IBD MEETUP/NORTHRIDGE

LET’S MEETUP AND DISCUSS STRATEGY FOR Q2-2014

AND REVISE OUR WATCHLIST

05/17/2014

REVISED WATCH LIST

DISCLAIMER

•During the course of this meeting we will review stocks that should be considered as additions to your watch list.•These are not trade recommendations. These are candidate trades.   Do your own research, keep position sizes modest, and stay diversified. •Also past performance is no indication of future stock trends.

CURRENT STATE OF THE MARKET• Trading and investing can often be a

minefield of confidence sapping, money draining traps.

• There is a never ending abundance of market news and information to digest.

• Being able to cut through the reams of information and misinformation is one of the greatest challenges confronting investors and traders.

SO WHAT DO YOU DO?

• To be successful in trading or investing YOU must develop the ability to:

• QUESTION, • seek ANSWERS, • Then finally ANALYSE what is happening

in the economy, the financial markets and the individual companies listed on the stock market.

CURRENT VALUATIONS

REALITY OF ECONOMIC GROWTH AND INFLATION

STOCK MARKET VOLATILITY: AN ERRATIC CYCLE

High or rising volatility [FEAR]often corresponds to declining markets; low or falling volatility is associated with good markets. The current period of low volatility is a reflection of a good market, but not a predictor of good markets in the future.

HISTORICAL VIX• The VIX, used for two decades to gauge

investor fear, has seen three of its 15 largest one-day gains in the past 13 months.

• According to data compiled by Bloomberg. In that time, no loss in the Standard & Poor’s 500 Index (SPX)  ranks among its top 100.

• On days when the stock index fell 1.75 percent or more since the start of 2013, the VIX jumped an average of 30 percent, the most ever.

RECENT VIX• Aggressive central bank policy may have made the

stock market comfortably numb and brought about the “death of volatility.”

• “As long as central banks feel they must respond to weak economic conditions with strong medicine, equity investors will feel that the Fed, European Central Bank, Bank of Japan, and other central banks will be in their corner.

• In fact, the VIX has closed above 20 only four times in the past 12 months, according to FactSet data. Go back 24 months, and the VIX has only closed above the long-term average 32 times. There are 252 trading days in a given year.

• Central bank actions have essentially become a volatility put.

VIX AS OF 5/15/14

SELL IN MAY (?)

• One of the long standing adages is investors would be wise to “Sell in May and Go Away” in most market environments.

• This adage contends that stock volatility historically is higher during the months of May to October.

• So investors may want to consider exiting the stock market in May, perhaps repositioning to less correlated asset classes, and returning to the stock market in November.

RESEARCH SHOWS

• According to the research of Yale Hirsch, founder of the Stock Trader’s Almanac, based on 50 years of monthly stock market returns.

• The Dow Jones Industrial Average has experienced an average return of 0.3% during the “more volatile” May – October time period while experiencing an average return of 7.5% during the ‘less volatile” November – April time period.

SO WHAT ABOUT 2014?

• perhaps 2014 will be the year to “Buy in May and be Prepared to Stay” as it relates to global equities.

• This market seems poised to experience a strong second half in 2014, though there will likely be more intermittent bouts of short-term volatility.

• Also there is more upside potential beyond 2014 in this market cycle.

REASONS

1. Volatility returned in Q1 because of:a. Heighten tensions and discord in Washingtonb. Revised growth estimates in EMsc. Unrest in Ukrained. Trepidation over Janet Yellen’s Fede. Concerns over Q1 Earningsf. Investors saw volatility as an opportunity to take

profits and move money out of the market

MY S&P FORECAST

2. Expect high, single-digit gain for S&P 500 by year end.

a) However US Equities might be outpaced by European and other International Equities

i. ECB will continue to keep rates low to stimulate growth.

ii. This is similar to the US QE program

b) Expect to see a sustained inflow of overall investment in the region

SECULAR BEAR OR BULL?

A Secular Market lasts 5 to 25 years.Many believe we are still in the Bear Market of 2002

SECULAR BULL MARKETI believe we are in the midst of a secular bull market.• Stocks have risen in

price more than they have fallen in price.

• Since 1802 there have been 7 recognized Secular Bull Markets.

• The average length of these have been more than 14 years.

HISTORICAL MARKETSTime Period Duration (in years)1815-1835 201843-1853 101861-1881 201896-1906 101921-1929 81949-1966 171982-2000 18Average Secular Bull Market Length

14.71Historical Secular Bull MarketsSource: Gold-Eagle.com, “Secular Market Trends” article, April 29, 2014

HOW HAS THIS PLAYED IN QI

•It Was the Weather. Now What?

•Despite signs that most of the U.S. economic softness of the last three months was weather related, equities have struggled to push higher lately.

•The backdrop has also shifted in a "topsy-turvy" way, with the best-performing assets of 2013 underperforming and the 2013 losers flourishing.

MARKET EXPECTATIONS?•Projections for Q2 earnings have been revised down as market expectations become more cautious.

•In 2009 companies earnings were heavily influenced by forced cuts in expenses not increasing revenues.

•This season’s earnings are released against a back drop of conflicting economic signals in the US and other parts of the world.

•Earnings growth should be built on production and consumption increases not inventory rebuilds and cost cutting.

•Scan the company guidance reports for clues on the US economy and whether a ‘double-dip’ recession remains a real possibility.

•The current change in market fortunes is founded on growing hope that a strong earnings season will propel the market out of its current slump.

MY EXPECTATIONS•Stocks Can Move Modestly Higher

•The market is certainly vulnerable, especially to a spike in interest rates or an economy slowing more than expected. That said, neither of those are our base case scenario.

•We still believe that the market will push ahead in 2014, given our expectations of modestly accelerating economic growth and continued low rates (we still expect the 10-year Treasury rate to rise to 3.25% to 3.5% in 2014).

•However, gains are likely to be more modest and volatile given ongoing geopolitical turmoil and Federal Reserve (Fed) tapering.

SWITCH STRATEGIES

•It's Time to Switch Strategies

•In this environment, rather than chase last year's winners—a poor strategy year-to-date—investors should consider embracing some of last year's losers and adopting a general bias toward value-oriented areas of the market.

•Valuations for last year's high-flying growth stocks appear stretched (this is particularly true for biotech and Internet stocks).

FIND THE VALUE•Where the Value Is

•We still believe that stocks offer better value than bonds, even after a five-year bull market.

•Within stocks, the shift toward value from growth supports our preference for large cap and mega cap names over small cap stocks, as well as our preference for international equities.

•Equities in Europe, Japan and select emerging markets possess one characteristic in short supply in the United States: value.

• While most options traders are familiar with the leverage and flexibility that options offer, not everybody is aware of their value as predictive tools.

• Yet one of the most reliable indicators of future market direction is a contrarian-sentiment measure known as theput/call options volume ratio. By tracking the daily and weekly volume of puts and calls in the U.S. stock market, we can gauge the feelings of Traders.

PUT CALL RATIO

• While a volume of too many put buyers usually signals that a market bottom is nearby, too many call buyers typically indicates a market top is in the making.

• The bear market of 2002, however, has changed the critical threshold values for this indicator.

BETTING AGAINST THE "CROWD"

• It is widely known that options traders, especially option buyers, are not the most successful traders.

• On balance, option buyers lose about 90% of the time.

• Although there are certainly some traders who do well, would it not make sense to trade against the positions of option traders since most of them have such a bleak record?

• The contrarian sentiment put/call ratio demonstrates that it does pay to go against the options-trading crowd. After all, the options crowd is usually wrong.

USE CBOE DATA• CBOE Put/Call Ratio Data

Looking inside the market can give us clues about its future direction. Put/call ratios provide us with an excellent window into what investors are doing. When speculation in calls gets too excessive, the put/call ratio will be low. When investors are bearish and speculation in puts gets excessive, the put/call ratio will be high.

• We need to know past values of these ratios in order to determine our sentiment extremes. We can also smooth the data into moving averages for easy interpretation.

• There are different ways to construct a put/call ratio, but the traditional CBOE total weekly put/call ratio is a good starting point.

• Simply take all the puts traded for the previous week and divide by the weekly total of calls traded. This is the weekly total put/call ratio.

USING PUT-CALL RATIO• When the ratio of put-to-call

volume gets too high (meaning more puts traded relative to calls) the market is ready for a reversal to the upside and has typically been in a bearish decline.

• And when the ratio gets too low (meaning more calls traded relative to puts), the market is ready for a reversal to the downside (as was the case in early 2000).

MOMENTUM

THE STOCK MARKET MOMENTUM INDICATOR [MMI]

• Traders have found the MMI to be an invaluable tool for determining the general direction of stock prices. The MMI analyzes the price strength of the 500 stocks in the S&P 500 Index.

• How the indicator is determined– Using a proprietary formula, a ratio of the percentage of designated

stocks and two moving averages of that ratio, a 10-day and a 25-day, are calculated and reported,.

– The movement and behavior of these two moving averages defines the value of the Momentum Indicator for determining the general market trend.

– An uptrend is signaled when the 10-day moving average crosses above the 25-day moving average and the 25-day moving average turns up.

– A downtrend is signaled when the 10-day moving average crosses below the 25-day moving average and the 25-day moving average turns down.

MOMENTUM• Momentum and rate of change (ROC) are

simple technical analysis indicators showing the difference between today's closing price and the close N days ago.Momentum = closetoday – closeN days ago

• Momentum is the absolute difference in stock, commodity:

• Rate of change scales by the old close, so as to represent the increase as a fraction.

Rate of change = (closetoday – closeN days ago)÷closeN days ago

RSI MOMENTUM INDICATOR

• RSI advanced from October to the end of November. • During this period, the stock advanced from the upper 60s to the low

80s. • When the stock traded sideways in the first half of December, RSI

dropped rather sharply (blue lines). • The green lines on the chart mark a period of sideways trading in the

stock and in RSI.

Momentum indicators employ various formulas to measure price changes. RSI (a momentum indicator) compares the average price change of the advancing periods with the average change of the declining periods

ROC INDICATOR• Rate-of-change (ROC) is a

centered oscillator that also fluctuates above and below zero.

• ROC measures the percentage price change over a given time period. – For example: 20 day ROC

would measure the percentage price change over the last 20 days.

• When the indicator is above 0, the percentage price change is positive (bullish).

• When the indicator is below 0, the percentage price change is negative (bearish).

FINVIZ.COM

GEORGE’S CORNER

• But as we look at the markets - and we respect the price action, of course - the price action in my view is the ultimate arbiter of variant views. So you could be bearish or you could be bullish, but at the end of the day, you gotta trade the market that we have, not the market that we want; and the market that we have is trading at all-time highs.      May 9, 2014     Todd Harrison 

NORTHRIDGE IBD/MEETUP

GROUP WATCHLIST

AS OF 5/16/14

REVISION NEEDED!

SUMMARY• I believe that the current Bull Market still has legs.

– In fact we might have passed out of the 2002 Secular Bear Market; and

– 2009 might have marked the beginning of a Secular Bull Market.

• 2014 will see a lot of sideways action as the Market bases prior to another major upturn.

• There are always investing opportunities.– The safest investments follow the trend.– In this type of Market, technical analysis trumps

fundamental analysis.– Investors need to daily assess the Market trend. There

are always minor trends within the major trend.

ANY VOLUNTEERS

I WILL BE IN EUROPE DURING THE MONTH OF JULY.

SO WE NEED A SUBSTITUTE ORGANIZER OR TO TAKE A VACATION BREAK!

AND

THE END