How to Identify a Trend

At some point in your investing career, you are most likely going to hear the cliche “the trend is your friend.” While this statement is true and seems simple enough, actually identifying a trend can be deceptively tricky–especially if you are new to technical analysis. And of course, the trend is only your friend if you can properly identify it.

[VIDEO] Identifying Trends

How Do You Identify a Trend?

Technical analysts have come up with many different ways to identify a trend. Some look at how moving averages are interacting with each other, some look at technical indicators that have been specifically created to identify trends and others–like me–prefer to look directly at the price action.

Stocks rarely move straight up or down. Rather, they move up and down in a stair-step fashion. In other words, they move up and down and up and down but ultimately move higher or lower.

Whenever a stock moves up and then starts to turn around and move back down, it creates a new high–or a peak.

Whenever a stock moves down and then starts to turn around and move back up, it creates a new low–or a valley.

You can use these highs and lows–or peaks and valleys–to help you determine the trend.

Identifying Up Trends

A stock is in an up trend when the price is making a series of higher highs and higher lows. For instance, if a stock moves up $1.00, then down $0.50, then up $1.00 and then down $0.50 again, it creates a series of higher highs and higher lows.

Identifying Down Trends

A stock is in a down trend when the price is making a series of lower highs and lower lows. For instance, if a stock moves down $1.00, then up $0.50, then down $1.00 and then up $0.50 again, it creates a series of lower highs and lower lows.

Identifying Sideways Trends

A stock is in a sideways trend when the price is making neither a series of higher or lower highs nor a series of higher or lower lows. For instance, if a stock moves down $1.00, then up $1.00, then down $1.00 and then up $1.00 again, it creates no distinguishable pattern of highs and lows.

 

Image courtesy miss-britt.

Does a CPI Drop Lead to Deflation?

Recall late 2008. The Consumer Price Index (CPI) fell for five straight months and the index showed inflation at its lowest rate since 1954. While pundits and news analysts began sowing the seeds for a deflationary environment we suggest these numbers don’t necessarily point to deflation. However, it is a debatable point and worth exploring in detail.

[VIDEO] CPI and Deflation

The first thing we need to understand is that there’s CPI, and then there’s core CPI. When the Bureau of Labor Statistics reports its monthly CPI numbers, it reports CPI numbers and Core CPI Numbers, and each number tells a dramatically different story.

Consumer Price Index for All Urban Consumers (CPI-U)

— The Consumer Price Index for All Urban Consumers (CPI-U) is the broadest measure of consumer inflation used by the government. Basically, it tells us how much prices on nearly almost everything a consumer might buy are rising or falling.

Core Consumer Price Index (Core CPI)

— The Core Consumer Price Index (Core CPI) is a narrower measure of consumer inflation. Core CPI looks at everything the CPI-U looks at except for the price of food and energy. Now, if you’re looking at this and thinking to yourself…”Wait a minute. Aren’t the prices of food and energy pretty important when you’re looking at what typically consumers are spending their money on?”…you’re not alone. Food and energy prices are extremely important.

Each one of these numbers also has a dramatically different affect on the value of the U.S. dollar (USD).

What We Can Learn from CPI Reports

The numbers we saw in the 2008 CPI report told us something extremely important: deflation was not yet a major problem. And in fact, that remains the case to this date.

Specifically, here’s what we learned from the 2008 report:

“Declining energy prices, particularly for gasoline, again drove most of the decline. The energy index declined 8.3 percent in December. Within energy, the gasoline index fell 17.2 percent and accounted for almost 90 percent of the decrease in the all items index. The index for household energy declined 0.7 percent.

“Excluding energy, the index was virtually unchanged for the third straight month. The food index declined 0.1 percent in December, the first decrease since April 2006, as many meat, dairy, fruit, and vegetable indexes decreased. The index for all items excluding food and energy was virtually unchanged in December.”

In other words, the CPI dropped because food and energy prices—which had risen to unrealistic prices during the commodity bubble of the summer of 2008—dropped, not because prices in general dropped. In other words, it appeared that prices were just re-setting, not deflating.

 

Image courtesy [sic].

The Dark Side of Currency ETFs

Currency investing is a good idea. However, before you get involved keep in mind that education is critical. Investors may attempt to shortcut the learning curve by investing in currency Exchange Traded Funds (ETFs) because they trade like stocks but they won’t act like stocks. However, the similarities end here. Currencies are not like stocks or bonds, which are designed to deliver a return on investment. Therefore currency investing is subject to an entirely different set of expectations.

[VIDEO] Currency ETFs

As investors look for new ways to make money and diversify in the financial markets, currency ETFs have become a way to speculate on movements in the international market by shorting a weakening dollar or buying a strengthening yen. We generally like these products as a low-cost, low-leverage way to make an investment in the currency market. However, we start running into issues with the new “emerging markets” currency ETFs.

The idea behind the emerging markets currency ETFs is to get exposure to a breadth of different currencies like the ruble, rand, bhat, zloty and won among others. However, many investors are inferring that an emerging market currency fund will also share the usual ETF benefits of lower volatility, expectations for growth, diversification and low costs. Unfortunately these benefits are not likely to emerge.

For example, an emerging market ETF is essentially a basket of currencies that are expected to rise in value compared to the U.S. dollar. Another way to look at it is that you basically making a bet that the dollar will fall. That is not a diversified investment.

Emerging market currencies are extremely volatile, prone to currencies crises and are subject to frequent intervention. They are anything but smooth. You can see an example of this kind of volatility with the Turkish lira chart below. By the way, the uptrend is not a good thing for the lira. It means the U.S. dollar has been strengthening against this emerging market’s currency for some time.

Most importantly, many investors are inferring that an emerging market’s currency will appreciate like a new stock might. This is not the case. There are many reasons that an economy will not want its currency to appreciate and very few reasons for them to want it to grow in value versus the dollar. Currencies are not like stocks and there is no historical reason to assume that they will rise in value versus the dollar.

This investment opportunity is not unlike the Iraqi dinar investment scam currently making the rounds on the internet. Most small currencies weaken against the major currencies in the long run so if you can’t expect growth in the value of this ETF, what is its real purpose?

This is a great example of the importance of investor education. There are a lot of very bad products out there waiting for buyers. Some of these are offered by very reputable firms but they have no other purpose than to generate fees from the uninformed. If you are interested in making an investment in currencies you can learn to do it through legitimate currency ETFs or in the spot market itself.

 

Image courtesy Roger Schultz.

Understanding IRAs and Rolling Over Your 401(k)

An IRA (individual retirement account), as the name suggests, is a retirement account for individuals that allows you to boost your retirement savings by investing pre-tax dollars.

[VIDEO] Understanding Individual Retirement Accounts (IRA)

Many individual investors don’t have access to an employer-sponsored retirement plan, like a 401(k). However, these individuals need to be planning and saving for retirement too. And since Congress didn’t want to play favorites with only those investors who work for companies that offer retirement plans, it created IRAs. An IRA offers most of the perks and benefits you will find in a 401(k) plan, but it gives you the ability to manage your investments on your own.

IRA Basics

IRAs are defined by a few basic features. Once you understand these basic concepts, the rest is just details. Here are the important points you need to remember:

  • You don’t pay taxes on the money you put into your IRA
  • Your investments grow tax-deferred inside your IRA
  • You pay taxes when you take your money out of your IRA at retirement

IRA Details

The following table outlines the specific details that make an IRA unique.


Plan Components


Specifications

Tax Treatment (Contributions) Pre-Tax Contributions
Tax Treatment (Withdrawals) Ordinary Income
Contribution Limits (per year) $5,000
Catch-Up contributions (50 years old or more) $1,000
Employer Contributions N/A
Contribution Deadline April 15 of the following year
Early Withdrawal Penalty 10% Penalty
Withdrawal Eligibility Age 59 1/2
Minimum Required Distribution Age 70 1/2
Minimum Required Distribution Based on Age and Account Size
Rollover Options Rollover IRA
Loans from Your IRA Not Available
Investment Choices Depends on Your Broker

 

Moving Your Money from a 401(k) to Another Account

When you leave a job where you have a 401(k) retirement account, you have a choice. You can either leave your money in the company’s 401(k) account, or you can transfer your money out of the company’s 401(k) account and into a personal retirement account. For most people, the choice is a simple one–move the money into a personal account so you have control of it.

[VIDEO] Rolling Over 401(k) Retirement Accounts

The question is, how do you do that? How do you transfer money out of a 401(k) account and into a personal retirement account? Watch the video above and we’ll walk you through the process.

 

Image courtesy Vickie Hugheston.

Why Consumer Confidence Reports Matter

How would you react, as an investor, if you heard that consumer confidence fell during the previous month? What if you heard this in October and you knew were were headed into the holiday shopping season? This is important because a falling trend in consumer confidence may hurt the holiday shopping season. In a consumer-driven economy this is a bad sign and one that traders will be very concerned with, so it’s important to understand the impact of these numbers.

[VIDEO] Why Consumer Confidence Reports Matter

Consumer Confidence: A Glimpse Into If and How Consumers are Going to Spend Their Money

Once a month, the Conference Board gives us a glimpse into if and how consumers are going to spend their money. Traders love this information because the Consumer Confidence Survey number helps them determine if the economy is going to be expanding or contracting in the future.

The more confident consumers are in the current and future state of the economy, the more money they are likely to spend. The more money consumers spend, the more profits companies earn. The more profits companies earn, the higher their stock prices typically go. In other words, a positive Consumer Confidence Survey number typically leads to higher stock prices.

The less confident consumers are in the current and future state of the economy, the less money they are likely to spend. The less money consumers spend, the fewer profits companies earn. The fewer profits companies earn, the lower their stock prices typically go. In other words, a negative Consumer Confidence Survey number typically leads to lower stock prices.

Of course, there are certainly other factors you should be looking at when determining how Consumer Confidence is going to affect the economy so Don’t Read the News in a Vacuum.

What is the Consumer Confidence Survey Number?

The Consumer Confidence Survey™ is a survey of economic expectations conducted by the Conference Board—an independent, non-governmental organization. The survey is based on a representative sample of 5,000 U.S. households. To put it another way, the Conference Board asks consumers what their expectations for the economy are and how confident they are in the current state of the economy.

You can see the most recent Consumer Confidence report here.

Retail Stocks to Watch

The Consumer Confidence Survey number is especially important for major retailers. When you see the Consumer Confidence Survey number rising, it is a good sign for retailers and the outlook for their future sales numbers and will typically have a positive impact on the price of their stocks. When you see the Consumer Confidence Survey number falling, it is a bad sign for retailers and the outlook for their future sales numbers and will typically have a negative impact on the price of their stocks.

Here are a few of the largest retailers you should keep an eye on:

  • Dillards (NYSE: DDS)
  • Saks Incorporated (NYSE: SKS)
  • Nordstrom (NYSE: JWN)

 

Image courtesy tshein.

Mutual Fund Redemptions Help You Determine a Market Bottom

The stock market has seen its share of ups and downs lately. Unfortunately, we seem to have seen a lot more down than up — at least it feels that way with all this market volatility. The question is… what does it mean when stock value declines accelerate, and how can you determine a market bottom?

[VIDEO] Understanding Mutual Fund Redemptions

There are a lot of factors that contribute to market dips—credit markets freezing, foreclosures rising, global recessions or slowdowns—but none of those factors can actually make stock prices fall. The only thing that can make stock prices fall is when more and more investors want to sell their stocks and there are not enough buyers at the current market price to absorb the increased supply. So to find more buyers, sellers have to lower their prices, and down and down we go.

When retail investors throw in the towel on the stock market by redeeming their mutual funds, they turn their fund managers into sellers.

Redeeming a Mutual Fund

When you buy a mutual fund, you are giving the mutual-fund manager money to invest on your behalf in exchange for ownership shares in the mutual fund. When you redeem a mutual fund, you are returning your ownership shares in the mutual fund in exchage for an amount of money equal to the value of your shares.

Now, the important thing to remember is that once you give your money to the mutual-fund manager, he puts it to work in the market. Mutual funds do not sit on mountains of cash, they invest it. Why is this important to remember, you ask? It is important because when you ultimately decide to redeem your ownership shares in the mutual fund for cash, the mutual-fund manager has to come up with the cash somewhere, and the only way he can do that is by selling the assets of the mutual fund—like the stocks it is invested in.

When your mutual-fund manager sells stocks, it increases the supply of those stocks on the market. And as we all remember from our Econ 101 class, an increase in supply equals a decrease in price.

When Equity Mutual Fund Redemptions Increase

During a three-month stretch in 2008 redemptions increased at faster and faster rates. According to TrimTabs Investment Research, equity mutual funds saw the following outflows of capital:

  • During the week ending August 6 $2,987 million
  • During the week ending August 13 $3,932 million
  • During the week ending August 20 $5,135 million
  • During the week ending August 27 $511 million
  • During the week ending September 3 $4,790 million
  • During the week ending September 10 $11,926 million
  • During the week ending September 17 $17,852 million
  • During the week ending September 24 $6,327 million
  • During the week ending October 1 $7,159 million
  • During the week ending October 8 $43,301 million
  • During the week ending October 15 $13,937 million
  • During the week ending October 22 $6,470 million

To see the impact the increase in redemptions had on stock prices—especially the week ending October 8—take a look at the daily chart of the Dow Jones Industrial Average below.

Daily Chart of the Dow Jones Industrial Average in 2008

Did the Market Find a Bottom?

You will notice above that since the week ending October 8, the rate of equity mutual fund redemptions fell off. At the same time the Dow Jones found support at 8,000. Is it a coincidence that the support level at 8,000 showed up at the same time retail investors stopped stampeding to get money out of their equity mutual funds? I don’t think so.

It appears that all, or most of, the investors who were going to panic and redeem their equity mutual funds had already capitualted and sold. Typically, according to most investment psychology books and books on major market crashes, this happens just before the market finds a bottom. Yes, it’s true. During times of heightened market volatility and fear, all of the sheep eventually jump on the bandwagon of selling at just the wrong time.

I see a reduction of redemptions as a signal we are at, or near, a market bottom. Of course, being at the bottom does not mean the market is going to instantly turn around and move higher. It does, however, mean it shouldn’t continue going lower.

 

Image courtesy permanently scatterbrained.

ETFs or ETNs? Choose Exchange-Traded Funds

Looking to diversify your porfolio? Maybe you have heard of exchange-traded funds (ETFs) and exchange-traded notes (ETNs). Both have similar sounding names and both offer instant diversification, but these two investment vehicles are actually extremely different. They both serve the same purpose in your portfolio, but they are structured quite differently. In fact, the structure of ETNs makes them much more risky than ETFs. Let’s take a look at the differences and why you might want to stick with ETFs.

[VIDEO] ETFs or ETNs? Choose Exchange-Traded Funds

Exchange-Traded Funds (ETFs) vs. Exchange-Traded Notes (ETNs)

Exchange-traded funds (ETFs) are one of the most popular investment choices for investors looking to diversify their portfolios. ETFs are investment funds traded on stock-markets. They are not mutual funds yet they offer all of the benefits of diversification that you would expect from a mutual fund. ETFs also enjoy all of the benefits of liquidity that you have from trading individual shares.

ETFs offer instant diversification because when you purchase one, you invest in a fund that buys and holds multiple assets. ETFs are like baskets into which fund managers place various assets such as stocks, bonds and commodities. When you buy an ETF, you buy ownership of a basket and its contents, not piecemeal ownership of the individual contents. That saves substantially on trading costs as well as on the capital you would need to buy each individual stock within an ETF that corresponded to an index, like the S&P 500.

Exchange-traded notes (ETNs), on the other hand, are not investments funds. ETNs are structured products that are issued as debt securities by banks and are based on the performance of various assets, indexes and strategies. When you buy an ETN, instead of putting your money into a fund that acutally buys and holds assets, you are buying debt from the ETN issuer—much like a bond investor would. Instead of being backed by the assets that are in the investment fund like ETFs are, ETNs are simply backed by the full faith and credit of the issuer.

ETNs have maturity dates. When you hold an ETN until the maturity date, you receive a one-time payment based on the performance of the underlying asset, index or strategy. For instance, if you buy an ETN covering oil and the value of oil appreciates during the time you are holding the ETN, you will receive a higher payment at maturity than you will if the value of oil depreciates during the time you are holding the ETN.

Of course, you do not have to hold an ETN until maturity if you don’t want to. You can sell your ETN at any time on the open market. However, depending on current market conditions, you may get a less favorable price for your ETN if there are not a lot of interested buyers in the market.

Risks Associated with Exchange-Traded Notes (ETNs)

Exchange-traded notes (ETNs), just like any other investment, carry risk. However, ETNs carry the following two risks that ETFs don’t:

  • Credit risk
  • Call risk

Credit risk is the risk that the institution that has issued the ETNs will default on the notes. Remember, ETNs are issued as unsecured debt securities—meaning there are not specified assets that serve as collateral for the ETNs. Instead, ETNs are only backed by the full faith and credit of the issuer. In good times, this isn’t typically a problem. But during a financial crisis when banks and other large financial institutions—the main issuers of ETNs—are at risk of collapsing, it can be a big problem.

To illustrate my point, the following is a list of ETN issuers:

  • Bear Stearns
  • Lehman Brothers
  • Morgan Stanley
  • UBS
  • Barclays Bank
  • Goldman Sachs
  • Credit Suisse
  • BNP Pariba

Any of these names look familiar? If you paid any attention to the news about the Credit Crisis of 2008, you definitely recognize these names. A few of them are not even around anymore.

Call risk is the risk that the issuer of the ETN may call the ETNs back before maturity. If an issuer calls an ETN back, the issuer will compensate you for the ETN according to the call provision in the ETN, but you will lose the right to hold the ETN until maturity.

 

Image courtesy mckaysavage.

Understanding Reverse Stock Splits

Companies like to do whatever they can to control the price of their stock. Sometimes company management will drive to boost quarterly numbers, sometimes it will create a marketing and public relations campaign to influence investors and sometimes it will change the number of company stock shares that are available through a reverse stock split.

[VIDEO] Reverse Stock Splits

The term reverse stock split is not one you will hear very often in the financial media, but it does creep up every once in a while when a company’s stock price is in trouble.

To understand what a reverse stock split is, however, you first need to understand what a stock split is.

Stock Splits

A stock split is a process whereby a company increases the number of company stock shares that are available and decreases the price per share by splitting the current shares into multiple pieces rather than by issuing more new stock.

For instance, in a 2:1 stock split, the company takes every one share of stock and splits it into two shares of stock.

Here’s an example. If a company has 1,000,000 shares of stock trading at $100 a piece, and the company executes a 2:1 stock split, the company would then have 2,000,000 (1,000,000 x 2 = 2,000,000) shares of stock trading at $50 ($100 / 2 = $50) a piece after the split. In another scenario, if a company has 1,000,000 shares of stock trading at $100 a piece, and the company executes a 3:1 stock split, the company would then have 3,000,000 (1,000,000 x 3 = 3,000,000) shares of stock trading at $33.33 ($100 / 3 = $33.33) a piece after the split.

In both instances, the number of shares changes, but the market cap of the company remains the same at $100,000,000 [(1,000,000 x $100 = $100,000,000) or (2,000,000 x $50 = $100,000,000) or (3,000,000 x $33.33 = $100,000,000)].

Now let’s look at reverse stock splits.

Reverse Stock Splits

A reverse stock split is a process whereby a company decreases the number of company stock shares that are available and increases the price per share by combining the current shares into fewer shares.

For instance, in a 2:1 reverse stock split, the company takes every two shares of stock and combines them into one share of stock.

Here’s an example. If a company has 2,000,000 shares of stock trading at $50 a piece, and the company executes a 2:1 reverse stock split, the company would then have 1,000,000 (2,000,000 / 2 = 1,000,000) shares of stock trading at $100 ($50 x 2 = $100) a piece after the reverse split. In another scenario, if a company has 3,000,000 shares of stock trading at $33.33 a piece, and the company executes a 3:1 reverse stock split, the company would then have 1,000,000 (3,000,000 / 3 = 1,000,000) shares of stock trading at $100 ($33.33 x 3 = $100) a piece after the split.

In both instances, the number of shares changes, but the market cap of the company remains the same at $100,000,000 [(1,000,000 x $100 = $100,000,000) or (2,000,000 x $50 = $100,000,000) or (3,000,000 x $33.33 = $100,000,000)].

Why Would a Company Execute a Reverse Stock Split?

Companies will typically execute a reverse stock split for one of the following three reasons:

  1. Increase their share price to avoid being delisted from an exchange
  2. Increase their share price to avoid being removed from a stock index
  3. Increase their share price to avoid the “low-quality” stigma that is associated with penny stocks

 

Image courtesy James Sarmiento.

Discount Brokers or Full-Service Brokers: Which is Right For You?

Discount brokers provide trading executions at rock-bottom prices. That is the key benefit they offer.

Discount brokers do not offer the same level of customer service or the same number of products that full-service brokers do, but discount brokers do offer all of the tools and services you need to place trades as an individual investor. If you feel comfortable conducting your own stock analysis and placing your own trades, you may want to consider using a discount broker.

[VIDEO] Discount Brokers

Now that you’ve got the basics of what a discount broker is, check out the video above and see what else you can learn about discount brokers at the whiteboard.

Full Service Brokers

Full-service stock brokers, as their name suggests, provide a full range of products and services to their clients. Typically when you are working with a full-service broker, you will work with an individual who personally oversees your account and is responsible for taking care of your needs.

[VIDEO] Full-Service Brokers

Video pending…

A full-service broker can provide services, such as:

  • Trade execution
  • Stock selection advice
  • Retirement advice
  • Insurance

In return for providing extensive, hands-on service, a full-service broker typically charges higher commissions.

Now that you’ve got the basics of what a full-service broker is, check out the video above  and see what else you can learn about full-service brokers at the whiteboard.

 

Image courtesy avi.photos.

 

What Happens if NYSE Delists a Stock?

The global financial crisis took its toll on stock prices — especially on bank stocks like Citigroup (C), Bank of America (BAC) and Barclays PLC (BCS) — that are listed on the New York Stock Exchange (NYSE).

This raises an interesting question: what if stock prices were ever to drop too low? Will the NYSE start delisting stocks? What does this mean?

[VIDEO] What Happens if NYSE Delists a Stock?

What Is Delisting?

Delisting is the process of taking a stock off of the exchange where it is currently listed.

You see, stock exchanges — like the NYSE, the NASDAQ and the American Stock Exchange—give stock traders a place to come and buy and sell stocks and get price quote information by listing stocks on their exchange. If a stock is not listed, there is no public forum where stock traders can go to get information about and execute trades on the stock.

Of course, just because a stock gets delisted by one exchange doesn’t mean that it cannot be listed on another stock exchange, but being delisted puts a negative stigma on the stock itself.

Why Would The NYSE Delist a Stock?

The NYSE and other stock exchanges have minimum requirements a stock must meet to maintain its listing on the exchange. If a stock does not meet those minimum requirements, it will be delisted.

For instance, the NYSE has a rule that the 30-day average price of a stock must remain above $1. Unfortunately, one of the members of the Dow Jones Industrial Average, American International Group (NYSE: AIG), is currently listed on the NYSE, but it is trading for less than $1 per share and is at risk of being delisted.

Ultimately, stock exchanges delist stocks for the following two reasons:

  • They want to maintain their premier image, which helps them attract premier stocks, by disassociating themselves from less-than-premier stocks.
  • They earn money whenever a stock trades that is listed on the exchange, and premier stocks tend to have more volume than less-than-premier stocks do.

 

Image courtesy Solidariat.