I woke up to the good news flashing across my trading screen that stocks had enjoyed their biggest day in more than a month, fueled by merger fever and a big rally in financial, industrial and materials stocks. The Dow Jones industrials closed up 124 points, or 1.3%, to 9,789. The Standard & Poor's 500 Index was up 19 points, or 1.8%, to 1,063, and the Nasdaq Composite Index added 40 points, or 1.9%, to 2,131.
Last night's were the biggest gains for the Dow and the S&P 500 since Aug. 21 and the best performance for the Nasdaq since July 23. The rally came as the market nears the end of a surprisingly strong September. In addition, the major indexes can look forward to their second quarterly gains in a row. An interesting note is last night's gains came on light volume as many traders had taken the day off to observe Yom Kippur.
And instead of a quiet day of trading and fretting over the market's three days of declines last week, corporate deals set off waves of buying.
An interesting research article from Morgan Stanley this morning predicted that S&P year end fair value will be 1050 at $70 EPS in 2010 on 15X multiple, and is expected to trade broad range between 850-1250. In fact they are bullish that it may even stretch 1200 at 16X EPS of $75!
The article further recommends buyng into growth rather than looking for value, which brings to my mind the mis-understood version of "value" investing during my seminars. Most students thought that "value" investing means looking for fundamentally good companies that has strong balance sheet. Well, it took me quite an effort to explain that "value" investing means looking for stocks that are mis-priced, ie., the current market price is either under-priced or over-priced. It's really difficult to find "mis-priced" stocks as it involves application of various variables used to determine today's stock price.
This is what my "value" stock screening criteria search for companies with good fundamentals with strong balance sheet and consistent earnings and free cash flows. I do not look for mis-priced stocks, i look for stocks that has growth potential.
Which leads me to the question I was asked today if I had made money on my trades last night. Well, I have bought the stocks I screened yesterday, ie. BHI (Baker Hughes) and decided not to buy GCO (Genesco).
First let us look at cycletrend charts:
The Dow Jones Daily Chart shows that the market should be trading range for the immediate future. While candle charting indicted an engulfing bull, I would rather wait for a confirmation tonight to decide if the bulls are in for real, taking into consideration the reason for the surge in DJ as mentioned. The trendic and OBOS charts below the candle chart is a little worrying as it indicated that the market may correct this week. This calls for caution when deciding to trade. Though the cycle signal a steeper downtrend, it does not translate into same depth of price fall. Selecting stocks with good fundamantals and growth potential is still the key.
Here is the chart for GCO:
Though the company is fundamentally strong (see yesterday's blog) GCO's chart has no clear indication from both cycletrends and candle and the price has moved toward the resistent of the upper bollinger band. It should be trading sideway and taking into consideration the overall DJ direction, I decided not to buy, and will wait for the stock to retract and for the charts to indicate better buy signals. Well, for the record, it opened at 24.12 and closed at 24.18.
How about BHI? Remember that I have mentioned that BHI has very good cashflows and consistent operating income and the stock should grow when the economy starts picking up? Well, I bought on the dip at $41.94 and looking at the chart for both candle and cycletrends, there is no downside fear so I am holding on to my gains. It closed at $43.30.
Hope you guys can contribute to my ideas and make this blog the best for all traders!
See you soon.
Francies Cheng
BBus MAppliedFinance
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