Look Out Below: RSI Breaks

Hypnotized
Photo Credit: anguila40 via Compfight cc

Hypnotized?

Momentum is powerful and addictive.  It can be hard to perform a selling analysis on a company that has been so good to you and your portfolio that you’re considering naming your next child or grandchild after the company.  We’ve often wondered if we could build a monitoring method that could use relative strength indices and overbought breakdowns as another component of our portfolio-centered approach that is based on return forecasts and quality rankings.

We continue our exploration and vigilance using these long-term charts, starting with the company with the highest RSI at this time, Pfizer (PFE). The case studies will also include McDonald’s (MCD), Stryker (SYK) and Apple (AAPL).

We’ll close with an answer to the question: “It’s down 36% from its highs, would you buy Apple right now?”

Pfizer (PFE) has delivered a fairly massive advance — during a period when it went “non-core” with low and uncertain growth expectations over the last several years. The stock price has basically tripled in four years.

We’re reminded that a company can maintain an overbought condition (RSI>70) for months and even years … but we’ll be monitoring PFE going forward for the day when an excursion takes it to a value less than 70.

Just for kicks, a side-by-side comparison of the chronicle for Pfizer (PFE) displaying the elevated return forecasts at the price bottom, the convergence point (mid-2010) shown in the preceding image … and a steadily improving quality ranking.

Roll Call

So … are any of the stocks in neighborhood of 70 displaying “breaks” below 70 — making them sell consideration candidates?

We’ll start with the companies with return forecasts (PAR) less than the market median (MIPAR) at this time. We see that five companies cry out for a closer look. And since these would be more “challengeable” in portfolios (more likely to reside among the lower PARs in portfolios), it’s probably prudent and timely to do this on a continuing basis going forward.

The long-term RSI for 3M Company (MMM) is still increasing. We’ll be watching.

McDonald’s (MCD) is interesting. I hope none of you mind while I “think out loud” while trying to learn and decide with respect to the long-term potential value of monitoring from this perspective.

Observations:

1. I’ve shown three of the RSI breaks since 2008, denoted with the red arrows.

2. The concept is that we’re not surprised to see either a stock price decline or a disruption accompanied by an “extended trading range” following one of these turbulent disruptions.

3. The magnitude of the stock price correction and/or duration of the trading range seems to be somewhat proportional to the amount of geometric area (shaded green) preceding the price break. Note the subdued disruption in late 2010/early 2011.

4. We also know that we can be less concerned with high-quality core stocks and that RSI dips are less destructive so long as the long-term (60-month) trend, denoted in blue here is strong and increasing from left-to-right. (This is very consistent with our core holding and quality emphasis “theology.”)

5. I need to do more research regarding the RSI=50 level/threshold. Are the “reflections” or bounces at RSI=50 typical? Is there a chance that these reflections are signals (see mid-2009 and 4Q2012 & subsequent price advance) that the extended trading range could be waning or ending?

I hope the Danaher (DHR) 10-year chart will help illustrate why we’re scratching our heads over this. The magnitude and duration of the price corrections following the RSI breaks on this chart seem to be quite “proportional” to the overbought areas.

Community favorite Fastenal (FAST). It’d probably be fascinating to take a look at community sentiment (particularly the hand-wringing variety) during the relatively few disruptions over the last ten years. Note that FAST navigated/mitigated the bear market period exceptionally well during 2008-2009.

More research nudged on the RSI=50 breach moment shown here …

Leave it to community favorite Stryker (SYK) to be among the most colorful of this stroll.

1. The RSI, although near 70, is still an increasing trend.

2. Stryker (SYK) spent an extended period at the top of the MANIFEST 40, fueled by accumulation trends following that price correction in the middle of this display.

Shine Off The Apple?

And we’ll wrap up for now with the $64,000 question and one that many of you are waiting for: What does Apple (AAPL) look like?

Observations:

1. Apple is the most widely-followed stock in the MANIFEST 40.

2. The strength of that long-term (5-year trailing average) is massive.

3. That leads to a situation where AAPL was “potentially overbought” for a significantly extended period. See the RSI area from early 2010 to late 2012 — a period of over two years. This serves as a powerful reminder that under the right conditions, a stock can be overbought for a long time.

4. The area of the disruptions (stock price decline in combination with the duration of the trading range) does seem to correlate with the RSI areas and sharpness (rate of decline) of the overbought RSI condition.

During the most recent Round Table I was asked if I would sell (or buy) Apple as a long-term investor.

My short answer was that I didn’t think it was time to buy (yet).

We also want to point out that we strongly urged a trailing-stop mentality (if not programmed stops) for Apple in a series of articles a little over a year ago. Those of you who heeded that suggestion, you’re welcome.

This series of charts provides my longer answer to the question posed by the webcast attendee.

Take a look at the current area of disruption on display here for AAPL. Compare the preceding overbought RSI area, rate of RSI decline, etc. for the previous corrections. The extended period where RSI>70 leads to a pretty good size green-shaded area with an amplitude similar to previous episodes.

I think the yellow-shaded area is going to get materially larger for AAPL as this chart rolls forward. The only way for that to happen is for either (1) a continued price drop or (2) an extended trading range … or (gulp) a combination of both.

We’ll certainly be watching for a gain back above RSI=50 that is sustained. But I think it’s far more likely that the stock price for AAPL could continue to decline to the point where RSI is less than 30. I’d be vigilant for price surges to the upside to reduce my position over time — all the while waiting for the reversals that will put an end to the disruption area shown here.

We’ll continue with more long-term RSI snapshots in the Manifest Investing forum and will certainly flag any that deserve to be “flagged” and hope that any ensuing hypnosis will lead to focused vigilance … and an incremental benefit to our long-term returns.

Triple Play Screen (3/19/2013)

Photo Credit: Alan Cleaver via Compfight cc

A couple of people have requested a quick triple play screen in the last few days, so we’ll take a closer look.

Companies of Interest: Recent Round Table selection Vera Bradley (VRA) just toggled back to “Bullish” and with fundamentals intact, the price drop could be a sale vs. distressed merchandise. Kohl’s (KSS) was downgraded by JP Morgan this morning — so study carefully and monitor for impact on long-term trends. Coach (COH) continues to be challenged in a challenging retail environment but the news/expectations out of China have been quite good of late. United Health (UNH) has some of the stronger P/E expansion and margin enhancement potential on the list.

Keep in mind that the Triple Play screening criteria is generally most useful in the later stages of a bear market but the concepts are always valid.

Here are the three major Triple Play criteria:

  • Damaged stock price (Elevated return forecast)
  • Potential for profitability improvement (margin expansion)
  • Potential for P/E expansion

Using our stock database:

We begin by limiting the field to companies with Fusion Rankings (a combination of return forecast, quality ranking and technical factors) greater than 80.

We then limit the field to companies with (1) projected P/E ratios greater than current P/E ratios and (2) profitability forecasts greater than current profitability levels. P/E expansion and margin enhancement are both annualized in the results table.

The qualifying companies are sorted (descending) by MANIFEST Rank.

Average Investor Monkey Pile

Has re-entry into equities begun and are you in that number?

Intriguing headline from an advertisement on Seeking Alpha this morning.

Answer: Uh, no. That would have been the case THREE YEARS AGO.

We have an idea that you might want to try. Invest regularly in leadership companies with the highest quality rankings. At any price? Heavens no. Shop diligently and WAIT for the best return forecasts.

Our audiences are sometimes skeptical about the “average investor returns” suggested by the DALBAR research. With ads like this one this morning — really?

Forward Your Shamrocks to Cyprus

Banking in Cyprus … a different need for gun control?

Cyprus? Many people rolled out of bed this morning and unless they’ve been on a Mediterranean Cruise, may have had to remind themselves about this island nation of 1,000,000 people not far off the coasts of Turkey and Israel.

“There is no room…to believe that increasing debt has anything to do with long-term growth.” — Jeremy Grantham (GMO)

Grantham is talking about the period from 1982-Present, where the federal debt has tripled during a period when overall growth has materially slowed. (As he says, granted, there are other factors, BUT …)

This is a must-view interview with Jeremy and Charlie Rose.

It links with this weekend’s events in Cyprus. Keeping interest rates low is harmful — mostly to our senior citizens who need fixed-income alternatives that actually have a rate of return … and as Grantham points out, low interest rates are the engine for wealth transfer from the less wealthy to the most wealthy.

The real tragedy is that we’re painted into a corner … because increasing interest rates would slaughter the federal budget (and most likely do very damaging things to our muddle-through economic recovery.) President Clinton mentioned this briefly during the recent presidential election, an honest moment that seemed to be hushed as quickly as it was uttered. I don’t think our elected representatives WANT the general population to understand what dangerous challenges are presented by this condition. (And it’s not easy to decipher from any of the budget concepts distributed by any and all of the current party leaders)

Enter Cyprus. In a nutshell, imagine how you’d feel if you woke up to discover that FDIC insurance didn’t “hold up”, that you couldn’t withdraw your deposits … and that your total assets on deposit were about to be subjected to a special tax — with the amount based on the size of your account.

It’s not a pretty picture. You might want to hang on to a shamrock or two …

Value Line Low Total Return Screen (3/22/2013)

 

Companies of Interest

The average low total return forecast for Issue 5 is 7.0% — so there are some shopping opportunities in the group. (Reminder: The companies displayed in the screening results are limited to the top two quality ranking quintiles, or greater than 60)

Nu Skin (NUS) is a somewhat speculative study but displays some promising characteristics. I’m reminded of Laura Berkowitz’s timeless “Confessions of a SafeSkin Buyer” published years ago in Better Investing and wonder if the study shouldn’t include a threats and opportunities analysis of single-product companies, fads … and the like.

Gentex (GNTX) is a potential study in conflicted consensus. Morningstar thinks the price-to-fair value ratio for GNTX is 74% (attractive). S&P thinks the P/FV is 103% (fairly/fully valued). Go ahead. Rumble. What do you think?

Walgreen (WAG) and CVS Caremark (CVS) continue their leadership campaign and compete with each other. Both companies remain attractive from a return perspective and the fundamentals at CVS have strengthened of late — now topping WAG in the quality ranking. S&P sees opportunity with a P/FV of 74% for CVS.

Materially Stronger: Arris Group (ARRS), Cisco Systems (CSCO)

Materially Weaker: Acme Packet (APKT), Broadcom (BRCM), Tellabs (TLAB), Alaska Communications (ALSK)

Market Barometers

The Value Line median low total return forecast is 6.8%, down slightly from last week’s 6.9%.

Look Out Below: MANIFEST 40

The relative strength index (Stockcharts.com RSI) is a significant momentum indicator that we’re using to identify overbought (RSI > 70) conditions as well as oversold (RSI < 70) potential buying opportunities.

As we’ve noted, we’re tracking a long-term version of this indicator, using a trailing 12-month RSI in conjunction with 10-year monthly charts. We think that RSI breaks — when RSI has been greater than 70 for a prolonged period and then breaks back below 70, that’s it is a moment worth noting and time for portfolio-centered consideration.

More (specific case studies) to follow …

 

Look Out Below: Carriage Services (CSV)

With our median return forecast at 6.7% (nearing historical lows) and the relative strength index for the Value Line Arithmetic Average at 71.9 — we thought it might be worthwhile to check for some overbought/weakening stocks. We’ll do this on a continuing basis, inspired by Barry Ritholtz’s relatively infrequent “Look Out Below!” posts on his Big Picture blog. In this case, it’ll be Look Out Below: Individual Stocks edition. When Barry signals a macro-economic seismic event, it’s worth paying attention and at least checking or double-checking your capital preservation status if you’re in that mode.

We open with Carriage Services (CSV). Carriage Services currently has the highest relative strength index, RSI (94.8) — based on the long-term perspective shown here.

A few things …

  • There’s an element of poster child morbid poetry here. Carriage Services provides death care services and merchandise in the U.S. The company operates two segments: funeral home operations and cemetery operations.
  • The Value Line low total return forecast for CSV is 1% (based on a stock price of $13.00). Accounting for the change in stock price and long-term horizon, the low total return forecast is now -8.1%.
  • We know that an elevated RSI is just one component (puzzle piece) of a bigger picture. We also know that companies can remain in an “overbought condition” for weeks, months, quarters and in some cases — years.
  • That said, we’ll be monitoring all of our covered companies for a “retreat” from overbought — watching carefully for that long-term crossover from RSI > 70 to RSI < 70.
  • Note that the decline for Carriage Services (last RSI crossover) at the onset of the Great Recession (Halloween 2007) reached a monstrous 91% drop in stock price. We think it might be prudent to at least be aware of these conditions … and that a considered decision (selling, trailing stops, options, etc.) seem pretty worthy and potentially rewarding over the long term.
  • And lest you worry about the long-term investing selections made by your peers, Carriage Services only shows up on 0.02% of all subscriber dashboards at Manifest Investing.

We’ll be taking a look at our entire batch of companies … and flagging those (particularly our community favorites) for indications of potential Look Out Below! vulnerability.

Value Line Low Total Return Screen (3/15/2013)

Companies of Interest

The companies with the strongest fusion ranking (combination of fundamental and technical analysis factors) this week are: Aerovironment (AVAV) and United Healthcare (UNH).

Aerovironment has been under fire in recent weeks and the stock price has sagged while growth, profitability and valuation characteristics have slightly deteriorated. After accounting for the reduced expectations, AVAV still ranks among the best opportunities among our covered companies. We have the projected annual return (PAR) at 15% with a quality ranking of 89 (11th highest percentile) after this week’s refresh. Morningstar has a fair value for AVAV at $34.

Materially Stronger: United Therapeutics (UTHR), Quality Systems (QSII), Davita (DVA), Biomarin Pharma (BMRN), AllState (ALL)

Materially Weaker: Select Medical (SEM), Posco (PKX), Amedisys (AMED), AK Steel (AKS)

Market Barometers

The average Value Line low total return forecast is 6.9%, down from 7.2% last week.

The Value Line Arithmetic Average reached an all-time high last week, joining the Dow Jones Industrial Average at the party — but much more quietly. All-time highs are nothing new for this all-of-the-above average of the types of stocks that we routinely pursue, study and own. In fact, this composite made it “back to even” 2-3 years ago and we celebrated and noted that our Tin Cup model portfolio recovered equally quickly at the time.

On this 20-year chart, we’re reminded of the swoons that followed (1) 1998 and Long-Term Capital Management, (2) the 2001-2003 correction and (3) the 2007-2009 Great Recession. We’re also reminded that peaks in relative strength index (RSI) are not the sole piece of the puzzle … as there are periods when successive peaks accompany a continuously advancing bull market. That said, any time the RSI has been “north” of 70 and retreats to 70, we’d urge high-alert status because the vulnerability of significant price corrections is elevated. (A big picture version of “Look Out Below”)

Rites of Spring … Spring Eternal

Derek Jeter’s (2) play kept the Yankee dynasty alive in 2001. Many veteran sportswriters regard this play as the most “heads up” play they’ve ever seen. Note that Jeter is behind home plate as he follows through. It was impossible, picture perfect and simply unforgettable. Giambi (7) was tagged out inches from home plate. Source: http://www.espn.com

Now that pitchers and catchers have reported … followed by the rest of the team … and the World Baseball Classic is underway, we revisit this gem from our own Cy Lynch from March  2007.

It’s a reminder of the virtues of practice (and paying attention) in investing — through the eyes of baseball and spring training:

If you’re new to investing, Cy Lynch captured the essence of “practice … practice … practice …” with this classic celebration of baseball’s annual rite of Spring Training.

For the players, Spring Training is far from glamorous. It’s an often monotonous, even grueling time. Fielders take ground ball after ground ball practicing so that they are in the right place when it counts. Pitchers, not known for, or relied on for their hitting ability, practice bunting over and over so that it becomes second nature. Attention to detail. Routine. Second nature.

For a spring training drill, Yogi Berra instructed his players to “Pair off in threes.”

Seriously, it’s the spectacularly routine things that matter most.

Rites of Spring