Friday, February 5, 2016

S&P 500 - The Increased Volume Means Something

Generally, after a big move, the trading volume is falling. Then there is a period of accumulation / distribution  - in this phase the trading volume is much lower than during a big move.

However, looking at the price / volume action, presented by US indice,s I see something totally different - let me take S&P 500 as an example:

Since the middle of January we saw very high volatility but basically the index was trading between 1,870 - 1,950 points. The strange thing is that the accompanying trading volume was very high - most frequently around 3.1 - 4.5 billion shares were changing hands every day.

To show this situation better - the chart below presents the 10-day volume average:

Here we may spot that since January 7, 2016 the average volume went quickly up from around 1.9 billion shares to 3.3 billion shares a day.

Well, when prices go nowhere and volume is rising rapidly the market wants to say something important. In my opinion, the message is: SOMETHING BIG IS IN THE MAKING...

Wednesday, February 3, 2016

Another Strange Seesion In New York

It was really a strange trading day:

  • US dollar weakened 
  • Gold and precious metals stocks went strongly up
  • US stock indices were very volatile

Let me dig a little bit on today's stock market action.

The table below shows the ultra short-term market action, starting from January 27, 2016. Please, note the yellow area. On January 28 S&P 500 went up but the number of new highs was lower than new lows (minus 41)  - as I noticed in my post, it was a very strange occurrence. Then, on January 29, the market went strongly up (from 1893.36 to 1940.18).

Now, look at the greenish area. Today the market went slightly up but the number of new highs was lower than the number of new lows (similarly to January 28). If history repeats, tomorrow S&P 500 should go strongly up.

Well, I do not have the slightest idea where the market is going to go in the short term - there is so much volatility that everything is possible. That is why the best idea today is to stay on the sidelines. It is especially recommended for those encountering cardiac problems.

Saturday, January 30, 2016

Long - Term View On The U.S. Stock Market

Well, I was totally wrong in my last post on the U.S. stock market. Instead of going down it went strongly up. I am quite a good example of how difficult it is to predict a market move in the short - term.

Fortunately, January was a good month for those trying to profit on the descending stock market - for example, S&P 500 fell 5.1%.

In this post I want to look at the U.S. stock market in the longer time horizon.

Firstly, this market still looks like it is in its topping stage. While many other stock markets look to be in their bear market phases (or in a strong correction), the U.S. stock market stands firm:

Apart from Dow Jones Transportation, which looks like being in a strong correction or even in its bear market, other indices seem to be in their topping phases (which means that currently they are going nowhere).

However, in the long-term the markets do not paint a rosy picture.

1. Open interest in S&P 500 futures is going down:

The green arrow depicts the descending trend in open interest. When during the bull market phase the open interest goes down it means that less and less players are interested in participating in the game. And the basic stock market rule is that bull markets end with vanishing enthusiasm.

2. Less and less players are taking long positions in stocks (measured as a ratio of long positions / short positions held by big speculators):

3. More speculators are taking short positions in stocks:

As the chart shows, despite the ongoing bull market in stocks, since the middle of 2013 more and more speculators have been taking short positions.

4. The spread between junk bonds and U.S. treasuries is widening:

The chart shows the widening spread between junk bonds and 10-year treasuries. Please, note that before the last financial crisis (2007 - 2009) we encountered a similar pattern.
Since the second quarter of 2014 the spread has widened from 36 points to 50 points but the stock market seems not to be prone to that phenomenon. Not just yet...

Summing up, in the long-term the U.S. stock market does not look rosy for those believing in another year of price increases. However, in my opinion, there is no hurry to open short positions in stocks (unless you have very deep pockets). Topping processes are very tricky. What is more, the may last and last.

Friday, January 29, 2016

Precious Miners Portfolio - December and January Performance

Below you will find how my precious metals portfolio performed since inception:

Since December 16, 2015 the portfolio went up 14.4% while GDX (the big precious metals miners ETF) went up only 1.14%. In the same period the broad stock market, represented by S&P 500, lost 6.4%.

Another chart:

And the performance of each company:

As the chart shows, all picks reported positive returns. The best ones were Claude Resources (an increase of 30.2%) and Richmont Mines (21.1%). The worst stock was Fresnillo - an increase of 5,4%.

It Looks Like Harley Davidson Replicates The U.S. Economy

Most recently Harley Davidson (NYSE: HOG) published its 2015 results. Looking at the annual company's vehicle shipments I have spotted an interesting pattern:

The chart demonstrates changes in annual shipments. If there is an increase in shipments it is depicted in green. And vice versa - if there is a decrease, it is depicted in red.

It is interesting that in 2007, one year before the last financial crisis, Harley Davidson reported a decrease in shipments. A similar situation happened last year - for the first time since 2010 shipments went down 1.6%.

Well, it looks like Harley Davidson, a flagship U.S. company, behaves like the U.S. economy. Currently it is slowing down.

Thursday, January 28, 2016

Strange Session In The U.S.

It was not a usual session in the U.S. Main indices went up, slightly but up.

However it seems that we saw an artificial increase. For example, NASDAQ 100 went up 1.4%. This increase was made at a very high volume - 910 million shares changed hands.
What is strange enough - today as many as 141 issues made new lows (yesterday it was only 70 issues) and 14 issues hit new highs (nearly the same amount as yesterday). It is not a normal situation when indices go up (in such cases the number of new lows should go down).

Similar things happened to S&P 500. What is more, the chart below shows that today the big investors were selling their shares (descending Accumulation/Distribution line):

Now we are close to the medium-term lows. Usually at such levels stocks used to start a bounce up.

However, since January 21 the market does not want to go up. Well, in my opinion, the market is trying to tell something important and it seems that the info may be negative for those looking for another leg up...

Facebook - Optimism Not Based On Fundamentals

Yesterday Facebook announced its 2015 preliminary results. It is not an easy task to analyze this company - simply put, it has a very short financial history. What is more, Facebook's strength is based on its popularity among its users - the company is something like a fashion company.

However, let me try to do it in a simple, as usual, way.

I assume that the company's valuation is driven by its ability to deliver positive cash flows. Facebook was definitely able to deliver higher and higher cash flows from operations:

Of course, in the case of Facebook, its ability to deliver cash flow from operations is strictly linked to the company's revenue. In other words, the higher revenue the higher cash flow from operations.

At this point I see the first scratch. Facebook is still able to increase its revenue from year to year but last year this growth was weaker:

Well, I guess that the company is going to face this phenomenon in the coming future - it is really hard to increase such a high revenue ($17.9 billion in 2015) through organic growth.

That is why Facebook should focus on improving its effectiveness, for example through increasing its cash flow margin. To remind my readers, cash flow margin says what amount of cash is generated by one dollar in a company's sales. In the case of Facebook, in 2015 each dollar in sales was delivering $0.44 in cash flow.

Here is another scratch. It seems that Facebook's efficiency is slowly going down:

As the chart shows, 2015 was the first year when the company's cash margin was lower than in the previous year. Putting it differently, Facebook is currently facing some limits. Its revenue is growing at a slower rate; what is more - this revenue is delivering less cash, measured on a percentage basis.

Now I can try to present a quick valuation of the company's shares. According to the company, in 2015 Facebook delivered free cash flow of $6,076 million. Let me assume that Facebook is going to grow its earnings at the rate of 3% per year, indefinitely.

Next, assuming that:

  • the company's beta is 1.04
  • risk free rate is 2.38%
  • historical return of the stock market in the U.S. is 5.81%

then the cost of equity is 2.38% + 1.04 x (5.81% - 2.38%) = 5.95%

Facebook is a debt-free company therefore the cost of capital is equal to the cost of equity.

To find the company's business value I have to discount the annual free cash flow by the cost of capital diminished by the growth rate:

Facebook's business value = $6,076 million /  (5.95% - 3.0) = $205,966 million

To find value of equity I have to increase business' value by adding cash held by the company ($18,434 million at the end of 2015). As a result, the company's equity value is $224.4 billion.

Well, today the company's market cap (assuming that shares are trading at around $110 a piece) is around $312 billion so the company is actually overvalued by 28%.