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Market Posture and a few ideas

March 15, 2007
tags: , , , , ,

Greetings! Sorry for the long period of inactivity on the blog. I’ve been very sidetracked with my career pursuits. I’m thinking that may be more of a norm in the coming months, but I’ll try to keep this alive if I can.

It was great to be back at the meeting tonight and see a great group of core regulars there. Good energy!

Though it may be obvious to most, I’ll post our reading of the market posture having gone through the Market Posture grid.

The SPX itself gave quite an intra-day scare but didn’t close with a lower low just yet, so there is not yet an official down trend begun. The rally in yesterday’s action was pretty impressive, still that’s just the action durin one day. The past two weeks have been decidedly bearish and abrupt. That this should just smooth over and resume a nice steady uptrend seems unlikely. In any case, we’re cautiously bearish because we don’t have the lower low yet.
(Click the image for a large view.)

Ray made the good point that just because the VIX is high doesn’t mean the market will go down further, nor is it necessarily “time to buy.” Unless it continues to go higher, than we should read it as neutral and wait for a turn back down as a bullish indicator. If it continues higher, that will be with further bearish action in the market. But the real value in this indicator is when it turns from being low or high.
At this point, we have a higher low, but not yet a higher high after the break above the 12.50 area. I think Ray’s probably right that the VIX will form a new range roughly where it has been in the last two weeks. That doesn’t really give us much to work with other than the knowledge that the market is now a bit more volatile than before. So it might be fair to read this indicator as neutral to bearish.

We talked a bit about the group list but didn’t get to really dig into it. I want to get rid of a majority of the list. In fact, many of them might be good bear watch-list candidates now.

KBH, UNT, and ZMH need to go if for no other reason because they don’t have an F/E score of 3.25 or higher. And have you seen the chart on KBH? OUCH!
With a move up to and bounce down from resistance at 37.50, that might be a nice entry for a bearish play. I’d look for a shorter term quick profit, though, because this stock has been beaten up for a long time. I think it is severely undervalued at this point. PEG of .67. And look at its P/E compared to its group. But the chart is what it is until it isn’t anymore. It had an intermediate uptrend going, but that was obliterated a few days ago on the break of 47.50.

CRDN should probably go because it’s 5 year growth estimate is only 7.5%. Remember that we’re looking for a minimum of 20%.

ICE is quite overvalued with a very high P/E and PEG. It looks like its great run is over and if it breaks support around 127, there looks to be nice room for profits in bearish plays even with multiple stops for support along the way.

NTAP is also perhaps overvalued with a high PEG above 2. Looks pretty toppy as well with what looks like a relatively orderly turning over. A break below support at 36 would negate the hammer candle yesterday and be a nice entry for a ride down to 33, 31 or 29(two former areas of recent horizontal support and one diagonal support line from the low in 2004.)

More thoughts on what should get booted from the list soon.

For the long side just in case the market does look strong from here. NTRI is a potentially nice entry here with a higher low after being beat down by silly analysts changing with the wind. On strong earnings the recent gap up and low volume pullback seems as if people are ready to start buying this stock again. Fundamentals are very strong and the valuation is quite low. Look at the P/E compared to its group. PEG is .77. Very low, which is good. If you don’t know what PEG is, do a search on Investopedia for the short and quick answer. But here’s a more in depth presentation PEG from thestreet.com that is pretty good. Notice the date on the article and Cramer’s mention of how undervalued MA was given its PEG. And look what happened to the stock shortly thereafter: It was up 160% at its high last month!

It’s been a wide ranging year for NTRI, but more or less sideways. We’re now at the bottom of that range with a symmetrical triangle that seems likely to break to the top side given the volume on the recent earnings announcement and gap up. An entry on a break above the resistance line or 47.50 seems pretty reasonable with a target of 60 or so. It’s a touchy call with the state of this market right now, but with a conservative position size the potential reward may just justify the risk.

That’s all for now.

Feel free to chime in in the comments section here.

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