Selection for the week

Good morning,

We are now into the second week of the New Year and once again it’s time for the new stocks selected by KUTE. My friend asked me today what exactly does KUTE stands for. Well, KUTE is KONCEPT UNIQUE TACTICAL EXECUTION method for stock selection. It is a system to screen the fundamentally strong companies and the application of the technical to determine the entry and exit strategies. Stocks are selected with a stringent list of criteria to shortlist companies with strong financials and good growth potential before cycle trend and candlesticks formations are used to decide if the stocks should be traded for the week. The criteria for the selection include PE ratios, Growth, Debt/Equity ratios, PB ratios etc, to name a few. The idea behind KUTE is that if the company is fundamentally good, there’s nothing to be worried even if the entry price is wrong. After all good companies with the stringent criteria should appreciate in value over time and if the money management is applied with discipline, there should not be any losing trade over time. I am planning to conduct my 1st stock seminar in 2010 to share KUTE’s methods and I look forward to another interesting sharing lesson with new participants.

Let’s first see how the macro of the markets will be this week. The coming week will see the start of the new earnings season with Alcoa, Intel and JP Morgan reporting their last quarter’s earnings. It will be interesting since these 3 companies represents metals, semiconductor and banking and it will be a good gauge to see if the economy has recover as expected. There will also be 3 economic reports this coming week, i.e. the trade balance, the Fed’s beige book and the retail sales for December. I am expecting the earnings report to be good, and monitor closely the 3 economic reports. On the technical, the weekly cycle trend is indicating a upside potential using bartel trend and the weekly candle is indicating a white opening marubozu and bullish engulfing formation. With the expected good reports and the candle stick formation and cycle trend, I believe the markets will be trading up this week. My macro decision will be to buy and sell at higher target returns, allowing the stocks to ride the trend of the current markets.

The KUTE’stocks selected for this week with good fundamentals are: DOX, NOV, NE, DSX, PDE, SAB and RDC.

Rowan Companies, Inc. (RDC) is a provider of international and domestic contract drilling services. Rowan also owns and operates a manufacturing division that produces equipment for the drilling, mining and timber industries. During the year ended December 31, 2008, the offshore fleet consisted of 22 jack-up rigs, featuring two 84 class jack-ups and one 116 class jack-up, seven 116C class jack-ups, three Gorilla class jack-ups, four Super Gorilla class jack-ups, four Tarzan Class jack-ups, and one 240C class jack up. The company’s revenues and operating profits for the last 5 years are consistent and positive and its operating cash flows have increased for the same period. However, it has not register a positive free cash flow for the past 3 years because the company has invested heavily in the purchase of fixed assets during this period. Hopefully the increased in fixed asset will add value to the company’s operations the next few years to ride along with the economy recovery. For the technical, the weekly cycle trend is appreciating and a candle formation is a ‘wait’ formation. My tactical for this stock is to place a market order at 0.3% above last Friday closing price of $25.25.

Grupo Casa Saba, S.A.B. de C.V. (SAB) is a multi-channel, multi-product national wholesale distributor in Mexico. The Company distributes pharmaceutical products, health, beauty aids and consumer goods, general merchandise, publications and other products. The majority of these products are distributed by the Company on a non-exclusive basis. The company’s operating income, operating cash flow and free cash flows are positive and acceptable. The cycle trend is indicating a strong upside for both the weekly and the daily curves and the candlestick formations are white opening maruzbozu and its daily is a black spinning top with a “wait” indication. This is another stock that I may place a market buy order at 0.3% above its last Friday’s closing price.

NOV weekly cycle trend is showing a continuing of its recent upside price movement for the week but its weekly candle stick is a “sell-if” formation. I will stay away from this stock for once. NE weekly cycle trend indicates a slight decline and its weekly candle formation is a long white candle calling for a “hold” recommendation. DSX weekly cycle trend is flat with no clear direction but its weekly candle stick forms a white opening marubozu. Combining with the last 2 and 3 weeks candles, it forms a bullish kicking and bullish morning star pattern. The only concern I have is the flat cycle curve so I will continue to observe this stock and wait for a buying opportunity. DOX weekly candle and cycle trend are both calling for a sell signal so I will not do anything with this stock and PDE weekly cycle and candle is also bearish without a strong buy signal.

Have a great week!

Francies Cheng
BBus MAppliedFinance

Week's performance evaluation

Good morning,

It’s time of the week to evaluate the stocks selected by KUTE again. Here are the performance evaluations of the forecast made last Friday and yesterday’s close:

DJIA was forecasted to continue its’ Bull Run, will trade within a broad range and was expected to end the week higher. The index closed at 10,428.05 last Friday and ended the session at $10,618.19.The range was between 10.655.60 and 10,430.69. The decision was to buy the selected stocks and sell when the targets were achieved.

Before I continue with the stock evaluations, I need to clarify myself regarding the targets. Firstly, I always use the percentage returns when I fixed my exit strategy and not the absolute dollar returns. It’s important because dollar returns are the most tempting factor to unwind our learned and controlled emotion to time the exit the trades. Let me explain. If assuming my students have bought a position with $1000, a $100 return for the day may not be attractive enough to take profit because $100 gain seems too little. However if it is calculated in term of percentage returns, it’s a whopping 10% a day! Assuming the returns are consistent at 10% a day and if we were to compound this rate of returns, the $1000 will be doubled in 7 days! Also, my returns are on the actual capital I used for the trade, not the full amount of money I deposited with the broking house, i.e. if I have deposit $100,000 with the broker and used $1000 to trade a stock, my capital used for determining the rate of return is $1000 and not the full amount of $100,000. There is no fixed rule to the required returns for my trades. Whether it’s 10% or 20% depends on the current trend, the company, and my ability to take higher risk within my 30-20-50 money management rules. Alright, let's look at the performance of the stocks selected by KUTE:

NOV Friday’s close was $44.09 and it closed at $47.11 last night. My position I bought on Thursday was squared at limit order last night with a decent profit to enjoy my weekend. This stock has made me money for the week with the positions closed on Tuesday for the purchase I made last week adding to the profits I had last night.

PDE Friday’s close was $31.91 and ended the week at $33.86, another stock I made money with the buying and selling within the week. PTI was $20.45 last Friday and closed at $21.53, NE was $40.70 and close last night at $44.87, DSX was $14.48 and ended the week with an impressive $16.09 and CAB Friday close was $14.26 and ended the week at $16.05.

All my positions were squared and I am looking forward to enjoy my gains with a good bottle of sake tonight. I’ll be back next Monday for the new recommendations for the stocks selected by KUTE.

Happy weekend!
Francies Cheng
BBus MAppliedFinance

PDE squared at 20% returns

Good morning,

It’s Friday again. The first trading week of the year will be over soon. How fast time flies, and soon it will be Chinese New Year, and I am still hanging around in bars, living the current time in celebrating festive mood. I have a good bottle of Junmai Sake at a very nice sake bar with my alumni and a pretty lady from the MRI department of our local general hospital. We were drinking to celebrate my Finance classmates’ passing of the FRM examination. Well, FRM is the tough Financial Risk Management professional paper and they passed it on the very first attempt, where many have failed. Our meetings are also fun, and obviously we talked about investment, the stock markets, and the coming directions and with their newly acquired professional qualification, risk management. Our idle chats drew much interest from the lady from the hospital and hopefully she can learn some trading tips as much as she was enjoying the nice sake.

I have mentioned when to buy the stock when the candle indicates a “BUY-IF” signal in the previous blog. A reader of mine asked me when should he sell if the signal is a “SELL-IF” candle, since the weekly intraweek candle formation is still indicating the signal. A SELL-IF signal is confirmed and turns into a SELL CONFIRMED signal by one of the following conditions;

The week opens with a downward gap (an opening price below the previous week’s close) signaling a bearish sentiment. The benchmark is the opening price. A confirmation is valid if the week’s prices stay below the benchmark. The pattern of this confirmation can be defined as a black weekly candlestick with a downward gap, or;

the week opens at a level, equal to or above the previous week’s close. The benchmark is the closing price of the previous week. A confirmation is valid if the week’s prices stay below the benchmark. The pattern of this confirmation can be defined as a black weekly candlestick closing below the previous week’s close, or;

the week opens with a big upward gap suggesting a very bullish week in this rarely observed case. However, the prices turn down and the week ended with a long black weekly candlestick still closing above the previous week’s close. The benchmark is the closing price of the long black candlestick. The pattern of this confirmation is a long black weekly candlestick closing above the previous week’s close. If one of these conditions is not satisfied, the SELL-IF alert remains valid without confirmation and three confirmation criteria are sought in the following week.

The only exception is a long white weekly candlestick which makes the signal void and invalid automatically without further search. If there is still no confirmation in the following week, the alerts turn to be void and invalid regardless of the following week’s pattern and the search is terminated. As mentioned, I am not taking the weekly candle formation seriously for last week’s formation since the volume is low, and I am monitoring the daily candle for buying opportunity.

NOV was down 0.97% to close at $47.10. The day’s range was $47.50 to $46.70. I bought a new position at $46.90. PTI gained another 2.29% to close at $21.85, PDE gained 1.11% to close at $33.58, NE lost 0.2% to close at $44.06, DSX was down 2.65% at $15.42 and CAB gained 1.74% to close the session at $15.16. My positions for PDE were squared with 20% returns and the better news is Citigroup is slowing creeping back with gains.

Have a great day.

Francies Cheng
BBus MAppliedFinance

Yankees

Good morning,

It’s the seventh day into the New Year and so far the year has being good for my stocks. I had a great time with a couple of new friends from Sands in my bar chatting about the Yankees. One of them is from the States and has supported the Yankees since 10. I came to know about Yankee when I was staying in New York and without the daily dose of soccer, I grew to enjoy baseball, watching the games every night in my room. It was those nights that I learned about the game, how the scores were calculated, the positional play and the strength and weaknesses of each player. The more I understand the game, the better I am predicting the possible outcome of the results. Isn’t it the same as trading stocks? The more I know about the companies I am trading, the better chances I have to be profitable in these stocks I trade. So it the same constant reminder, that is to do our homework to understand the companies before trading the stocks.

The DJIA and the broader S&P 50 ended higher while the Nasdaq dipped on Wednesday after Federal Reserve officials said they were still worried about labor market weakness and a report on the services sector showed only slight improvement in the economy. Despite plenty of potential catalysts for trade, the broader stock market lacked direction for the second straight session. Traders were muted during the session and it seems that they are all waiting for tomorrow’s non-farm payrolls report to ascertain the strength of the recovery. At market close, DJIA rose 1.66 points, or 0.02 percent, to end at 10,573.68. The S&P 500 Index inched up just 0.62 of a point, or 0.05 percent, to finish at 1,137.14 and Nasdaq dropped 7.62 points, or 0.33 percent, to 2,301.09.

Despite the muted reactions and the slight gain of the markets, stocks selected by KUTE did well last night. NOV gained another 1.43% to close at $47.56, PDE up 1.16% to close at $33.21, PTI up 2.5% at $21.36, NE up 1.31% at $44.15, CAB up 1.43% at $14.90 and DSX up 0.13% at $15.84. My position in PTI was squared while drinking wine with my friends when it hit my limit orders. PTEN was also sold after achieving its target returns. The current positions in PDE are in the money and with PTEN finally sold with profits after 3 months at more than 20% returns, I am feeling good that KUTE system has not have a single losing trade for the last 3 quarters.

Have a great day.

Francies Cheng
BBus MAppliedFinance

Another good day for KUTE selected stocks

Good morning,

There was this article that highlighted that in Jan 2009, the stock market surged upon the beginning of the year but ended the month in the red. The article suggested that it will happen again and cautioned its readers not to be too optimistic after the markets surged yesterday. I wish it is so easy to predict the market by correlating events, and if it is so, I will be busy looking at woman’s skirts, since there is this correlating theory suggesting that the stock markets are highly correlated to the length of the skirts. Well, DJIA didn’t continue its advancement last night, and ended the session with 0.09% decline to 10,506, but I am not too worried that the article’s prophecy will come true. One of the key reasons is the yield curve which I have mentioned in my blog 2 days ago. The macro environment is not the same as it was 12 months ago, and with the expected correction due because the Fed will need to increase its interest rate this year, I do not see any tailed-end events that could cause another meltdown this year. I believe it will be more productive and profitable if I were to spend more time understanding the companies’ earnings and its revenue growth than to idle around and look at woman’s skirt. (smile)

DSX’s candle indicated a “BUY-IF” daily signal last night before the markets open. What should we do to position ourselves when we see this signal? According to the rules of candle, a BUY-IF signal is confirmed and turns into a BUY CONFIRMED signal by one of the following conditions;
The week opens with an upward gap (an opening price above the previous week’s close) signaling a bullish sentiment. The benchmark is the opening price. A confirmation is valid if the week’s prices stay over this benchmark. The pattern of this confirmation can be defined as a weekly white candlestick with an upward gap, or;

The week opens at a level either equal to or below the previous week’s close. The benchmark is the closing price of the previous week. A confirmation is valid if the week’s prices stay over this benchmark. The pattern of this confirmation can be defined as a white weekly candlestick closing above the previous close, or;

The week opens with a big downward gap (an opening price way below the previous week’s close) suggesting a very bearish week in this rarely observed case. However, the prices turn up and ended with a long white weekly candlestick but still closing below the previous week’s close. The benchmark is the closing price of the long white candlestick. The pattern of this confirmation can be defined as a long white weekly candlestick closing below the previous week’s close. If one of these conditions is not satisfied, the BUY-IF alert remains valid without confirmation and three confirmation criteria are sought in the following week. The only exception is a long black weekly candlestick which makes the signal void and invalid automatically without further search. If there is still no confirmation in the following week, the alerts turn to be void and invalid regardless of the following week’s pattern and the search is terminated. DSX started the session fulfilling one of the rules and ended the session with another 3.33% gain to close at $15.82.

For the rest of the KUTE selected stocks, NOV gained 1.74% to close at $46.89, PTI was up 0.72% to close at $20.84, PDE up 0.15% to close at $32.83, NE up 3.22% to close at $43.58 and CAB lost 1.08% to close at $14.69. All my KUTE positions are in the money and I am also beginning to see light at the end of tunnel for Citigroup and hopefully the light will become stronger and justify my wrong call for this stock purchased out of the scope of KUTE.

Have a great day!

Francies Cheng
BBus MAppliedFinance

Made some but missed out on few

Good morning,

It was a good start to the New Year so the market surging to new 52 weeks high with the volume picking up after most traders and money managers are backed from the long holidays. Report from ISM which exceeded expectation helped pushed the Dow up 1.5% to close at 10,583.96. However, after the initial surge, sideway trading dominated the whole trading session and the market closed the session with solid gains.

There was an important lesson for me yesterday as I see the market surged and I missed out on the solid gains of the few stocks selected by KUTE for its fundamentals. I have forgotten that technical are tools for me to understand the current market participants’ behavior and not tools for accurate predictions. I should have known that candles can paint a better picture if the volume is large since we need the large number of participants to understand the trading moods. In fact I have questioned the reliability of reading the candlestick formation in my blog yesterday because of the low volume of trades over the holiday sessions. Well, looking at the positives, I should be glad that if the candles had shown bullish upswings and the markets declined, I would have incurred losses. At least I didn’t lose, except for the opportunities lost. I will be looking at the trade volume from now to verify and confirm the formation of the candles. That is why stock trading is great. Much better than mahjong, because it keeps me my mind sharp as I constantly explore ways to be more accurate in stock trading and there’s so much I can learn daily as I trades.

NOV was impressive last night and my limit order was done last night, making me good profits again. The stock closed 4.54% at $46.09. I am sure my students have made money from this stock again. Perhaps they can buy me wine now, with the excess profits after deducting their seminar fees (smile).

PDE closed the session with 2.73% gain at $32.78. I have bought one position at $32.45 and another at $32.66 last night. PTI gained 1.17% to close at $20.69 and this position is also in the money. NE was up 3.73% to close at $42.22, DSX gained an impressive 5.73% to close at $15.31 and CAB closed the session at $14.85, up 4.14%.

Have a great day!

Francies Cheng
BBus MAppliedFinance

I am back with the new KUTE selections

Good morning,

It’s the start of the New Year and I believe 2010 will be a challenging year for the economies and the stock markets. Already there are many experts giving their views and forecasts, ranging from a very bullish year to the pessimists predicting the dreaded W to happen in 2010. It seems confusing for those wanting to have a glimpse of what to look for to decide if it is the good time to invest and trade the stock markets. A friend of mine told me excitingly that the stock market will be very bullish because of the steep yield curve. He is right to a certain extent, but it is important to understand the relation before jumping in to buy the shares.

The yield curve is the relation between the interest rate or cost of borrowing and the time to maturity of the debt for a given borrower in a given currency. Basically it has to do with the interest payable on the short, mid and long term government bonds. A normal yield curve pays higher interest for longer term bonds because of the higher expected risk free rate in the future and higher risk because of more uncertainty for longer duration bonds compared with the shorter duration bonds; or opportunity cost of bond holders for holding the longer term bonds. On the other hand, an inverted yield curve can happen if the market's anticipation of falling interest rates causes such incidents. Negative liquidity premiums can exist if long-term investors dominate the market, but the prevailing view is that a positive liquidity premium dominates, so only the anticipation of falling interest rates will cause an inverted yield curve. Strongly inverted yield curves have historically preceded economic depressions. So what can we make of the yield curve to forecast the stock market? Since interest rates affect the profits of firms, higher interest rates will be more expensive for firm to borrow. If the firm absorbs the costs, it will be less profitable; if the firm passes on the costs to the consumers, it can cause the demand to shift along the demand curve and with reduced demands, it will also affect the overall revenue of the firm. Thus we should be buying stocks when the interest rates are low and sell when the rates are high, i.e. buy when the interest rates are declining and sell when the interest rates are advancing. However, rising interest rates may be a sign that the economy in improving and may be a good indicator for stocks, so there are other factors to consider when using the yield for forecasting. One of the factors is the money market yield curve. For US, bills with lesser than 1 year maturity are considered money market instruments and 3 months bill are accepted as risk free rates (what can really happen to US in 3 months?). Thus if the shorter term 3 months rate is higher than its longer dated bills, more money will flow into this risk free returns, draining money away from the stock markets. It’s the same for the difference in spread of the 10 years bonds and the 3 months bill. If the 3 months bills have higher rates than the 10 years bonds, we can expect money to flow into the 3 years bills because the reason for the inverted curve is the expectation that the market is anticipating a recession where federal may have to reduce its future interest rates. It is not the scope of this blog to explain the academic reasons but I am glad to summarize the following considerations:

Buy stocks when: The federal funds rate is declining and; the money market yield curve is positive and; bond quality spreads are shrinking; and the difference between 10 years notes and 3 month bill spread is positive.

Sell stocks when: The federal funds rate is rising and; the difference between 10 years notes and 3 month bill spread is negative and; bond quality spreads are widening; or the 10 years yield is more than 10%. (This is logical since professional fund managers would prefer to invest in lesser risk bond that offers 10% returns than investing in higher risk equities which long term returns are around 9%).

Though I am expecting the interest rates to rise in 2010 which is an indication that the economy is recovering and we should see some correction when it does, the current data seems to point towards a continuing of the advancement of the recent run. The rising interest rate has not reached a level that I will be concerned for the markets to turn south. However, I will be careful with the 10 years bonds and 3 month bill spread and the 10 years yield and will monitor this closely for the overall macro view when KUTE system is applied.

With the overall yearly macro view in mind, let’s see how the weekly macro outlook will be for the first week of the New Year. This week will see some important reports from the labor department for the non-farm payroll, the initial claims, unemployment rates and the ISM report on manufacturing. The cycle trend using the bartel trend is showing a potential continuing of uptrend, but the weekly candle is also not very encouraging with a black spinning top. With the previous week’s thin volume and shorter trading week, I believe that it will be better not to read too much into the candlestick. With the market expectation of the timing of interest rates increase, I am quite sure that the markets will be volatile and trade within a broad range for the next one month. My strategy will again be to buy when it dip and sell at target.

The stocks selected by KUTE for this week are: NOV, NE, PDE, PTI, DSX and CAB.

Diana Shipping Inc. (DSX) is a global provider of shipping transportation services. The Company is engaged in transporting dry bulk cargoes, including commodities as iron ore, coal, grain and other materials along global shipping routes. The company has strong financials with increasing revenue for the last 5 years and both its operating and free cash flows are positive and growing. However, both its weekly cycle trend and candlestick formation are not indicating any buy signal so I will leave this stock alone for the time being.

Cabela's Incorporated (CAB) is a specialty retailer. The Company is the direct marketer of hunting, fishing, camping and related outdoor merchandise. The Company’s products offerings include casual and outdoor apparel and footwear, optics, vehicle accessories, taxidermy products, gifts and home furnishings with an outdoor theme and furniture restoration related merchandise. The Company issues the Cabela’s CLUB Visa credit card, which serves as its primary customer loyalty rewards program. The Company operates through three business segments: Direct, Retail and Financial Services. Its’ next generation store format, multi-channel strategy and seasonal product assortments enable CAB to focus on increasing stores productivity and sales per square foot, and lowering labor costs. Retail operating income margin expanded 240 basis points to 11.6% in third-quarter 2009. Its’ healthy balance sheet viable strategy and improving operating efficiencies offers investors a strong growth profile. It remains on course to achieve its targeted long-term return on invested capital of 12%-14%. Another growth engine is Cabela's Club Visa credit card, which is enhancing brand name and increasing merchandise revenue. However, both the cycle trend and weekly candlestick are not showing any buy signal so this will be another stock I will not be buying this week. One interest note is the monthly cycle trend is very positive and I am consider adding this stock to my 30% of the 30-20-50 rule.

As for the rest of the stocks, I will only be looking at the technical since they were all covered previously. NOV cycle trend is still showing strong upside potential for both the weekly and daily time period. However both the weekly and daily candlestick formations are calling for a sell recommendation, I will not add on to my current position which is out of the money at market open price. Since I cannot be sure of how genuine the candlestick formation can be from the thin volume and short trading week, I will observe the stock and may consider buying if the daily and intra-week candle shows wait or buying signals. NE has the same reading for both the candlesticks and cycle trend as NOV so my decision is the same. PTI weekly cycle trend is flat but its’ daily cycle trend is positive. The weekly candlestick with a white candle showing more bulls last week with the attempt by bears to push the price down but the bulls managed to win the week with the stock closing higher than its’ opening price. The indicator is still a “sell-if” signal waiting for the next period to confirm. Since I do not have a strong buy signal, I will just hold my current position and wait for it to hit my limit order before I decide my next course of action.

PDE weekly and daily cycle trend upside trend is not confirmed by the candlestick formations with the weekly candlestick showing a bearish engulfing and evening star, so it will be better to observe for the next period candlestick before any decision is made for buying this stock.

Have a great week!

Francies Cheng
BBus MAppliedfinance