history repeat. You have to understand technical analysis from another angle.

People use technical analysis to try to find clues about where the smart money is going and anticipating. It is nothing do to history or whatsoever. Therefore, a perfect technical analysis does not just analyze some statistics or charts, but line-up those analysis with the actual situation you are encountering.

Okay a little update on my portfolio. Still holding SVA, Tuesday's downward movement worries me a bit, as the markets rallied so much but SVA dropped, doesn't look very promising, I'll keep an eye on it.

Besides, I bought into FXP and TWM before noon. I acknowledge I got into a bit late or early, as before noon actually was almost the highest prices throughout the day. If I got into it right at the opening I will be much better. But since I want to confirm the sentiment of the strong stocks that's why I got into a bit late.

I have no intention to hold the two ultra short for very long, just a swing or two to the downside like we had late last week will do me good.

The market today did show weakness to me, provide that GOOG opened up by $13 only to see it closed at down by $19. Or BIDU opened up by $25 and closed with only up by $2.55. Or AAPL opened up by $7 and closed down by $3.85... The list goes on specially to tech stocks and Chinese stocks. Anyway I feel uncertain about a strong tech Q4.

Where will market go?

Despite the 8.7% increase in my SVA, market was choppy on Friday. Strong stocks like GOOG, BIDU, AAPL and RIMM fell fast, came back a bit and fell fast again. Shorter term EMAs of SPY, DIA, QQQQ and IWM were all going downward with heavy volume.

So, where is market heading to? Well I would say in the short term it is hard for the market to go higher, it probably will either go down a bit more or channel between certain range. We should lower our entry points for strong stocks and wait for the market price to come to your entry point, not raise your entry point to catch the market price. For example, in the meantime I'll take the 20-week EMA as the first support of the strong stocks. Base on how strong the stock you believe, you can adjust from there.

Chinese stocks slowed down by a lot as well, as Chinese government wants them to slow down. After all, the Chinese government is not stupid to let the market crash and do nothing (not that mean they can perfectly prevent it from crashing). As said, if my SVA goes up too fast I'll sell and look for opportunity to buy it back.

U.S. financials did not stop going down, in fact, they speeded up last week, leaded by Citigroup, Merill Lynch, Wachovia and Washington Mutual. I'm still waiting for a good entry point to step in with some money, just that it sounds like it's still not the time yet. But if there happens a very strong down day with tons of selling, I think I'll kick in some money, that's the idea of "buy when blood on the street".

EFUT

I finally sold EFUT at $17.24 today. I'm a bit disappointing about the pos, not just due to the massive 35% loss, it's also the fact that I did not spot the market was going to retreat by a lot. But since I was getting in EFUT at the wrong time by using daily graph, if I changed to use weekly graph at least my loss should much smaller. Anyway, this pos originally was more like a pure technical bet than quantitative analysis, I accepted the loss and learn from it.

Surprisingly in such a down day my SVA moved up instead of down, it showed some strength to hold above the 20-day EMA. Now using both daily and weekly graphs, it showed 20-period > 50-period > 100-period > 200-period. Looking backward further enough, $7 is more or less the most critical level as it's the historical high (base on closing price, not intraday).

Market is losing steam in here, even strong stocks like GOOG, BIDU, AAPL and RIMM drop like crazy in a day. Yes they rebounced a bit but if CSCO said they see slow down due to lower spending from the financial sectors, then the ripple effect may spread to other tech stocks.

In the meantime I will erase all my previous recommendation on buying into any position, including NTES (with disappointing earnings anyway), FMCN and any others.

It is not the end of the world, but patient is a very important ingredient, I don't want to make mistake like EFUT again. When I think market starts to consolidate and calm down, I'll look to buy into higher respect name like the 4 mention above. As well, Chinese stocks I believe can still go from here as the Chinese economy may slow down but still grow. When things are settled I'll try to pick the leaders in the sectors, not just any Chinese stock.

SVA

So many news these days. Is market heading up or down??? Are people too crazy about chinese stocks??? How bad can financial stocks go??? So many questions being unanswered.

Anyway, PTR suddenly becomes the biggest firm on earth with about $1 trillion market cap. Holy cow that's a lot. I guess I have to admit that it goes up a bit too much for now, hey I don't mean it should fall by a lot, it may just hang in there for a while to let the earnings catch up the market value.

On the other hand, Alibaba.com went public in HK and boosted 169% in IPO. People probably are thinking about tom.com in tech bubble's time.

If you really just think these are again purely tech bubble hypes you probably are not perfectly right. Ask anyone on the street to see if she has a computer at home and ask the same question about 10 years ago, you'll see how computer/internet changed our basic living style.

Anyway, I initiated a position in SVA, a Chinese biotech firm, which is pretty small. It's 20-week EMA is around $4.50 and I got in at $6.07, a bit high but again I mean to hold it for longer, unless it went up too fast like BIDU did.

BIDU shot up as high as $430 before it retreated, I should have sold it this morning instead of yesterday, well but I guess I profited from it so shouldn't complained.

I feel bad about CTRP as if I have hold onto it I'm now making 20%..... If I have use the weekly graph to guide my trade probably I'll hold onto it (or may not). Can't believe similar things happened to CEDC as well.... I'm such a loser.....

BIDU

BIDU made new high in a volatile day. I sold at the open as I'm not sure how credit crunch news will affect the market, so I sold at $403 and locked my profit. As I said, I'll consider buying it back if it retreats some, but that may not happen, we will see.

Still looking for chances to buying into NTES or FMCN, I would prefer FMCN more than NTES though.

LOCM reported earnings after closing today, price dropped after hour. Let's see how it goes tomorrow.

Remember I said the columnist who wrote on Sunday shorting BIDU since $180? No surprise that he is still holding the position. Read a bit in his column and you will find that he likes to refer general investing public as "stupid people". As well, he likes to refer the market as "sustained by stupid people, just how long it can sustain".

There are always people that will never admit they are wrong (on timing) and try to hide their mistake by saying others are stupid. I'm pretty sure BIDU will go up and down along the way. But if BIDU did not go down when you think it should and went up by 140% more, it's pretty obvious that your original decision is wrong. Okay, anyway, I'm tired of talking about this "smartest person".......

LOCM

Quick update on my holdings.

I sold LOCM on Friday at $5.24. The stock price broke below the all weekly EMA I use. As well, if I changed to use weekly EMA than daily EMA, the 20-week EMA actually failed to break above the 100-week EMA (there is no 200-week EMA for now). So if I used the weekly EMA to enter the signal, I shouldn't enter into the position at all. I took the 25% loss and move on.

BIDU broke through $400 and closed at $409 on Friday. It went up faster than I thought, I wonder should I take profit. If I take the profit it's primarily due to the speed of its move in such a short term, as well as I have capital loss to use to offset my 18% gain on BIDU. Market will still put more focus on subprime ripple-effect on all financials these days, at the end it may affect the sentiment on BIDU. I guess I would like to take the profit by this week as I anticipate BIDU to retreat and it may retreat to as much as low-$300. I will then buy it back.

Remember I mentioned that on a newspaper a columnist paper-traded and sold short BIDU at $180. This guy is still holding his short position..... sitting on a loss of 127%. I don't know what this guy is thinking. Anyhow, this guy hasn't updated his reason for holding the position. How ridiculous.

Stocks today act like tech bubble in Y2K? Part 3

How can we not talk about China when we talk about asset bubble today?

I haven't really defined what I mean by bubble here, it's now part 3, let me define what I mean by bubble before I continue. You may see my definition is totally different than what other people may define it.

My definition of asset bubble means the asset price is "X" standard deviations above the most optimistic expectations. For the value of X, it is more complicated as it depends on quite a few variables. I'm not going to discuss X in here for now, I will leave that later. In the meantime, just accept my definition and assign a value to X yourself which you think it's insane.

PTR is definitely on the hot spot these days because its market value is now only stayed behind Exxom as the second largest company on earth. So I'll use PTR as the talking point here.

Although it's just behind XOM, but I'm not using XOM here. In fact, I'm using CVX and BP, as their net incomes came close to PTR, serve as a better comparison (Their net incomes are all about $19 billion).

I checked from yahoo finance, both BP and CVX quarterly revenue growth (yoy) are about 4.0%, while PTR is 20.3%, five times higher. Operating margin of BP is merely 9%, CVX is 14% and PTR is 25.6%. Ok, tell me if I'm wrong. That means if their revenue growth continue for a few more years as last year, for each year BP and CVX make $1 revenue, PTR can make more than $1. As well, every $1 more of revenue to BP and CVX, only $0.09 and $0.14 go to net income, while PTR will make $0.256 as net income out of $1 revenue. You also compound the $0.256 to 5 times higher revenue growth, the difference becomes even larger.

Let's now look at the P/E and PEG, PTR's P/E (about 24) is double that of BP or CVX, while PTR's PEG is slightly higher than CVX (1.67 vs 1.42) but lower than BP (2.53). So even PTR is overvalued, it's not crazily overvalued as compare to CVX, it's probably not even overvalued compare to BP.

PTR's current dividend yield is among the lowest, 2.2% for now, while BP is 3.4% and CVX is 2.6%. But wait, let me pull back XOM in here, XOM's current dividend yield is only 1.6%, lower than PTR.

Finally, I want to pull in Mr. Warren Buffett as well. He sold all his stake in PTR and made probably $250 million of profit. But hold on, isn't Mr. Buffett's phliosophy is to buy and hold forever? Why would he sell PTR after holding for about 4 years? I guess other than whatever political reason/conspiracy, I can only guess that it's because he thinks PTR is an asset bubble.

Now you see my definition comes into play. If asset bubble means X standard deviation above the most optimistic expectation, and if my comparison above is at least reasonable, PTR could be overvalued but doesn't look like crazily overvalued. In this case I guess I can only say that Mr. Buffett has a very low X in his formula, if not negative.

So, is China forming an asset bubble? Let me move my discussion to Hong Kong market. HK's currency is linked to US dollar. While US dollar continues to depreciate, HK dollar cannot stay up due to the link. Therefore, it's very hard for HK market to raise interest rate unless they want to remove the link. Therefore, HK has (or at least approaches) to negative real interest. It creates an environment similar to Japanese Yen. Simply, borrow HK dollars cheaply and purchase HK assets, because inflation in HK assets is even higher than the interest you have to pay. And you know HK's currency amount cannot appreciate much in the short term. Yes, it's very similar to the case of Yen carry trade.

So, no wonder HK market up by so much this year because some very smart people know this relationship. My rough guess is, if US dollar does not appreciate, HK market cannot drop by much due to the currency link.

I cannot say if China is a bubble by now, at least use PTR as an example, because I think it doesn't reach the X yet (but should start to be cautious). There are always stocks that are overvalued and undervalued, I cannot conclude the whole market by only one statement.

Stocks today act like tech bubble in Y2K? Part 2

These days the most popular tech name in Canada I believe is Research In Motion. So I'll check RIMM to see if it deserves to be a bubble at today's price.

RIMM has experienced some negative earnings along the way, so I'll use the gross profit for now for simplicity.

Annual gross profit ending Feb 1999 was $18.6 million, while gross profit ending Feb 2007 is $1.66 billion. Well, it's 89 times. Okay, what about I use net income as measure, not to care that at some point in time net income decreased then going back up. Anyway, I'll show you what I mean.

Annual net income ending Feb 1999 was $6.4 million. Guess what, net income ending Feb 2007 is $631.6 million. 98.7 times, my friend.

RIMM's stock price (in $US) was $1.47 by end of Feb 1999 and $46.87 by end of Feb 2007 (adjusted for all stock splits). So, that is an increased of about 32 times. Hey, even lower than the increase of net income.

With RIMM trading at $122 today, that came to an increase of 83 times from $1.47. So, can I say RIMM is overvalued??? If $1.47 made sense by that time, shouldn't RIMM have gone up by 99 times to $145 by Feb 2007 already???

Okay, maybe I missed something. Earnings per share by Feb 1999 is $0.10. So with an unadjusted price of $8.88, RIMM's P/E back then was 89, quite high. Let's say we think a P/E of 30 should make more sense back then (30 is actually pretty low for a small growth stock), it will make the starting price became $0.50 instead of $1.47. So if we believe $0.50 was more fair by that time, given that net income increased 99 times, as at Feb 2007 RIMM should trade at $49.50. So, the actual price of $46.87 by end of Feb 2007 was not bad.

Now, with RIMM sitting at $122 per share, a bit more than double from Feb 2007. To me, it means if RIMM can show a net income increase by double then I think the price make perfect sense. Anything less than a double is more like a miss to me. Since $46.87 at Feb 2007 makes sense, so at least I will say RIMM was not a tech bubble by that time.

Stocks today act like tech bubble in Y2K? Part 1

Many articles and news have compared today's market to the tech bubble in about 8 years ago. Well no two markets are exactly the same, they may look alike, but I think it's too easy to come up with such conclusion that they are alike. Let me compare something between today and 8 years ago.

Google did not go public yet in 2000, its net income is roughly $3.5 billion per year in 2007. This kind of net income is like Microsoft in 1997.

In 1997, Microsoft traded between a P/E of 31 to 57. As at end of today, with Google sitting at $703 per share, it's P/E is about 55. Highest price of Microsoft in 1997 was $37.75. You know the peak of tech bubble was in 2000, where Microsoft reached $120 before it came back down (Microsoft splitted 2 to 1 once since then, so the highest now should be $60.). So Google sitting at P/E of 55 is still in Microsoft 1997's range.

Microsoft's net income grew from about $3.44 billion in 1997 to $9.42 billion in 2000, a 2.74 times. Its stock went up from highest to highest 3.2 times. I guess if I say if Google can grow its net income in this speed and its price should go up by 3 times to $2,100 per share ($6,000 billion in market value) sounds crazy to many people, but unless you see that kind of price movement in 3 years a new tech bubble may not be true.

Let's look at this issue in another way. We fast forward from 1997 to today. Microsoft reported annual earnings of $14.1 billion ending June 30, 2007, it's now at $346.7 billion in market value. I know everyone agrees Google can grow faster than Microsoft like China can grow faster than U.S., but still you need time to pick up the difference, which is a 4 times difference in net income.

So if Microsoft producing $14.1 billion net income and is (only) worth $346.7 billion in market value. While Google has (only) $3.5 billion net income and is now worth $219.5 billion in market value. I think people are betting on Google can make up the difference very fast, otherwise, the price of Google seems too high. But unfortunately I don't know if it's too high to worth shorting Google.

Anyway, judging an existing of tech bubble only by comparing Google and Microsoft is not fair.