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Stay Razor Sharp With 3 Simple Investing Moves

Stay Razor Sharp With 3 Simple Investing Moves

By Man holding razor

Louis BaseneseThe only thing that worries investors more than a volatile market is a calm one.

Well, as I mentioned yesterday, volatility has flat-lined.

This year, the S&P 500 has gained about 9% but has yet to register a daily move in either direction of more than 2%.

The longer a market goes without action, the higher investor anxiety will get.

Yes, valuations are high at this late stage of the current bull market. And the political risks to the market are many.

But we’re not ready to call a top in stocks.

And with buyers stepping in on every dip… I wouldn’t short the market at large, either.

Here’s senior analyst Jonathan Rodriguez with three simple, strategic moves to make right now…

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily

How to Stay Sharp in a Dull Market

Jonathan Rodriguez

With stocks in their least volatile period seasonally (June to August), now is the perfect time to gear your portfolio up for the second half of the year — when things really get moving.

Here are three strategic moves you can make today…

1) Fatten up Your Watch List

Louis Pasteur famously once said, “Chance favors the prepared mind.”

I couldn’t agree more.

The better prepared you are for what the market hands you, your chances of bagging big gains on stocks increase.

As such, an investor should always have a list of well-researched stocks ready to go when an opportunity presents itself.

This goes for long-term buy-and-hold investors and short-term traders alike.

For me, a good stock list has five to ten stocks from different market sectors. I also note the price I’m willing to pay for them and determine a near-term price target (usually one year).

Now, long-term investors don’t really need a price target. But if you’re planning on holding a stock for less than two years, having an upside target can help you to build an appropriate reward-to-risk ratio.

This ratio is simply a trade’s net profit divided by total exposure.

At a minimum, most traders are looking for a 2:1 return on capital. The most aggressive traders are often trading setups of 4:1 or more.

For a price target, you could easily use Wall Street’s consensus one-year price target (which can be found on sites like Yahoo or Google Finance). You could also craft one using your own valuation model, or use an online calculator.

Any way you slice it, armed with a watch list ahead of time, you’ll know exactly what to buy — and when it’s time to pull the trigger.

2) Mind Your Stop Losses

The second most important thing to do in a calm period is to adjust your stop losses.

After all, the best way to make money is not to lose it in the first place.

Most buy-and-hold investors use trailing stops, which automatically trail a stock by a percentage (like 25% or 35%).

And generally speaking, you shouldn’t need to adjust them unless a stock becomes more volatile than usual.

But if you’re sitting on a sizeable profit and you’ve got a hard stop (which is a manually set limit price) on a stock, you might consider raising your stop to lock in your gains.

This is especially true during long periods of low volatility, as they tend to be followed by large moves in stocks.

Louis Basenese uses strict stop losses at our flagship publication, True Alpha. To learn more about this research service — along with a list of new currencies now available to trade — click here.

3) Consider Options to Increase Alpha

Options are one of the best tools available to investors to pull outsized gains out of the market, yet they are widely misunderstood — and, as a result, misused.

When used correctly, however, they don’t only magnify gains over regular stock returns but actually are safer instruments than stocks.

As you may know, volatility is one of the biggest factors in the pricing of options. And when volatility is low, options get cheaper.

So let’s say you’re sitting on a stock that’s doubled in price over the last five years. Furthermore, you think shares have a bit more room to run but you want to take some profit off the table.

Consider selling your shares and using some of the proceeds to purchase a deep-in-the-money call option.

This strategy is called stock replacement, and it allows you capture a stock’s upside at a fraction of the cost to owning shares.

Bottom line: Don’t let this dull market lull you into sleeping on stocks. Let your winners ride and use the time — and these strategies — to prepare yourself for when stocks really start moving again.

On the hunt,

Jonathan Rodriguez
Senior Analyst, Wall Street Daily

The post Stay Razor Sharp With 3 Simple Investing Moves appeared first on Wall Street Daily.



Will Volatility Continue to Flatline?

Will Volatility Continue to Flatline?

By Will Volatility Continue to Flatline?

Louis BaseneseSo the VIX has flatlined.

It’s been meandering along in a sideways direction for nearly four years.

In fact, the four-year chart of the VIX looks like an electrocardiograph (EKG) of a recently diseased person.

Sure, you’ll see an occasional blip.

But not even a dead person has a ruler-straight EKG line.

Sorry, folks — that long, continuous “flatline tone” when you die is mostly a Hollywood fabrication.

I’m covering the VIX today because it was once a key contrarian indicator.

Perhaps it’s time to announce this patient as dead, though.

Let’s check the vitals…

Also known as the “fear index,” the VIX measures the volatility of the S&P 500.

High VIX levels (above 20) suggest a fearful market.

Fearful markets represent great times to buy.

Low VIX levels (below 20) speak to a complacent market.

Complacent markets represent great times to take some profits.

Generally speaking, the VIX climbs about 4% for every 1% fall in the S&P.

The last notable upward blip on the VIX came in September 2015 as the result of a dovish Fed announcement. And it barely moved the S&P’s needle.

I asked my senior analyst, Martin Hutchinson, a simple question…

Is the VIX is dead… or can it be shocked backed to life with paddles?

Hutch’s full report is below.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily

Martin Hutchinson: Today I’d like to talk about the VIX — the Chicago Board Options Exchange Volatility Index — and how it’s useful to investors.

VIX shows the market’s expectations of 30-day volatility. It’s a measure of how much the markets are expected to bounce around in the next 30 days.

It calculates the weighted average of implied volatility of eight Standard & Poor’s 500 index options.

What’s implied volatility?

You take the price of the options and shove it backward through the Black-Scholes options valuation model and out spits the implied volatility.

Usually you use the Black-Scholes model to start with volatility and end up with a price. Here, you’ve got the price and you want the volatility, so you feed it through backward.

Note that the implied volatility is the market’s forecast of volatility. It doesn’t actually represent real volatility or what the volatility’s going to do. It’s merely what options prices think volatility will be.

The VIX is around 10–15 in calm times. It’s about 10 at the moment. It goes above 30 as markets get choppy. Today, at around 10, the market’s very flat and complacent.

VIX acts as a fear index even if the market isn’t more volatile in a bear market. In other words, even if the market doesn’t move much, VIX goes up anyway.

That means that Standard & Poor’s 500 index puts are a good deal. As the index drops, the implied volatility will rise, so the index puts will rise more than the index drops.

The Chicago Board Options Exchange enables you to trade VIX options, but only out six months.

There are ETFs tracking the VIX, such as the ProShares Ultra VIX Short-Term Futures ETF (UVXY). That takes a two times leverage on VIX, but it has a huge tracking error. That means unless it goes your way very quickly, you’ll tend to lose money on it.

My conclusion is that you should use VIX as an indicator of what the market’s mood is and as something that helps you with out-of-the-money puts.

But don’t trade it directly; it’s a real Las Vegas sort of game.

This is Martin Hutchinson, signing off.

Smart investing,

Martin Hutchinson
Senior Analyst, Wall Street Daily

The post Will Volatility Continue to Flatline? appeared first on Wall Street Daily.


“Invisible Force” Claims Responsibility for Everspin’s Ascent

“Invisible Force” Claims Responsibility for Everspin’s Ascent


Louis BaseneseWhat’s the deal with Everspin Technologies Inc.?

The company is under heavy buying pressure, and momentum will likely push shares above $30 before the end of the month.

Whenever momentum hits such levels, I always take a peek under the hood.

Is it possible that Everspin is disrupting an existing industry?

Here’s what I discovered…

Everspin specializes in the development of random-access memory (RAM), which has been around for over 50 years.

Not a single technology invented in the 1960s can push shares from $9 to $22 in six weeks.

So it must be “special” RAM, right?

Well, kind of…

Everspin calls it “MRAM” — a type of memory that retains information even in the absence of power.

Knowing that MRAM can survive a grid meltdown or a catastrophic power failure gets us closer to quantifying the stock’s vertical ascent.

The company also touts a few high-profile customers like Broadcom, NXP and STMicroelectronics.

Heck, even sales are up 27% in the latest quarter.

Still, those metrics alone don’t justify the stock doubling since late May.

This is simply a case where momentum has overpowered reason.

Momentum is a powerful force to invest behind.

My senior analyst, Martin Hutchinson, is regarded as an expert on momentum.

Hutch’s full report on momentum can be found below.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily

Question: Today we’ll be discussing momentum investing, which is founded upon the belief that stocks in motion will tend to stay in motion.

Let’s jump right in, Martin. How do you define a momentum stock?

Martin Hutchinson: A momentum stock is one that has shown stronger and persistent trends recently. So a momentum investor buys stocks with positive momentum and sells short those with negative momentum.

And there are a number of advantages of this, and the first is the fundamental fact that the market is not efficient. It doesn’t move in a random walk. If the market were a random walk, which is what people believed for a long time and modern financial theory says it is, then momentum investing wouldn’t work.

But the fact remains is that trends do persist more than would be indicated by chance. So there is some value in momentum investing. It’s just difficult to do. But you can make money doing this.

You can make money jumping into strong stocks in bull markets and weak ones in bear markets. If the stock and the market are going the same direction, the momentum is obviously more likely to persist.

There are cases where this has been highly profitable.

The most obvious case recently is holding on to the FAANGs for a long period. If you’d bought Facebook, Apple, Netflix, Google or Amazon, say, five years ago, then the thing to do wasn’t to jump in and out of those. The strategy was just to shut your eyes and hold onto them. And of course, you’d have made eight, 10 times your money, depending on the stock.

On the bear side, it can also be useful. Stocks can enter a death spiral where they can’t get finance. So selling companies with strong negative momentum, or buying puts on them, can be a very profitable strategy.

Question: Hutch, tell us, what are the snags?

Martin Hutchinson: There are a number of disadvantages.

Firstly, with momentum investing, you tend to buy stocks that have gone up a lot. So you may be buying stocks that are overpriced.

You’re paying no attention to fundamentals, and those can be important. You’re paying no attention to value, and that can be important.

And fashions can change, and markets can crack — quickly.

An example of that is oil in 2014, which went from $100 to $50 a barrel, and all the oil stocks fell out of bed.

Momentum investing is a short-term strategy because momentum factors can change quickly. So you can get whipsawed by sudden change.

Question: OK, Hutch, before we break, let me give you the final word on momentum investing. What do you suggest? What strategy should our readers be putting forth?

Martin Hutchinson: I don’t think you should use it as your only investing strategy. But you can certainly combine it with value, dividends and other strategies — and use it for short-term trading.

If you’re just looking to make a quick profit in the next two or three months and there appears to be a really strong trend, then by all means, momentum investing can work.

Question: So it’s fair to say you better have genuine conviction to go short in a bull market on a stock that’s under positive momentum. And then conversely, the same thing in a bear market — where a stock is in negative momentum. You better have genuine conviction if you’re going to pull that trigger. Is that accurate?

Martin Hutchinson: That’s absolutely right. And in particular, if you’re buying put options or taking a bear position in a stock that looks very expensive, you’d better not do it while it’s still going up.

Question: OK, fair enough. Thanks for your time today, Hutch.

Martin Hutchinson: Great to be with you.

Question: This is Wall Street Daily, signing off.

Smart investing,

Martin Hutchinson
Senior Analyst, Wall Street Daily

The post “Invisible Force” Claims Responsibility for Everspin’s Ascent appeared first on Wall Street Daily.


Friday Charts: Overly Bullish Analysts and the Dumbest Trade in the Market

Friday Charts: Overly Bullish Analysts and the Dumbest Trade in the Market

By Friday Charts: Overly Bullish Analysts and the Dumbest Trade in the Market

If you’re new to the Wall Street Daily nation, here’s the rundown…

I’ve embraced the adage that “a picture is worth a thousand words.” So each Friday, I hand-select compelling graphics to put the week’s investment news into perspective.

All it takes is a quick glance and you’ll be up to speed — this time, regarding analyst sentiment, digital disruption and the dumbest trade in the market.

Whoever said achieving enlightenment isn’t easy? Enjoy!

Consensus or Contrarian

Sell-side analysts are notoriously liberal with their buy ratings and stingy with their sell ratings. At any given time, buy ratings outnumber sell ratings by a factor of 8:1.

Clearly, all those stocks aren’t screaming buys, though. So what are analysts good for? Absolutely nothing — except perhaps serving as a contrarian indicator.

Don’t just take my word for it.

“We have found that Wall Street’s consensus equity allocation has been a reliable contrary indicator,” says Savita Subramanian, the head of equity and quant strategy at Bank of America Merrill Lynch.

“In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa.”

Where do we stand now? Well, don’t kill the messenger. But the consensus is trending rapidly in a bearish direction.

In fact, the latest survey of Wall Street strategists’ asset allocation recommendations is at its most bullish level since 2011:

Zig When Wall Street Analysts Zag

We’d be hard-pressed to find an individual analyst that’s calling for an outright end to the eight-year-old bull market. Their collective opinions, however, might be signaling it. Be on guard!

Speaking of caution…

A Mind-Numbingly Dumb Trade

We’ve been chronicling the absence of volatility in the stock market for months now (see “O Volatility, Volatility, Wherefore Art Thou, Volatility?”).

And we’ve struck a cautious (not cavalier) tone. That is, we should expect volatility to return with a vengeance — and prepare for it. Either by going long the CBOE Volatility Index (VIX) or by implementing trailing stops to protect your profits in the event of any sudden and severe market sell-offs.

Go figure. It appears that the investing herd is doing exactly the opposite. They’re betting that the placidity continues.

According to Macro Risk Advisors (MRA), a firm that arranges volatility trades, anti-volatility bets on the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) are surging.

A single day in late June witnessed $3.3 billion worth of bets that U.S. stocks will essentially trade flat. As you can see in the chart, this is becoming an extremely crowded trade:

Dumbest Trade Ever?

What’s most concerning is the “growing interest in shorting volatility among retail and others who are not specialists in volatility trading,” says Pravit Chintawongvanich, the head of derivatives strategy at MRA.

Don’t fall into the trap.

When a sudden unexpected spike in volatility hits — and it will — anyone making this mind-numbingly dumb trade is going to be in a world of hurt.

If you’re looking for the smartest trade in the market right now, check out my latest research on a rare class of stocks that surge as high as 1,000% every Monday, here.

Now it’s back to the hurt…

Disruption Quantified

We’ve spilled a ton of pixels here identifying the winners of the smartphone boom. From personal experience, we know the losers — MP3 players, digital cameras, GPS devices and camcorders (remember those?).

But this graphic puts the drubbing into perspective. It shows the decline in sales for the various gadgets since the introduction of the first iPhone in 2007:

The Smartphone Victims

I know it’s hard to imagine a time without smartphones. But if history is any guide, a different electronic gadget will dominate our lives in less than 10 years.

Any guesses? Augmented reality headsets? Voice assistants like Amazon’s Alexa?

Put on your Nostradamus hat and let us know what you think in the comments section on our website, or by emailing us at

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily

The post Friday Charts: Overly Bullish Analysts and the Dumbest Trade in the Market appeared first on Wall Street Daily.



Premature Ignition Hit Wall Street

Premature Ignition Hit Wall Street

By Premature Ignition Hit Wall Street

Louis BaseneseFireworks ignited one day early on Wall Street this year.

The market kicked off the second half of the year on a positive note, with the Dow reaching an all-time high on July 3.

Granted, July 3 is usually a solid day for stocks. Since 1928, the S&P has generated positive returns 73% of the time, according to Bespoke Investment Group.

But the overall momentum in the market is tough to ignore. And as the upward trajectory continues, it’s getting more difficult to find cheap stocks.

Be careful, though!

As investors get increasingly desperate to find a bargain, they tend to fall for “value traps.” That is, stocks that appear cheap on the surface — but are actually fundamentally unsound.

That doesn’t mean you should just give in and buy stocks at all-time highs, though.

I asked senior analyst Martin Hutchinson to take a deeper dive into value traps. Check out his full analysis below to see how to avoid falling for them in the coming weeks.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily

Question: Martin, you’ve agreed to help us compile a library of the most important investment catalysts on Earth.

These are baseline concepts that every investor should know. And today we’ll be discussing value traps and how low stock prices can appear so attractive to investors.

Let’s jump right in, Martin. Why are beaten-down shares in some cases a trap?

Martin Hutchinson: Well, it’s interesting. Value traps are shares that appear to be cheap because the stock is trading at a low P/E multiple, price-to-book multiple or cash flow multiple. But then they stay cheap — or move cheaper — because of fundamental unsoundness, which is the general reason why something’s a value trap.

There are a number of reasons why cheap stocks can turn out to be value traps.

Firstly, the sector can be doomed because of new competition. Like retail now, which I don’t think is completely doomed but certainly has doom around it.

Second, earnings can be inflated because of temporary conditions. Like oil companies in 2013 (when oil was $100 a barrel).

A good example of this is a company called Thompson Creek, which I bought in 2011.

It was a molybdenum mine that had consistently good earnings and was then selling on five times multiple P/E ratio. It had just bought a new copper and gold mine.

However, molybdenum prices turned out to be in a bubble. Who knew? It fell below production cost. The copper and gold mine took 50% more than budgeted to build. The company loaded up with debt, closed the molybdenum mines and the copper and gold mine couldn’t pay the debt.

Eventually, I sold for a tenth of my buy price in 2016. That’s a very good example of a value trap.

Then also the company may be too small to attract institutional interest or it may have no catalyst that makes stock prices rise.

Question: Now, Hutch, there’s a psychological component at play here for sure, particularly when we’re in a bull market.

The nature of investors is they just want to buy low, sell high. So they try to buy a stock that fits.

But you have to ask yourself… In the middle of a bull market if a stock is trading on the low end of things, something’s likely fundamentally wrong, right?

Martin Hutchinson: Something may well be fundamentally wrong but there are some sectors that just go out of fashion for some reason. It’s difficult to tell.

I distinguish between two different types of value traps. There are ones that are on the way to bankruptcy and ones that just sit there.

People talk about a company that just sits there being a value trap. And obviously when everything else goes up, to some extent it is.

But the ones that just sit there can be a very good investment if they pay a good dividend. After all, that’s what investment was all about until the 1950s. You didn’t look for capital gains; you looked for dividend. You’ve got to remember the other way around.

High-price stocks often fall without doing anything wrong. There’s nothing wrong with a cheap stock that stays cheap.

The real trap is where the business is unsound or earnings depend on a temporarily inflated price — such as oil in 2013 or molybdenum in 2010/2011.

The term “value trap” is often used by people trying to sell you growth stocks. They make value stocks seem more dangerous than they are.

You have to remember that fundamentally cheap is good. With the value trap concept, it’s useful to remember that there can be dangers. But there aren’t always dangers.

Question: But it’s a worthwhile endeavor to try to find good prices out there.

There may be actually some values in a bull market out there where stocks for some reason are lagging behind other stocks.

In other words, all stocks that are trading down aren’t value traps. There are some hidden gems out there. Am I correct on that?

Martin Hutchinson: Absolutely, and my belief is looking for those is likely to do you much better in the long run than chasing the ones that are going up all the time.

Question: Is it safe to say that you’re just basically flipping what you said about how to avoid a value trap? You’re basically just flipping that?

You’re looking for companies that are beaten down but are fundamentally sound companies, is that correct?

Martin Hutchinson: Yes, that’s correct but always remember the concept of a value trap. In other words, look for the snags before you buy.

Question: OK, so there are companies in this bull market that are trading way behind the market and lagging. So before you jump in those, make sure that you’re not jumping right into a value trap.

I’ll give you the final word, Hutch.

Martin Hutchinson: I think that’s absolutely right. The concept of value traps is useful to remember, that there’s danger out there even in cheap stocks.

Question: Thanks for your time today, Hutch.

Martin Hutchinson: Great to be with you.

Question: This is Wall Street Daily, signing off.

Good investing,

Martin Hutchinson
Senior Analyst, Wall Street Daily

The post Premature Ignition Hit Wall Street appeared first on Wall Street Daily.



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