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Archive for the ‘Indicators’ tag

January recap: It was ugly out there

Financial blogger Alan Brochstein surveys the wreckage of the worst January on record and notes the following:

Industrials were weakest for large-cap, and that reflects GE, CAT and other large industrials with captive finance programs and lots of debt. I continue to think that this is one of the worst places to be and would recommend holding only companies with minimal or no debt. The group tends to sell capital equipment, which will be deferred, and it is being hit by currency headwinds, dropping global demand and tight credit all at once.

He thinks health care and utilities stocks hold much more promise.

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Tom Mangan posted at 6:36 am February 2nd, 2009 |

Short-term challenge for Caterpillar’s stock

For those thinking Caterpillar screams “buy me” today, take a look at this chart of Cat’s trading range compared to the S&P 500 for the past 12 months:

Cat vs. S&P 500 trading channels

Note that since the bear marked kicked into high gear last summer, the S&P 500 has barely budged above the center of its RSI trading range. Meanwhile, Caterpillar is at the bottom of its RSI range today.

At some point the S&P 500 will rocket back to the top of its range and take everybody along for the ride. What strikes me as more likely in the short run, though, is that as the market digests more bad news, it grinds back toward the bottom of its range, making it highly difficult for individual shares to get much traction (especially ones where the immediate outlook is so bleak, like construction and machinery.)

Disclosure: I own no Cat shares.

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Tom Mangan posted at 10:29 am January 30th, 2009 |

Recession round-up

Trust me, it’ll make you stronger in the long run.

Durable goods orders decline

The 2.6 percent drop was worse than economists had forecast, a Commerce Department report showed today in Washington. Excluding automobiles and aircraft, orders decreased 3.6 percent, also more than anticipated. The Labor Department said separately that the number of Americans collecting jobless benefits soared to a record 4.776 million.

Today’s reports reflect efforts by companies from General Motors Corp. to Caterpillar Inc. to downsize amid a pullback in both domestic spending and demand from overseas. The Federal Reserve yesterday warned that a prolonged global downturn may push the U.S. to the brink of deflation.

“Economic Tsunami” for job seekers

In all, more than 11 million U.S. workers are unemployed, a 48 percent jump from a year ago.

The numbers translate to roughly four job seekers for every one job opening in the United States, according to Heidi Shierholz, an economist at the Economic Policy Institute, a Washington-based think tank.

The grim job picture cuts across nearly every sector, she said. “There are literally millions of workers unemployed with no hope of finding a new job,” she said.

Time magazine checks in on how things are going in Peoria:

Many in Peoria are preparing for the worst. Pierre Serafin, co-owner of UFS, a discount store here, says customer foot traffic has remained steady, although average sales are down 10% from a year ago. Because fewer people are buying homes, there’s less of a need for appliances. The handful of folks buying refrigerators are trading down from stainless steel to the less expensive “stainless mist,” which, Serafin says, “looks almost like stainless steel.”

How many other P-town natives remember when that store was called Unclaimed Freight?

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Tom Mangan posted at 9:26 am January 29th, 2009 |

Lenny Dykstra’s favorite fundamentals

Dykstra typically starts his columns with lame references to recent headlines from the world of sports, but if you hang with him, he gets around to sharing lots of sane investment advice, especially for rookie stock-pickers. His latest from notes some of his top fundamental indicators.

The fundamentals that I want to see are price-to-earnings and price-to-book ratios, return on equity, operating and free cash flow generation, and cash on hand to pay liabilities.

Online stock screeners like can clue you in on all these indicators. Lenny likes Caterpillar’s return on investors’ equity.

An important criteria for me is return on equity, which tells us how profitable the company is relative to shareholder equity. I’ll use blue-chip stock IBM as a benchmark. Big Blue has some of the best returns going: Its ROE is 49.4% for the last 12 months.

One of my recent picks — and a previous winner for me — is Caterpillar, which has a solid ROE of 42.4% for the past 12 months.

I’m always dubious of advice from famous people, particularly star athletes, but all I’ve seen from Dykstra to date has had at least a whiff of authority about it.

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Tom Mangan posted at 9:21 am January 13th, 2009 |

Must read: Layman’s financial crisis glossary

BBC amasses the most-used terms in the current mess on Wall Street and beyond, from A to Z. Choice samples:

  • Collateralised debt obligations (CDOs)
    A collateralised debt obligation is a financial structure that groups individual loans, bonds or assets in a portfolio, which can then be traded.

    In theory, CDOs attract a stronger credit rating than individual assets due to the risk being more diversified. But as the performance of some assets has fallen, the value of many CDOs have also been reduced.

  • Credit default swap
    A swap designed to transfer credit risk, in effect a form of financial insurance. The buyer of the swap makes periodic payments to the seller in return for protection in the event of a default on a loan.
  • Leveraging
    Leveraging, or gearing, means using debt to supplement investment.

    The more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are. Leveraging can maximise both gains and losses.

  • Ponzi scheme
    Similar to a pyramid scheme, an enterprise where – instead of genuine profits – funds from new investors are used to pay high returns to current investors. Named after the Italian fraudster Charles Ponzi, such schemes are destined to collapse as soon as new investment tails off or significant numbers of investors simultaneously wish to withdraw funds.
  • Toxic debts
    Debts that are very unlikely to be recovered from borrowers. Most lenders expect that some customers cannot repay; toxic debt describes a whole package of loans where it is now unlikely that it will be repaid.

Left off the list:

  • Taxpayers:
    Rubes who will pay for other people’s foolishness for the next 20 years
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Tom Mangan posted at 11:46 pm January 11th, 2009 |

Indicators I like to follow

Most market pros look for hints on where the Dow, Nasdaq and S&P are going from signals within individual sectors. These are some I follow (with links to their charts at

  • Dow Jones Transportation Index: Often a leading indicator because companies that ship products and people feel the effects of economic shifts first.
  • Philadelphia Semiconductor Index: Pretty much everything in the Nasdaq starts with the fundamental building blocks: microprocessors. I don’t trust any rally if the SOX isn’t playing along (and preferably leading the way). Tech stocks generally lead the markets, and the SOX generally leads tech stocks.
  • CBOT VIX: The celebrated “fear index” can be useful in the context of a sustained bull market: big breaks to the upside on the VIX almost always correlate to recoveries in the broader markets. However: VIX followers who bought stocks at historic highs back in October — when it hit 50 for the first time in several years — got blasted when it rose to 80 amid the credit market meltdown.
  • U.S. Dollar index: Especially important for Caterpillar watchers because a cheap dollar makes expensive Caterpillar tractors built in the U.S. cheaper overseas.

One of the trustiest adages I’ve heard over the years is “let the trend be your friend.” These indicators help confirm or refute which way the prevailing winds are blowing. There are, of course, thousands more. The only indicators that really matter are how much you paid for your stock and how much you can sell it for; the rest are all hints.

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Tom Mangan posted at 9:57 am January 9th, 2009 |

Quickie intro to charts

I’m no expert on charts or technical analysis (all I know I learned from Trader Mike) but I have picked up a few things over the years. Here’s the latest from Caterpillar:

Stock chart for Cat

About the indicators:

  • Stochastics show when a stock is “oversold” or “overbought.” Always remember a stock can stay oversold or overbought for far longer than you can stay solvent. Also: stocks can lose a huge chunk of their value going from the top to the bottom of this range, so saying “I’ll just buy when it’s at the bottom of the range and sell at the top” can be very costly because a stock that trades at 80 at the top of its range in October might be only at 60 at the top in November.
  • On-balance volume is a trend-follower’s friend. It’s reasonably safe to be long in a stock while the on-balance volume is positive.
  • Bollinger Bands narrow at trend changes. Whole books have been devoted to these bands; I just know some traders watch them like hawks.
  • Candlesticks offer clues on trend reversals. Long “tails” can point in the direction of the coming move. has an excellent Chart School to provide a grounding in what these and other indicators mean.

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Tom Mangan posted at 11:53 am January 8th, 2009 |