Cyclical Stocks – Semiconductors and Airlines (This Stock Goes to 11)


Today’s post is not for the serious investor, but instead for the hobbyist who likes the thrill of playing the market and paying brokerage fees.  the serious investor who is looking to hold stocks for long periods of time and make serious profits may find the post of interest as well because it shows the kind of stock to avoid because it will never make money long-term.  That is the cyclical stock.

Examples of cyclical stocks are semiconductor companies and airlines.  Neither of these business create the desired steady, long-term price appreciation desired.  Instead, they tend to experience regular cycles of boom and bust.  While some of the booms are larger than others, the price eventually always busts and the stock falls back down.

For semiconductors, this is because there is a sweet spot in the life of a new chip where they are selling a lot and therefore making a good profit.  In this part of the cycle the company ramps up production, opening lots of fabrication plants.  Eventually, however, foreign competitors start to flood the market with chips, causing the price to fall and the company to shutter factories and pay the associated costs. The stock price then falls back down and somehow the amount of money the company actually has in the bank is about where it was when they started.  This repeats as new newer, faster chip is created and reaches the sweet spot on price.

I have owned Cypress semiconductor several times in my life and made money each time.  I learned early on that the price would periodically take off and then fall.  See the long-term price chart and you’ll see what I mean:

http://finance.yahoo.com/q/bc?s=CY&t=my&l=on&z=m&q=l&c=

A friend and I used to joke that the stock always went to 11, so if it was below 11, buy, if it was substantially above 11, sell.  Any price between 10 and 20 really could have been picked and this philosophy successfully applied, but 11 was a humorous value as devotees to Spinal Tap will attest.  Substantial money can be made with this type of stock by figuring out what is “low” and what is “high” and then just waiting for the price to fall within the desired ranges and act accordingly.  The trick is to avoid the temptation to think that “this time is different” and hold too long or buy too high. 

Note that the closer you set the values together the more often you will be in and out for the stock, but the returns, strangely enough, will be about the same if brokerage fees and taxes are ignored.  It makes sense therefore to set the limits fairly far apart so the stock is not traded too often. 

Cypress CEO TJ Rogers actually did an analysis of trading Cypress based on Price to sales ratio.  This study is available from their website and is well worth reading:  http://www.cypress.com/?rID=34959

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

We’re near a Bear Market – Market Commentary for May 26th


In the last post, I provided the correct definition of a Bear Market.  As I said, it has nothing to do with price, it has to do with the long-term trend of the market being in a down-trend, as opposed to an uptrend, which would be a bull market.  And to follow Dow Theory, the “market” is judged by the Dow Jones Industrials and the Dow Jones Transportations.  The charts for both can be found at the following links, thanks to Yahoo:

Industrials:  http://finance.yahoo.com/q/bc?s=%5EDJI&t=1y&l=on&z=m&q=c&c=

Transports: http://finance.yahoo.com/q/bc?s=%5EDJT&t=1y&l=on&z=m&q=c&c=

You’ll note that the DJIA is started a down-trend — it had a low that was below the last low and a high that was below the last high.  The Transportations, however, have only had a lower low — the index has not moved up again.  We therefore may be on the verge of a bear market.  Being more cynical, looking at the longer-term 5-year chart for the DJIA:

http://finance.yahoo.com/q/bc?s=%5EDJI&t=5y&l=on&z=m&q=c&c=

you’ll notice that we haven’t yet gotten back up to the high reached back in 2008.  This may suggest that we never emerged from the Bear Market that started back then, and the rally we saw was just a long and substantial bear market rally.  Looking at the fundamentals, the debt crisis in Europe is certainly not good news for the market that thought it was finally going to see earnings rise out of the hole left by the housing collapse.

On the other side of the coin, however, the very, very low interest rates that the Fed has created must have an effect eventually, either causing growth or inflation.  If the former occurs, the market may rally, debt crisis or no debt crisis.

What this all means is that we may be ready to see another retreat by the markets, possibly testing the lows set in 2009.  While this might seem disheartening (no one likes to see the value of their investments go down), it actually presents a great buying opportunity for those with a long-term investment horizon.  You see, when the market retreats, it takes all stocks, good and bad, down with it.  This means that some great companies that have nothing wrong with them may be at fire sale prices soon. 

So here’s what to do.  If you have a long-term horizon (10, 20, 30 years) continue to invest regularly in case the market decides to rally and leave this bear market, but be a little picky about the prices you pay.  If a stock seems a little pricey, maybe buy a little but keep some cash in reserve.  Also, if you have a stock or two that has done well but has started to lose some of its luster, sell a bit and build some cash so you can take advantage of opportunities that may present themselves.

If you do not have a long-term horizon, for example, you are looking to retire in the next five years, build up enough cash to get you through the next 5-10 years in case the market decides to go down for a bit.  You should also be shifting money from growth stocks to dividend paying stocks, bonds, and REITs – you actually should have been doing this for a while.  It is always a good idea to keep cash in reserve that you will need in the near-term because it is difficult to judge anything about the market during short periods.  Don’t take big risks with market volatility when you don’t have time to wait things out.  But if you have the time, take advantage of the drops and don’t worry too much about the fluctuations.

Did you find this info useful?  Refer a friend: https://smallivy.wordpress.com 

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Correction vs. a Bear Market



Please allow me to address a pet peeve of mine today.  That is the correct definition of a correction and a bear market.  It wouldn’t bother me so much if just the nightly newscasts got this wrong, but I hear people who should know better such as the Wall Street Journal getting it wrong as well.  Please refer your friends to this post and distribute it far and wide for I’d like to stop hearing people incorrectly using these terms.

First of all, the incorrect definitions.

Often on a newscast during a market downturn someone — either the anchor or the person they are interviewing — will say we’re having a correction, but have not yet entered a bear market.  They then will present the usual, incorrect definition that a correction is when the market has gone down 10%, and a bear market is when it has gone down 20%.  While it is true that the market will tend to decline more during a bear market than during a correction, the correct definition has nothing to do with percentages.  (This is like the old joke that a recession is when people are out of work, but a depression is when you’re out of work!)

To understand the correct definition, one must understand a little about charting, trends and Dow Theory.  For some basic definitions see the past post on charting: https://smallivy.wordpress.com/category/charting/ .  Corrections and bear markets have to do with what kind of trend the market is in. Specifically the long-term trend, which is found using a chart with intervals of a week making up each point in the chart.  Normally a Open-High-Low-Close chart would be used in which the opening price, high price, low price, and closing price for the week would be plotted for each point.  For an example, see the chart for Harley-Davidson during the last year:

http://finance.yahoo.com/q/bc?s=HOG&t=6m&l=on&z=m&q=b&c=

A stock is in an up-trend if the stock is making higher highs and higher lows, such that a straight edge can be laid on the chart and a line drawn from low to low and the stock does not cross this line.  This is known as the trend line.  Harley was in an up-trend from mid-February to mid-May of 2010, and as one can see the lows followed the trend line pretty well, such that each time the stock’s price fell to the trend line it bounced off of it and moved higher.  A down-trend is just the opposite, where the stock sees lower lows and lower highs, such that a straight edge could be used to connect the highs in a descending trend line.  A stock will be in an up-trend, a down-trend, or drawing lines (bouncing between two prices and going nowhere) at any given time.

In order for the trend to change, three things need to happen.  For an up-trend:  1) The stock’s price must break the trend line.  2) The stock must fall below the previous low, and 3) The stock must not reach the previous high.  For Harley the trend line was broken in early May, the low was broken in mid-May, and the stock failed to reach the previous high later in mid-may, so the stock has reversed from an up-trend to a down-trend (like much of the market right now).  One could now form a down-trend by connecting the high reached in early May to the lower high reached in mid-May.

Dow Theory looks at the Industrials (the DJIA) and the transportations (the DJ Transportation Index).  Each time both of these move down in price (one of the regular downward movements as was seen in the Harley chart) while they are in an up-trend — a Bull Market — it is called a correction.  If they both actually change from an up-trend to a down-trend, we are in a bear market.  For Harley, it was in a bull trend from February until May, with corrections about once or twice a month.  In late May it entered a bear trend.   

I’ve heard that the incorrect definition came from someone one of the shows was interviewing who didn’t want to go into Dow theory, so he just gave the 10%, 20% definitions, probably in a statement like, “If it is just a correction, we may see a decline of 10% or so.  If it is a bear market it may go down 20% or more.”  Because a correction only requires one down-leg before the stock climbs to a new high, while a bear market by definition requires at least two down-legs, most bear markets will result in a decline of about twice that seen during most corrections.  Likewise, a correction of less than about 10% probably would be barely noticed, so the trader was probably just trying to get the relative magnitudes across, not knowing that his rules-of-thumb would become gospel.

Corrections can be much larger, however.  An extreme example is the crash of 1987. 

http://finance.yahoo.com/echarts?s=%5EDJI#symbol=%5EDJI;range=my;compare=

In that stunning crash the Dow Jones Industrials went from 2596 to 1938 in one day — a decline of more than 20%!  Looking at the chart, however, you’ll note there was only one leg down, the trend was never broken, and the spectacular bull market that started back in the early ’80’s under Reagan continued clear until the early 2000’s when it was finally ended by the dot-com bust.  Since that time we have been drawing lines.

So, you now know the correct definitions, so please stop spreading the incorrect ones.  Also, forward a link to this post to all of your friends to correct the mis-information.  I’ll know my quest is done when I see USA Today with the correct definition.

Did you find this info useful?  Refer a friend: https://smallivy.wordpress.com 

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.