Archive for November, 2009

Blue Plate Specials – The “Hungry Bear” Menu, Market Notes, and Trading Tips

Friday, November 27th, 2009

Menu 11-27-09

In today’s final installment in the series of “How to order from the daily Blue Plate Specials” we’ll be looking at the portion of the menu designed for all of you hungry bears namely stocks that are either breaking down or are hitting new lows. But these lists aren’t just for the short-sighted! Most of us have diversified portfolios and if you see a stock in which you have a long position appear on one of these bear lists, then you should probably consider either lightening up your holding (either all or some of it) or protecting it via the use of put options.

So as not to finish off this series on a down note, we’ll also look into the daily Market Notes as well as the Trading Tips selections.

Bear Menu categories

* Please note that only stocks trading above $5 are considered. This is because most brokerage houses will not let you short stocks below that.

* Trading volume is not considered on the short side because it doesn’t have the same impact as on the long side.

New Lows
Hot Lists:
These are the stocks appearing on the New Yearly Low hot list that are currently trading above $5.

Selection Criterion:
* Stocks in this category need only to be making a new yearly low. Trading volume isn’t a factor here but one thing you might want to look for is a stock making a new low on extremely high volume and with a long bottoming tail in relation to the body (on a candlestick chart). This means that the supply of sellers has run out and a reversal in trend direction is highly probable.

How to use:
Stocks that make this list stand a good chance of going lower except for those fitting the above mentioned exception. Dr. Kris does not recommend that you run out and short these stocks unless you are experienced in short-selling (or buying put options) and are able to read a chart well enough to discern how far the stock could fall. For example, if there’s a major support level close by, it may not be profitable to take on a short position considering the reward versus the risk.

Example: See chart below.

Breaking Down
Hot Lists: These stocks are principally culled from the following hot lists: Percent and Point Losers, -VWAP, Unusual Volume, and Unfilled Gaps.

Selection Criterion:
*Stocks that are breaking a support level. These can include those issues that have enjoyed a significant run-up but are falling perhaps due to changes in company fundamentals (e.g., lower than expected earnings, lowered guidance, change in management or business focus, analyst downgrade, etc.), sector rotation (institutions moving into another sector because of a perceived change in future economic conditions), or the incompetence of one or more of their competitors thus bringing down the entire industry group. Sometimes there’s no apparent reason for the fall other than investors are losing interest and are finding other places to put their money.

How to use:
Stocks that make this list have the potential to go a lot lower. Shorting stocks is an art in itself and unless you’re experienced with the vagaries of short-selling, please only play with money you don’t care about losing.


SMTB Chart 11-29-09
Click to enlarge

Other categories: Market Notes & Trading Tips

Market Notes
This section appears at the bottom of the menu. Think of it as your eye on the market and as a crystal ball into future direction. It’s a distillation of internal indicators that are used to interpret current investor sentiment and leading technical indicators that point the way of future direction.

The main indicators used to measure the current market temperature are the Volume Weighted Average Price (VWAP) which is considered to be a measure of institutional buying or selling interest (VWAPs can be both positive and negative), the number of advancing issues versus the number of declining issues, and the Trin (Arms Index).

Indicators of where the overall market may be headed in the future include support and resistance levels of the major indexes especially the S&P 500 (SPX) and the Dow Transports (DTX); divergence in the direction of the Dow Transports compared with the Dow Industrials (Dow Theory); the direction of the Trin; and the direction of the VIX which is a measure of investor fear and uncertainty.

All of these indicators are used to formulate the state of today’s market and to provide an indication of near-term direction. Just one caveat: Lackluster internals cloud the crystal ball so that predictions of near-term movement can’t be made with much accuracy.

Trading Tips
This feature is only included when specific trading opportunities arise. Sometimes trading tips are disguised as “On the Move,” “Heating Up,” or “Cooling Off.” Consider these tips as possible trades that merit further investigation.

Now that you have a glimpse of what constitutes the Blue Plate Specials, I hope you start to use these menu selections as springboards for your own research. Please remember that all of the suggestions and recommendations made in the Blue Specials are just that; it’s up to you how you digest them.

Buon Appetito!

Gobble, gobble!

Thursday, November 26th, 2009


Wishing you and yours a very happy Thanksgiving from all of us at the Stock Market Cook Book.

Q: How do you top turkey, yams, gravy mashed potatoes, and pumpkin pie?

A: With a big couch, football, and a full box of Alka-Seltzer.

Have a good one!

The semi-reqularly scheduled blog will return tomorrow.

Blue Plate Specials – Special Categories

Friday, November 20th, 2009

Continuing our perusal of the daily *Blue Plate Specials* Menu, today we’ll be looking at a few of the more popular Special Menu categories. You can think of these as daily treats–sometimes they’ll be there, and sometimes they won’t.  It all depends on what ingredients the chef has to work with. 

Special Menu Categories

Low-Priced Leaders
Hot Lists:
These are culled from all of the bullish Hot Lists.

Selection Criteria:
*Stocks trading under $30 with most of the them under $15.

*Significant daily volume (usually >250k). They can trade on lower volume if their 5-minute charts move in an orderly fashion.

*Stock price has been moving up steadily for at least several months.

How to Use: Low-priced stocks moving up steadily on decent volume can signify that the investment community is waking up to new companies with major growth potential. This is where you’ll need to put extra effort into your due diligence as these could be companies you might want to hold for the long-term. Think Microsoft and Google in the early years.

On the other hand, I do pick stocks that have risen substantially which means that their runs could be coming to an end, at least in the near-term, and especially if the market is reversing to the downside. In bull markets you might want to add a few of these to your portfolio during market dips, starting with partial positions and building each as it moves up. Just remember to set a stop-loss as a fierce market move to the downside can spell disaster for smaller issues.


VMED Chart 11-19-09

Speculative Leaders
Hot Lists: These are culled from all Hot Lists, especially Unfilled Gaps, Unusual Volume, and Percent Gainers.

Selection Criteria:
*Stocks trading under $10. Sometimes if a higher-priced stock has been in a significant uptrend and it trades at a low volume, I’ll include it.

*Lower daily volume (usually <250k). They can trade on higher volume if their 5-minute charts move in a choppy fashion, usually according to the whims of the market-makers.

*They’ve been moving up for at least a few weeks to a few months with very few pull-backs below previous support.

How to Use: These are highly speculative issues. They can turn out to be extremely profitable but the probability of that happening is low. In this respect, it’s of the essence that you do as much research as you can on the company and only play with discretionary funds.

Stocks of this ilk tend to be very volatile so you might want to consider either dumping them when they break their first support level; or, you can sign-up for the longer term and hold them until they either tank completely (and hopefully you haven’t risked much money) or launch into orbit in which case you can retire in luxury.

Just don’t blame Dr. Kris if your investment in any of these speculative stocks leaves you with indigestion!


PWER Chart 11-19-09

Darlings of the Day
Hot Lists: All bullishly-biased Hot Lists.

Selection Criteria: These tend to be higher priced stocks (>$30) that have been in an up-trend for at least several months. Technically speaking, their charts are about perfect.

How to Use: Generally, these are well-established companies whose stocks have been beaten down and are on the rebound. Long-term investors might find them especially appealing and look to investigate them further. But remember that nothing ever goes up in a straight line forever and at some point, even these stocks will take a break.


CHKP Chart 11-19-09

Caveats to keep in mind:
*Despite the fact that I look at hundreds and hundreds of charts per day, many valid candidates don’t make the hot lists because they are symbol-limited. This means that if you see a stock breaking out to a new high and it’s not on my list, that doesn’t mean that it’s invalid. Most likely it didn’t make my hot lists at the time I was looking at it. Remember, too, that the price of a volatile stock can change markedly from minute to minute.

*Sometimes I see stocks that have broken out the day before that somehow escaped filtering. If the stock hasn’t broken out too much and I think it has an excellent chance of going higher (assuming the market is trending upward), I’ll put it on the appropriate Break Out list. I don’t want you to miss out on some good prospects!

*This may seem obvious, but please remember that stocks tend to move in the overall direction of the market. That means if the market is in a strong bullish trend, shorting stocks is not the percentage play, and vice versa. Even the strongest stocks will succumb to the pressure of a bear market.

Now that we’ve cleansed our palate with the bullish candidates, we can next focus on those that can cause gastric pain in many–the bearish entrees.

Bon appetit!

How to “order” like a gourmet from the *Blue Plate Specials* menu

Thursday, November 19th, 2009

I spend a couple of hours a day putting together the Blue Plate Specials that appear in the right-hand column of the website. Many people have written expressing their thanks for my efforts, but I’ve also received messages from people who weren’t sure what it means nor how to use it. To all of you in the latter group, don’t despair for I’m dedicating as many blogs as will be required (hopefully no more than fifty–okay, maybe three at most) to adequately explain the information contained in the menu and provide tips on how to use it.

So, unfold your napkins and get ready to be served!

How the Blue Plate menu is generated
Menu selections are based on technical analysis of stock charts that are sorted according to specific price and volume criteria. My charting program uses these data to organize stocks and ETFs into specific “Hot Lists.” Each list is comprised of the top 100 equities and ETFs that fit the list criteria. The Hot Lists that I use most frequently are New Yearly Highs (and Lows), Percent Gainers (and Losers), Point Gainers (and Losers), Unusual Volume (that is, those stocks that are trading significantly above their average daily volumes), Unfilled Gaps, Positive (and Negative) VWAPs*, Trade Rate, and Volume Rate. Even with all of these lists, there are still stocks that slip through my fingers.

I go through each hot list looking at the daily chart of every stock on it. When one of them fits the technical criteria that I’m specifically looking for, I add it to that menu category. So that you can see what I look for chart-wise, I’ll be providing current examples.

Let’s see what’s cooking on the Blue Plate menu…

Selection parameters
*Only equities and ETFs that trade on US exchanges are included.

*In bear categories such as Breaking Down and New Yearly Lows, only stocks trading above $5 are included since it’s the policy of most brokerage firms not to allow shorting of stocks under $5.

*Commodity and Sector selections are all US exchanged traded funds (ETFs) but futures traders in these areas may wish to make note of the movement in the corresponding ETF.

Bull Menu categories

Breaking out to new highs:
Hot Lists: Stocks are selected primarily from the New Yearly High list.

Selection Criteria:
*The stocks must be making a new yearly (or almost yearly) high.

*They must be breaking out of a consolidation pattern, even if that pattern has only been in place for a few days. In general, the longer the length of consolidation, the more forceful the breakout and the following upward continuation.

*The stocks must be trading above their 65 day average volume.

How to Use:
Technically speaking, stocks that pass the above fitness test have the greatest chance of moving upward in the future, provided that the market continues to move upward as well. Select the ones that appeal to you the most and begin your research using your own fundamental and/or technical criteria.


GTE Chart 11-18-09

Breaking out to new highs on lower volume
Hot Lists:  Same as above.

Selection Criteria:  Same as above except the volume is below average.

How to Use:  These stocks have all of the features of those in the previous category but they’re trading on lower than normal volume. You’ll have to do a little digging to see why that is; sometimes it’s just because whatever good news is propelling a stock higher hasn’t yet reached the masses and other times it could be that investors and institutions aren’t all that interested in the company’s business model. In general, these stocks don’t hold up as well as the previous ones in market downturns.


VIMC Chart 11-19-09

Breaking out
Hot Lists:  Percent & Point Gainers, +VWAP.

Selection Criteria:
*Stocks that have broken out of consolidation patterns but are not making new yearly highs. These can include stocks that still face some significant resistance at higher price levels.

*Stocks must be trading at greater than normal volume.

How to Use:  After a period of consolidation, a stock that breaks out on heavier than normal volume is a good candidate for further upward movement. It’s important that the stock not be bouncing off a low as this could be short-covering resulting in a false breakout. It’s also important to note the next levels of resistance in determining whether or not you actually want to be in the stock and also for how long.


SMRT Chart 11-19-09

Breaking out on lower volume
Selection criteria and chart are the same as the preceding except that volume is less than normal. Use them the same as you would for stocks “Breaking out to new highs on lower volume.”

Sector & Commodity Highs
These lists are composed of exchange traded funds (ETFs) only.  They follow the same rules as for stocks given above.

Although ETFs don’t always mirror the action of their corresponding futures market, futures traders may wish to take note of the current action since sometimes ETFs can front-run the futures.

Today we’ve focused on the rich, bullish dishes on the Blue Plate Menu.  Tomorrow, we’ll focus on the palate-cleansing special situational stocks. 

*VWAP: Volume Weighted Average Price:  A rough measure of institutional interest (or disinterest).

Blog Update: Addition of new Blog Link

Thursday, November 19th, 2009

People have been emailing me wondering where the heck my blog has been–have I been under the weather?  Have I taken an extended vacation?  Are the holidays beginning to weigh me down?  (Well, maybe the last one…) I just want to jump in here and say that Dr. Kris is still alive and well.  While most would never use the words “Dr. Kris” and “workaholic” in the same breath, I have been working hard behind the scenes trying to raise the Stock Market Cook Book to a new business level.

One effort that I can mention right now is that the Stock Market Cook Book is cross-promoting its brand with other companies that provide complementary content and services.  Through the kind efforts of Miles Jennings of OV Metrics, the Stock Market Cook Book now appears on the Links List of, a website devoted to all things related to portfolio measurement and  risk.  It’s chock full of educational material, original content, networking forums, and portfolio analysis tools for both the institutional investor as well as you home-gamers and  is well worth a look.  They’ve also added the SMC Analyzer to their list of Portfolio Risk tools and will be running my recent series of blogs on the Sharpe Ratio in their December 7th newsletter.  I couldn’t be more thrilled!

My web designer, aka Professor Pat, and I are also in the process of redesigning the website.  We want to make it easier to navigate while providing more content and interactive features. (I’m always open to suggestions concerning site improvement.)

That’s the short list.  I’ve also been working on a couple of research projects that are taking more time that I had originally thought (they always do).  I wish someone would invent the 30 hour day!

Okay.  I’ve got to get back to generating today’s  Blue Plate Specials.  Speaking of which, I’m writing a primer on how to use this feature and the the first installment will be the subject of today’s blog.  No flipping channels!

Note:  We’ll be adding to our blog list.  On a sad note, we’ll be deleting Investing in Africa as the site’s founder, Ryan Shen-Hoover, is closing down his Africa Fund.  In a private email, he said that it was becoming too difficult and frustrating cutting through the red-tape associated with chaotic government bureaucracies and illiquid markets.  I truly admire him for venturing into the deep jungles of the African investment frontier and reporting about it in his well-researched and eloquent articles.  All the best, Ryan!

*Blue Plate Specials* – Nov. 16

Monday, November 16th, 2009

Because of today’s market rally, the Blue Plate Special is too large to put in its usual spot in the right column. 

Breaking Out to new highs on stronger than average volume:  AXP, BMY, CEA, FLL, GHM, HL, HPJ, HPQ, IBKC, IPHS, KMGV, KRY, NM, RINO, RTP, SNIC, SPEX, SVM, TSL, ULTA, WG, YZC
Breaking Out to new highs on lower than normal volume:  AKR, AMX, BBL, BRP, BRS, CAS, CPSI, DCI, EL, ELS, EMR, FADV, FSYS, GOLD, GRS, HRBN, ITW, JAS LIHR, LII, NEU, RAI, RPM, SLT, SLW, STO, TS, TV, VIP, VTR
New Yearly Lows: LEAP
Breaking Out: 
Breaking Out on lower than normal volume:  NARA
Breaking Down:  MA
Low-priced Leaders:  MSPD, WIT
Metals Highs:  Silver SLV, Copper JJC, Platinum PG,  Gold (GLD, IAU), Gold Miners GDX
Sector Highs: Coal (PKOL, KOL), Materials XLB, Industrials XLI, Aerospace PPA, Consumer Discretionary XLY, Internet (IAH, HHH), Health & Medical (HII, XLV, IXJ), IT (VGT), Tech XLK, Consumer Staples XLP
Heating Up: Solar
Wow! Stock:  NLST on revolutionary memory technology
Beware One-trick ponies!:  Biotech PARD falls hard on failed clinical trial of sole anti-cancer drug
Market Notes:  SPX & DTX broke major resistance but market internals not matching bullish action–enter with caution!

Veterans Day Thoughts

Wednesday, November 11th, 2009

Veterans Day ImageSome may think that today’s anemic action in the market is due to the Veterans Day holiday but I’ve been seeing it for a while, and frankly it’s bothering me. The market has been rising for the past couple of days on stock VWAPs that smell of a bull market turning bearish; specifically, when a market rises on negative VWAPs that are greater in magnitude than positive VWAPs, that’s viewed as a contrarian indicator signaling a market reversal.

What the above means is that investors and institutions are getting out of the stocks with the negative VWAPs and moving into stocks with the positive VWAPs or into cash or other instruments. What we need to see for the market to move forward are convincing positive VWAPs, smaller negative VWAPs, and a lowering VIX. Too bad that the VIX seems to have put in a bottoming tail today at 23. Since this is a semi-holiday (the market wasn’t closed), the bottoming tail doesn’t have quite as much meaning as it would have on a typical trading day but I’d treat that as well as topping tails on the S&P 500 (SPX) and the NYSE Composite as potential signs of a market reversal. For the bull market to continue, we need to see the Dow Transports (DTX) to close above the 400 level and more specifically, the 404 level which defined previous resistance. 

That’s it for today’s market musings.

Veterans Day remembrance
On another, and far more important note, I’d like to extend my grateful Veterans Day thoughts in remembrance of my grandfather who served as a distinguished colonel in the US Army:

As to, “What is the meaning of Veteran’s Day?”

According to the Department of Veterans’ Affairs, Veterans Day is a celebration to honor America’s veterans for their patriotism, love of country, and willingness to serve and sacrifice for the common good.

To that I say thanks to all of the men and women past, present, and future for their dedication and sacrifices in the service of the ideals of democracy.

The Sharpe Ratio, Part III: Comparison of current portfolio allocations

Tuesday, November 10th, 2009

The Sharpe Ratio, Part III: Comparison of current portfolio allocations

This is the final installment of our discussion of the Sharpe Ratio. Today we’ll see some representative Sharpe Ratios of portfolios allocated according to Modern Portfolio Theory (MPT) using traditional asset classes, that is, stocks and bonds (as opposed to futures or derivative instruments). We’ll also see how adding the element of market timing to classic Modern Portfolio Theory greatly increases the Sharpe Ratio by dramatically reducing overall portfolio risk.

Current Optimally Allocated Portfolios and the Sharpe Ratio
Let’s look at some current (through September 2009) classic MPT allocated portfolios and their Sharpe Ratios. The table below lists the best allocations among a set of nine diversified asset classes. Target returns shown are for the range of possible achievable returns derived from monthly data since 1928. The data reflects compounded annualized returns.

Classic MPT Allocation Table 11-10-09

This table was computed by the SMC Analyzer software available for user subscription on the web site. As you can see, the Sharpe Ratios are highest for the lower risk portfolios  predominantly made up of Treasury Bills.  This is rather misleading because as T-Bills have historically averaged those returns, they’re not producing close to the same today. This is one reason to be cautious when evaluating the Sharpe Ratio as the contributing investment return term is backward looking, i.e. what the investment has produced in the past, while the riskless investment return is forward looking, i.e. what U.S. Treasury Bills will pay over the next few months. With this caveat in mind, one can still fairly compare the Sharpe Ratios in the above table since they are all calculated in the same way and over the same time frame.

Note that higher portfolio returns come at the cost of much higher risk (as defined by the standard deviation). By definition, an increase in risk lowers the value of the Sharpe Ratio revealing the declining compensation received for assuming the risks entailed with higher targeted returns.

Market timing improves Sharpe ratio values
Let’s now look at the table for MPT allocated portfolios using the conservative Long/T-Bills strategy enhancement to MPT. In this strategy, the percentage allocated to a particular asset class (equity asset classes only) is normally held Long when that asset class is in a bullish trend. When the trend reverses, the percentage of the portfolio allocated to that particular asset class is transferred into the safety of T-bills. (Trend reversals are determined by an oscillator that is optimized according to a robust and proprietary optimization method.)

The following table was produced using the SMC Analyzer software. In the table, Long/Long is equivalent to the classic MPT approach and is always applied to the bond asset classes.

SMC Allocation Table 11-10-09

The remarkable thing to notice is that it is possible to achieve a long-term rate of return of 10% with a Sharpe Ratio greater than 1.0. Compare that with the meager 0.44 Sharpe Ratio obtained with the classic MPT strategy!

The Sharpe Ratio can be a useful tool for financial decision making when properly understood and properly applied. As mentioned in Part I, the Sharpe Ratio is not a particularly reliable measure of non-traditional hedge fund comparison because of the non-Gaussian nature of the underlying instruments. What the investor has hopefully learned here is that when properly understood and applied, the Sharpe Ratio can be a legitimate tool for fund comparison but it shouldn’t be the only tool.

No Joe for MANDA

Tuesday, November 10th, 2009

The EU expressed objections earlier this morning to Oracle’s takeover bid for Sun Microsystems (JAVA) citing anti-trust concerns over its MySQL database.  Not willing to take any further risk, I sold the entire position in my M&A portfolio (MANDA) this morning for $8.25/share.  This represents a loss of 9.3%.  Bummer.

Note to Larry Ellison:  Maybe if you had treated the EU members to a cruise of the Mediterranean on your luxurious 450 foot yacht you wouldn’t be having this problem!

MANDA Portfolio Updates

Monday, November 9th, 2009

A couple of quick updates on the status of my M&A portfolio:

1. AT&T finally completed its acquistion of Centennial Communications (CYCL) at the offered price of $8.50. Regulatory roadblocks pushed back the expected Q2 close but those hurdles were eventually resolved through divestiture of some Southern state assets. The trade represents a 9% return on the portfolio’s investment.

2. On October 29, a shareholder lawsuit forced the board of Rubio’s restaurants (RUBO) to reject an $8 per share offer from private equity. I knew the perils of this when I purchased the stock (see 10/15 blog).  I was fooled and exited the position on October 30 at $7.48 for a 1% loss. The good news is that it’s a small loss and only the second loss (out of 18) in the portfolio.

3. Starent Networks (STAR) stock is rising today (currently $33.95) but if it backs off of current levels, I’ll be looking to add it to the portfolio. Cisco (CSCO) is offering $35 per share for the company.

4. I picked up some Harvest Energy (HTE) today at $9.31/share. The Canadian oil trust announced on 10/22/09 that the Korean National Oil Corporation offered $10 per HTE share. The deal has the blessing of the board and seeks shareholder approval at a special meeting to be held on Dec. 15. Pending approval, the deal is expected to close Dec. 22. (I wish I had bought it at Friday’s low of $9.13!)

The revised MANDA holding are shown in the table below.

MANDA 11-09-09

Click to enlarge