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    Chart of the Day



December 8th, 2019.
The Fed is expected to hold steady at the conclusion of its meeting on Wednesday after cutting rates three times this year to shield the U.S. economy from a global slowdown. Thanks @econoday for the chart.

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Two Post-Earnings Stocks for December: AMBA and ROST




In these tense weeks on Wall Street, where on one hand we have the indexes in all-time highs, and on the other a series of fundamental problems (Trade War with no-solution yet, global economic slowdown, possible recession in 2020, negative interest rates, investment of the yield curve, etc.), an attractive investment to refine the short-term side of your portfolio is to observe stocks with good recent earning reports positive ratings from the analysts but, for "strange" reasons (of course, market manipulation from smart-money), their shares can't get a trend, keeping up the expectation to go up.

As I commented earlier, buy and hold a stock before its earnings report is a bet: can be highly profitable or devastating for your portfolio. You decide the risk you face.  Personally, I always prefer to wait for the report, to compare their numbers with the estimates in eps, sales, and guidance, review the conference call for some additional data and see the analyst's actions the next day, which usually increases or decrease their weighting and price target. I search for the stocks that beat estimates but didn't react well. I wait for its behavior in the next days, in which high-volume transactions and implied volatility move, ideal factors for trading, are guaranteed. It is not an infallible method (there is none in stock trading), but for one who handles low-risk management, it is the most advisable.

Two stocks that recently reported earnings, are taking my attention, due to its price action: the semiconductor design company Ambarella AMBA, and the retail stores Ross Stores ROST.


1. Ambarella Inc. AMBA, $55.205


Click to enlarge.


Fundamentals:

Ambarella 2020 Q3 ER highlights, was better than forecasts: EPS $0.32 beats $0.20 estimate, above $0.21 a year ago. Sales $67.9M beat $65.03 estimate, an 18.6% increase year over year. Guidance Q4 sees sales $55-59M, inline. The company "envisions automotive and security to be down sequentially while other revenues to be flat to slightly up sequentially. It predicts consumer electronics revenues to be persistently soft, declining as a percentage of revenues over the next two to three years".  For sure, a Trade War resolution could send this stock again to $80 levels, as in 2017.

The stock's initial reaction in extended hours was a 7% spike to $63.5 highs. After Conference Call, from CEO and founder Fermi Wang, shares decrease slightly to $54 when closes the next regular session on Tuesday. Also, volatility closes in 34% from 56% before the earnings report. Next day, analyst publishes its ratings and price target, and, as you see, with no upgrades but a generally positive view for AMBA, as all of them raised its price target

- Morgan Stanley: maintains Overweight rating. Price Target. $60 > $61
- Roth Capital: maintains Neutral rating. Price target: $55 > $60
- Craig-Hallum: Reiterates Buy rating. Price target: $62 > $70
- Deutsche Bank: maintains Overweight rating. Price Target. $50 > $55
- Stifel Nicolaus: maintains Hold rating. Price target: $54 > $55
- Bank of America: maintains Underperforming rating.  Price Target. $50 > $53


Technicals:

With shares ranging since October, Ambarella needs more signals for a bullish bias, as overcome the Ichimoku cloud, its SMA50 and 100 averages and the November month pivot at $55.31. Stochastic at lows is a good signal for a buy-the-dip trade. I presume a slow recovery, ideal for speculation, could begin next week if the technicals mentioned above are achieved.






2. Ross Stores ROST, $ 116.33


Click to enlarge.


Fundamentals:

Session post-earnings open at lows $109 but thanks volume increasing during the day, shares finally close at $111 and next day a slow but firmly bullish rally was seen, sending the stock to $116.33 at the close.

Ross Stores 2020 Q3 ER was, as usual, better than forecasts, as the company always gives low guidance: EPS $1.03 beats $0.97 estimate, above $0.91 a year ago. Sales $3.85B beat $3.77B estimate. Also, show increases in comparable-stores sales (5%) and operating margin (12.4%), both above-plan, and expecting a nice $1.25 for the next quarter, as told its CEO Barbara Rentler in the Conference Call. Good numbers, confirm with the many analyst rating:

- Wells Fargo: maintains Outperform rating. Price Target. $116 > $125
- Wedbush: maintains a Neutral rating. Price target: $110 > $115
- Nomura: Reiterates Neutral rating. Price target: $110 > $113
- Deutsche Bank: maintains Buy rating. Price Target. $118 > $120
- Morgan Stanley: maintains an Overweight rating. Price target: $104 > $113
- Bernstein: maintains Outperform rating. Price Target. $118 > $125


Technicals:

ROST is moving in a powerful bullish channel since March, above main moving averages and Ichimoku cloud. With the current  ER is likely this rally will continue in the mid-term. As it is now trading at all-time highs, a good idea is to verify when it reaches its next resistance is in the upper line of the channel, at $118.40. With volatility at year lows (20%) a good opportunity is seen here for trade calls ITM or bullish spreads in this, now oversold, stock when a little pullback from highs occurs, likely next week.



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Breakout Sectors for next X'mas Rally (if happens...)




It all depends on Trump-Xi decisions in the next weeks. Let's check some popular sectors with its shares near to make a breakout:

1. Semiconductors ETF SOXX, $234.74



Since May, the popular Semiconductors sector (really a subsector, not properly a GICS sector), followed by the ETF SOXX, was ranging forming an ascending triangle with a strong resistance that finally breakouts last week at $221.40. And was a successful breakout as you verify its daily chart, with its three phases clearly distinguish: action, reaction, and resolution, all of them with its volume requirements. Technically, its shares may begin to rise, despite being in all-time-highs, as all technicals signals are very bullish now. Shares are above the three main SMA averages, above the Ichimoku cloud and its pivot line at $219.26.
But be careful with two details: as usual, the Trade War developments (a bad or no agreement will be devastating for Wall Street), and next Qualcomm QCOM and Nvidia NVDA earnings, two giants of this sector that could reverse the chart if its reports don't satisfy investors. I wait for a little pullback, due the stock is overbought now, and then enter long.



2. Biotechnology sector XBI, $83.14



The biotechs, follow by the popular ETF XBI, seems to be a great bet for these months. Now trading at the same levels of November 2018. Since April its shares were trading in a bearish downtrend channel as shown. Finally, last week overcome the key SMA200 average, and the upper channel line, but needs to retest it or could be a false breakout. On my radar: there is a long bullish road to go here for this industry.



3. Russell 2000 Index ETF IWM, $159.15



Not properly a sector, but an index, the small caps stocks are followed by the Russell 2000 index and its  ETF IWM, and of course the popular, and very volatile, ETFs TNA and TZA. Technically, its daily chart shows the same patterns as the XBI chart above: a bearish downtrend channel, with a recent breakout of the upper channel that needs to be confirmed in these days. Also, this ETF is on my radar, waiting for a long trade. If Trump and Xi decide to finish their war, the sky is the limit for all the markets and especially for this index.


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My Stock Watchlist for November 2019



November 2019


On my Thinkorswim trading platform, I manage several watchlists, differentiating them according to the instruments it contains. There are stocks, futures, ETFs, sectors, and indices.

My different ETFs watchlists (not shown below) usually keep the same symbols in time, diversified by sectors, industries, countries, commodities, both at 1X normal speed and 3X triple speed, combining long and short positions. My indexes, sectors, and futures watchlists (also not shown) are also fixed, covering the main index and commodities in Wall Street and major foreign exchanges, the usual managed by all traders.

Those that do change, usually weekly, are the symbols of my Main watchlist, shown below, 18 stocks which I follow on a daily basis, due to my own research, that consider both fundamental and technical analysis, news topics or popularity. Over time, it appears in the list a new stock, disappear other, according to the importance they are acquiring, in my opinion.





Keep in mind, it's a watchlist (longs and shorts), not a "Buy" Lists. My suggestions, charts, and ideas regarding these stocks, in which I'm long, short or neutral, I do in the blog posts. And more fresh data and news in my daily tweets through Twitter or StockTwits, which are much more friendly and dynamic platforms for a chat and get feedback from traders.


Image was taken on November 3rd, 14:22 EST.
Favorite 18 stocks that I'm following during November 2019.
Important notes: https://www.xgreedandfear.com/p/disclaimer.html


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Trader Notes: Are Buybacks driven the Stock Market Rally?



Definitely, YES. And they have the main credit for the stock market's rally since the 2009 crisis, and especially the latest years as they been reinforced during Trump's government due to the Tax Reform. It is enough to watch buyback' charts prepared by investment analysts to verify it, I add some of them below. 

Briefly, let's define the stock buyback. And what a better way to explain it that Investopedia, which defines that "a buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake." In days of a struggling economy, where get growth and profit increases are difficult, buybacks seem a good reason for companies to artificially inflate their share price.





Example of a Buyback


A simple numeric example, the best way to understand this, also taken from Investopedia: "A company's stock price has underperformed its competitor's stock even though it has had a solid year financially. To reward investors and provide a return to them, the company announces a share buyback program to repurchase 10 percent of its outstanding shares at the current market price."

Continue: "The company had $1 million in earnings and 1 million outstanding shares before the buyback, equating to earnings per share (EPS) of $1. Trading at a $20 per share stock price, its P/E ratio is 20. With all else being equal, 100,000 shares would be repurchased and the new EPS would be $1.11, or $1 million in earnings spread out over 900,000 shares. To keep the same P/E ratio of 20, shares would need to trade up 11 percent, to $22.22"

That's the reason:  no pay dividends, I prefer a share repurchase, which artificially raises the stock price. Great earnings season forever. Abnormally high levels of buybacks in the latest years generate an SP500 rising every year, despite real macroeconomic problems behind (incoming recession, Trade War and Brexit with no solution, inverted yield curve, manufacturing+services sector' contraction, negative interest rates, bond bubble, and so on). Investors, traders, people, Trump, and all Wall Street living a false illusion today, happy and carefree, hovering around its historical all-time highs. 


Check the chart below: this 2019 was especially aggressive in stock repurchase (yellow columns) above the 2010-2018 average (black columns). But, the year 2020 seems unpredictable. Probably the next US recession halts this situation as this can't hold forever.







Let's watch more crazy charts


In the following chart, Ned Davis Research measures the impact of share repurchase over the last nine years and found a significant effect. One of its four scenarios "buyback funds used to pay dividends" is shown above: watch that the SP500 would have been 10% lower. Given that growth stocks with high momentum have powered market gains since 2010, buybacks have been a particularly efficient strategy for creating shareholder return during this period.





In the next chart, Goldman Sachs compares the accumulated flows for different cases since the subprime mortgage crisis. Amazing the spread: yellow line shows money from SP500 stock repurchases (now $5 trillion!) growing every year since 2009, while other instruments as households, foreigners, and funds exhibit disappointing numbers. But, be careful, a recent report from the same Goldman Sachs warns that corporate buybacks are “plummeting” as companies tighten their purse strings, and it could have a big impact on the market. The boom may begin to slow in 2020: time for look for high-dividend stocks? Is the end of the bull market?







And last week finished the Buyback Blackout...


It is a usual theory on Wall Street that the market indexes dip during the days in which companies can't buyback its shares (usually a few weeks prior to reporting earnings and ends a few days after it). That period is called the blackout. It's incredible how the SP500 chart really whipsaws or corrects during the blackout periods, creating so a great key for well-informed traders.  

For short-term investors and swing-traders this chart is gold: shows that the buyback blackout period began to ease since mid-October, and today many companies are ready to repurchase its shares. And matches with October 26th, according to Seasonax, the historically day when begins the usual Christmas rally (if this year comes) and, seasonally, the best bullish weeks in Wall Street.



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Gilead, Illumina and Twitter Q3 Earnings this week



Three companies from my stock watchlist report Q3 earnings this week, all on Thursday 25 at the close of Wall Street's session: Gilead, Illumina, and the popular Twitter.

Traders love earnings' days. It's the right moment in which stocks get momentum and volatility, ideal for a quick day trade or a swing trade. One of the first rules of risk management in stock trading is don't traded longs or shorts before the ER, because it's just as gambling. Don't hurt your portfolio with bets. In that case, better use option spreads like the popular straddle ATM or buy a cheap call (or put) OTM, risking little capital with minimal, but existing, chances of a great profit.

The other way is taken by cautious traders: previously check chart trends, latest news of the company for key data, recent earnings surprise, insider trading, volatility, market sentiment, short-interest, and so. When earnings are published, checks and analyze quickly the main lines of the report (EPS, sales and guidance, if they beat or miss the estimates), buybacks and sensible data of the particular stock. Look at the trend in a tick-chart, read traders sentiment through chats (like Twitter or StockTwits) and wait for the conference call, usually an hour after the report, for more key information. A conference call could easily revert the stock trend and liquidate a hurried trade. The next day at the opening is a good idea to wait for analysts' reports and ratings: upgrade, downgrade, price targets, based on results. With all this information in our hands, it is more simple get a profitable trade.

Technical analysis seems unnecessary before an earnings report, but that's not true. Traders, investors, and smart-money always are looking at the charts for the previous levels and trendlines as a guide to limit the upside move ahead a good report, and similar for the downside. Let's review these three stocks:




1. Gilead Science GILD, $65.86




What an amazing and "clean" chart! The support at $61.40 is really strong, near six touches in this year. And above a clear resistance in its uptrend line. And today the price touching it again for 4th time in the year, and also at its SMA200 average! Depending on earnings, the price could explode and break any of the levels of this year-descendant-triangle pattern, easily $70, only in case of a positive report.



2. Illumina Inc. ILMN, $309.05




Since reach year lows in September at $263, Illumina began a decent technical recovery and now is t$309, the same level at which its huge gap closes in mid-July. Near $70 to fill that and its Q3 earnings could be the way for. The stock is gaining momentum last two weeks since the recent partnership with Qiagen QGEN to deliver in-vitro diagnostic tests. Take note that the biotechnology sector (followed by IBB ETF), saw some strength last week. Positive clinical readouts, a couple of M&A deals and hopes of drug companies clinching a broader opioid settlement worked in favor of the sector. A good earnings report could send this stock to $325-335, above the 50% of Fibonacci retracement.




3. Twitter Inc TWTR, $38.81




Ambiguous sentiment is perceived in this stock before its earnings report tomorrow, despite today is breaking down its strong support in the uptrend line shown, with increasing volume. I'm expecting great volatility, and prefer to wait tomorrow for deciding a trade. Usually, many analysts publish their ratings on this popular stock that finally decide the stock trend. Bad earnings report could send the stock to $36.90, its SMA200 average.


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Market Indicators give divergent signals



Although denied by several media, its macro data and yield curve say so: the US economy is entering a cooling cycle, a slowdown that is not yet a recession. The last data of Retail Sales was devastating: there fell the last hope of a stable economy after the Manufacturing sector's last readings confirm its contraction of several months, while the Non-Manufacturing is in a limit of 50.

While the US and China have achieved a commercial truce, which does not eliminate the uncertainty between the two countries, the above factors probably stimulate the Fed to reduce its interest rate at its next session. Add to this fact, that the end of the stock repurchase blackout is this week (the real engine of the stock rally). All this makes Wall Street live a false illusion today, happy and carefree, hovering around its historical all-time highs. Investors and cautious traders have already become aware of this panorama and are changing their portfolios, not closing positions but being more defensive. It is clear the situation does not only affect the US, but it is global: the Trade War is passing a very high bill to the global economies.

Some private indicators are reflecting this particular situation, markets high in a pre-recession economy, and are mostly neutral at the moment, although with a bias to change trends for the medium and long term.



Three indicators, different signals



1- The popular indicator 'Fear & Greed' of CNN Money identifies the emotion that drives the market. And today it's exactly neutral, increasing its value 8% since the previous reading. It works also as a contrarian indicator, that is, excessive greed is a bearish signal. It uses seven indicators in its calculation, one of them being notorious this time: this last week the volume of puts dropped to its lowest level in two years, a sign of extreme greed by bulls investors.
Another similar, the Bull & Bear indicator from Bank of America, not shown, this week rises its value to 1.9 from 1.2, being now in the limit between Buy or Sell signal (value= 2). Usually very accurate and follow by the smart money, the message is clear: don´t buy, just hold positions.







2- The last weekly survey of the AAII American Association of Individual Investors, showed a strong migration from bears to bulls, although this is still below average. This reads as optimism for the next 6 months. As it has historically proven to be also a good contrary indicator, higher increases over the current 33.6% can be interpreted as a medium-long term bearish signal.




3. This graph of The Conference Board chart reads alone: it shows that the CEO level of confidence in the economy behavior was below the 50+ positive level, reaching its lowest value since 2008. Usually, this happens during recession months (shaded in gray). Could it be that CEOs see economic problems before individuals of the AAII?



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    Weekly Economic Calendar

Real Time Economic Calendar provided by Investing.com.