Archive for May, 2009

S&P resistance levels

Tuesday, May 5th, 2009

Well, it seems as if a new bullish trend is developing. Today the VIX, the volatility index, closed under resistance at 33.50. The Nasdaq volatility index, the VXN, also broke resistance. The Dow Transports have remained above major resistance of 300 that it finally broke last week. This level is quickly turning into support.

So, assuming this bullish tenor holds and the results of the bank stress test are along the lines of what the Street is expecting, where do we go from here? A look at the chart of the S&P 500 below shows a minor resistance level at 935. If we can clear that, it looks like smooth sailing until major resistance at 1000.

Hope you have your buy lists ready!

Now back to my website…

Time to add dividend stocks to your portfolio

Monday, May 4th, 2009

If you believe that we’ve already seen the bottom of the market and it has no where but to go up (or sideways at the worst), then you might be thinking that now would be a good time to start lining your larder with some high dividend-paying stocks. Why would you want to do this? For the following reasons:

1. Dividends account for most of the wealth accumulated in the stock market. And don’t believe that dividend stocks are for income generation only—au contraire mon ami! In fact, if you’re a young person just beginning to save for retirement (which you should be doing!!!!), adding some high-quality dividend-paying stocks to your portfolio is one of the wisest things you can do. Especially if you elect to re-invest your dividends into buying shares of your stock. This is a form of compounding, one of the most powerful methods of generating long-term wealth.

2. Buying dividend-paying stocks at depressed prices boosts your dividend yield because of the low cost basis.

3. Buying dividend stocks at depressed prices also gives you the added benefit of price appreciation.

To find stocks that have high dividends and with a good fundamentals, I ran a stock screen on the MSN Money Central Stock Screener (which is free to all and with whom I have no affiliation) according to the following criteria:

* Average daily volume greater than 100,000 shares. This ensures liquidity and a narrower bid/ask spread.

* Last price greater than $2. In bullish environments, this criteria could be raised, but I chose this value since many issues are so undervalued.

* Current dividend yield = As high as possible

* Stock Scouter rating greater than or equal to 7. This is an attempt to capture the higher quality issues.

I screened the top 50 stocks according to the bullish strength in their charts. (I know this is subjective but judging from today’s action, this group is up on average over 3.5% as of this writing.) The following twenty-two stocks are my top picks. The stocks highlighted in rose are those that have broken out today.

The table is divided into three groups: the top seventeen stocks are drawn from the energy, financial, real-estate, and utility sectors—exactly where you’d expect to find the high-dividend payers. The next three are from other sectors that are trending up. The last two are currently in a holding pattern after an initial run up. [Click on the chart to enlarge.]

So, how should you play these?
I know you’ve heard that stocks that pay a high dividend should be avoided because there’s a usually a reason for the high payments. But in many of these cases, I think that the reason is just that they’ve been way oversold. Some of these stocks are as much as 75% off their highs. However, that doesn’t mean you should neglect your due diligence!

I grouped the table according to sector because it’s important to diversify your holdings. You don’t want your nest eggs to all come from the same basket as doing so increases the risk to your portfolio. Remember, it’s not only profits that count, but also the amount of risk that goes into getting that return.

If you don’t like my picks, try modifying the screening parameters to reflect your investment taste, but don’t waste too much time. I think that now is THE time to begin stocking up on dividend-paying stocks. Go gettem’!

Weekend Update: Portfolio updates + comments

Sunday, May 3rd, 2009

Dr. Kris has been under the weather for the past quarter-moon which is why I’m not at the birthday party of an acquaintance at a Moroccan restaurant replete with full bar and belly dancers. Feeling a bit better than yesterday at least, Dr. Kris (aka moi) has updated the Channeling Stocks Portfolio. As mentioned in Wednesday’s blog, I covered all of my short positions at their closing prices. The chart below reflects that.

As I also said, I don’t have time until my talk at the LA Traders Expo on June 4th at the Pasadena Convention Center to contribute more to this portfolio. The only two positions open are the two longs—HNP and OSIP.

But, as I mentioned at the start, this was a strategy that I’ve never traded before as an entire portfolio and it would be a learning experience for both of us. I’ve traded a few channeling stocks and index tracking stocks on occasion and made an overall profit on them. At the time, there weren’t nearly the amount of fundamental nor technical tools available as today (for better or for worse!), nor was the market so ambiguous. Running this experiment today has been an eye-opener for me

What I’ve learned from paper-trading Channeling Stocks
Here are some of the more notable things that I’ve learned from this experiment:

1. In markets that have been trending in one direction for a long time, trying to fade (go against) the market in the majority of picks was not optimum, even though the entry (short) signals were triggered.

Although it might be tough to discern market direction, when the market headed south at the beginning of March and the VIX didn’t follow was a signal that something was up, either good or bad. But once the market began rising and the VIX concurrently falling was a time to limit taking on short positions.

2. There’s always been a debate between those who think you should put all of your eggs in one basket (e.g. shorting stocks like I did at market down-turns) and balancing your total amount between long and short positions.

3. Unknown factors can be detrimental in any portfolio, such as short-holding Pepsi-America (PAS) which was covered right after the take-over announcement by Pepsi-Co. Unless you have insider info, there’s virtually no way you can spot this action. You might expect it if other companies in the sector are cash-flush and hurting for cash flow, e.g., new product.

4. Holding over an earnings release can be detrimental, especially if the release is in sync with current market direction that is opposite to your holding. Take Fiserv (FISV) who reported good earnings after the bell on April 30th. Good thing I chose to cash out of my short positions on April 29th based on other criteria, because my position would have suffered a bit: the stock opened on May 1 (after the good earnings announcement) at $37.58. Had I covered my short at that time, my loss would be -6.3% instead of -4.8%.

Even the most experienced traders in the business can be unprofitable if they’re novices in regards to a new strategy. That’s why I’m going to shout the following: PLEASE PAPER-TRADE ANY STRATEGY BEFORE EXECUTING IT! That’s how you learn the intracacies that you may never have thought of due to changing market conditions. Your failure does not make the strategy invalid; you just need to learn it.

Many people will tell you that trading the market is easy; if you’re new to trading and have good luck, you might agree with them, but after a while your luck can (and probably will) run out. That’s when you might consider giving up, but that’s exactly the time when you should examine your trades and learn more about why you succeeded and also why you didn’t.

Which leads me to the second point: KEEP A JOURNAL!

You’re only a failure if you keep repeating your losses.

End of lesson.

Channeling Stocks Portfolio:

[Click to enlarge.]