Posts Tagged ‘dia’
Use Earnings Season to Play the S&P 500
Written by Jared A Levy, Editor, Options Strategies Weekly
It is a big week, with lots of stocks in play. Alcoa (AA:NYSE), JPMorgan (JPM:NYSE) and Google (GOOG:NASDAQ) are just a few of the companies that will kick off earnings season this week.
To the average investor, earnings may seem like the same march of financial reports that happens each quarter. But for the select few who can get ahead of Wall Street’s expectations and understand exactly what to look for, it is a time to profit.
Think about it like this…
The stock market is the ultimate leading indicator of corporate and economic health. Investors buy and sell stocks based on emotions, economic data, news and chart patterns. These movements are confirmed by the strength (or weakness) of earnings reports. It’s sort of like a race with checkpoints along the way.
Believe it or not, the S&P 500 is in a position now that might surprise you.
Stocks on Sale
There is no doubt that my colleagues and I have cast a fairly bearish tone over the equity markets for the past several months. Fortunately, our thesis has played out profitably. But it is time to consider a change, if only for a short while.
I know you may think I’m crazy, especially given the shakiness of Europe and the overall negative economic data emerging from the U.S. But there is a reason…
I found some interesting and compelling indicators, the first of which you can see in the chart below.
Weekly P/E Chart of the S&P 500 — Courtesy of Bloomberg
View larger chart
This chart tracks the total price, earnings and estimates of all the stocks in the S&P 500 (SPX) over the past 12 years. The white price line is often a motivator for investors, but this time it means very little.
Price is relative. Remember price is just a dollar amount — value is determined in other ways.
Amateurs might look at today’s S&P 500 and think that because the S&P 500 is at April 2009 levels it is a reason to buy. Of course if you were to look back, investors may have said the same thing in October 2008, when the S&P was trading at levels not seen since 2004.
We all know that buying in October 2008 was NOT a good decision. So why are things different now?
I want you to focus your attention on the red and green lines. Try not to get dizzy.
These lines represent the expected price-to-earnings ratio and the trailing or realized P/E ratio respectively. They have been dropping along with prices.
The P/E ratio is the most popular measurement of value for a stock. Generally speaking, it’s good to buy when P/E ratios are relatively low and sell when they are high. It’s not the end all be all, but I have more data that may quiet the P/E naysayers.
Over the past 12 years of data shown on this chart, you can see that the ONLY time the S&P 500 even came close to its current P/E level (green) was in the crisis of 2009 and it was only about two points lower. The expected P/E is also in a favorable buying range.
The average P/E multiple for the S&P 500 over this time frame is about 19; a reading of 12 means value. As long as companies can at least meet their Read more
Is This the Ultimate Sell Signal?
Tuesday, 21 June 2011
Last week I discussed the chance of a major drop in the S&P 500. And for the past couple of months, Sara and I have accurately warned of sell-offs and market corrections. After all this selling you would think we would look at the bright side of the equities markets… unfortunately there is more bad news.
We may have just gotten the ultimate sell signal.
Those of you who have read or watched my commentary for some time know I am a fan of technical analysis and am an ardent statistical observer. In fact, I made a career out of numbers. It’s not because I believe in some secret mathematical code that controls the stock market, but rather I use numbers to find patterns in human behavior.
You don’t have to be a psychologist. With a smidgeon of knowledge, math reveals the truth behind human logic.
The 200-Day Moving Average
The world of technical and statistical analysis of stocks and options is massive and complex. There are many folks who study much more than I and have dozens of computer algorithms running in unison trying to figure out the market’s next move. It does not have to be that difficult.
Yesterday on CNBC, I must have heard the word “moving average” mentioned at least 20 times in a matter of two hours. Specifically, experts were referring to the 200-day exponential moving average (EMA) of several stocks, but one, Apple, was very popular.
Apple was the stock du jour and was on everyone’s radar because it fell below the 200-day moving average of about $316. Once this happened, the stock quickly dropped another $5, stabilized and closed right at $315.32 (the 200 EMA is $315.88, according to freestockcharts.com).
There are two major moving averages that traders use to determine if a stock or index is in a bullish or bearish trend. The Read more
Smart Investing Daily – Could Disaster Be Brewing Inside These Popular ETFs?
I feel it’s our duty here at Smart Investing Daily not only to help you discover new and unique investment opportunities and tactics, but also to warn you of impending potential disasters.
Looking at the financial markets on the surface, many experts are saying that it seems a little “overbought.” There is no doubt I am in that camp, but now I am gaining more conviction. Experts use things like price/earnings multiples and technical formations to make these determinations. They also look at the past to make future forecasts.
When determining an “overbought” or “oversold” financial market, I examine several indicators, like the ones mentioned above and several others, to confirm my thinking. But there are a couple of signals that are not being talked about and one that I think can not only give us insight into the real strength of the financial market, but also explain its odd behavior and seemingly unstoppable bullish run. These signals are coming from three index Exchange Traded Funds (ETFs) that are some of the most heavily traded and most popular in the world.
A Growing Problem?
These three ETFs – Dow Jones Diamonds (DIA:NYSE), S&P 500 (SPY:NYSE) and Nasdaq 100 Index (QQQQ:NASDAQ) – represent the bulk of the most heavily traded, largest companies here in the U.S. and abroad. Combined, they represent over 600 stocks and the majority of the trading volume here in the U.S. What no one seems to be talking about are the large changes we are seeing in something called “short interest” and the “short interest ratio.”
Short interest is the measurement of how many shares are in short positions. When you want to short a stock, you must “borrow” Read more
Smart Investing Daily – The Most Important Stock Market Chart of the Week
Early last week I gave you four reasons to buy the S&P 500 market (SPX or SPY), and hopefully you had the chance to participate in the market’s recent gains. Aside from the somewhat positive fundamentals of both the macroeconomic improvements and individual companies’ improved fiscal health, we have year-end window dressing and some good old statistical (and superstitious) beliefs working in your favor, especially if you are a bull.
What I have not addressed yet are some of the key technical levels that you need to be aware of. In just about every stock trade I make, I am paying close attention to a minimum of two stock market charts (usually more). I don’t just analyze the stock that my investment is in, but also a large index, such as the SPX, OEX, NDX or similar.
Don’t Pay Attention to the Dow Jones Industrial Average
I do NOT use the Dow Jones Industrial Average, because I feel the index is flawed in that it concentrates on the price of the stock for its weight in the index as opposed to its real value. In addition, to me, 30 stocks out of the over 5,000 stocks that trade on major exchanges is just not a good sample size. But I digress…
The S&P 500 Can Show You the Market’s “Hand”
Out of all the commonly watched indexes out there, the S&P 500 or SPX is the preferred barometer of Read more