Kohl’s (KSS) earning surprise sent the stock higher last week. We take a look at the news coupled with a reading of the current stock chart and industry trend to get a sense of whether KSS is a stock worth putting on your investment radar.
For a little over a month now the rekindled craze of Pokemon has swept the globe. This has translated to a temporary hysteria in the investment world, as well. Nintendo, the originator of the fabled Pokemon saw their stock price accelerate at a pace similar to the general public’s interest of the game. What has occurred since mid-July is a leveling of interest and expectations for both players and investors.
What we saw with Nintendo’s stock price is a classic example of what I dedicated a book to a few years ago. In Event Driven Investing, I put forth an investment philosophy and strategy built around visible news/events. In explaining the strategy, I noted that in situations, such as the Pokemon craze, you do not need to be the first one to the party. The most important part is that you realize relatively soon that their is party going on, which means investor excitement will become increasingly exacerbated.
When mass hysteria hits, it’s not difficult for ridiculous increases in price to occur over a short period of time. Nintendo’s stock doubling as a result of the exposure they were receiving from the new found popularity of Pokemon is not shocking. No one wants to get left out of the next big thing. In the mind of the market popularity = profitability. What is popular is assumed to be profitable. This is generally true, but the degree at which it is true can vary. In instances when unsuspecting trends emerge, such as Pokemon, properly gauging the correlation of popularity and profitability can take time. Therefore, the urge to react will outpace the data justifying the reaction.
In the chart below I am illustrating what is explained further in Event Driven Investing. The first stage is where we see the stock pop is the stage in which initial public interest is established. This period is when the news begins to decimate. The period is characterized by the stock price jumping significantly (+50% off the previous week’s levels in this case), but not to the level in which we would characterize it by full on madness. Remember, during the initial exposure to this Pokemon craze, we were hearing that Pokemon had more active users per day than Twitter and everyone from the company janitor to CEO were talking about it.
After this first wave, we see another wave of investors coming to the party. This is where your second wave of investors shows up because they too know the news and also see what has happened with the stock price. They do not want to miss the bandwagon.
The point of exit, which is always difficult to know precisely, shows itself on July 18th. On that day we see that the stock keeps trying to break above $38. It cannot, even thought it happens throughout the beginning and end of the trading day. Knowing that this is a craze, you might have been able to interpret the market’s activity as a sign to at least sell some of your position. The next day, on the 19th, is really the warning signal shows itself. You know that when Nintendo began it’s breakout it was at $18 per share. It had reached $38 per share, which is about a 111% increase in value. It now has pulled back from $38 and trades during the day from around $36 to $34. Volume is heavy during the day too. This signals that a good amount of holders of the stock are taking profit. This should be another warning sign that the rally might be over and it would be smart to take some more off the table. The next trading day the same pattern happens; the stock opens lower and can’t find it’s way back above where it started. Another bad sign. Time to get out of the position in full.
When the market is gripped by a mania, the craze can last a few days, a few weeks or even a few months given the circumstances. As an investor, you must stay on top of the position and be ready to get out. A difference exists between short-term investing and long-term investing. Event driven investing is about capitalizing on short-term movements in the market. The key is not to get overly greedy. Learn from the Pokemon crazy and the Nintendo stock’s reaction.
For all the technical minded investors or traders, you should put Enzo Biochem (ENZ) on your radar. The stock is near to breaking through a level which it touched recently. If it surpasses around the $6.30 point, the next stop could be between $7 and $8 per share. Keep your eye on this stock to see if it can keep it’s positive momentum. Remember, the trend is your friend.
Rail transportation is a main conduit in fostering economic activity throughout the world and particularly in North America. Peering back through history will lead you to understand that many of the largest cities/centers for economic activity developed around main rail road junctions. While rail roads are not a revolutionary force today, as they were in the 1800’s, they still serve as a key part of the world’s economic infrastructure. Data pertaining to freight carried on vial rail cars is a valuable data point in gauging the health of the economy.
The Association of American Railroads releases data regularly that measures rail activity in both the U.S. and Canada. Below I am including two charts recently updated by the association. The 2016 trend is certainly downward compared to the prior three years. The 2014 year, in terms of car loads is the post-recession high water mark. Prior to that period, transportation topped out in 2006.
Historically, the levels we are seeing so far in 2016 look more like 2010 and 2011.
The market has found its legs this week and, for the most part, has regained where it was prior to the Brexit shakeup. How strong is this rally? One area that throws a warning flag would be what slices of the larger market that have moved higher. Two parts of the S&P 500 that have outperformed are consumer staples and healthcare. Both of these areas are considered more defensive portions of the S&P 500. Therefore, the S&P 500’s current growth is being largely propelled by generally more defensive investment plays.
More aggressive areas of basic materials and financials are lagging the general market rebound of the S&P 500. The chart below tells the story of the past week.
If groups like basic materials and financials can gain more momentum, then the prospect of the index moving above its current range-bound realm would be greater.
The market broke through the level of resistance hit this past Friday. This is unsettling from a technical perspective because the path of least resistance is set for lower lows in the short-term. Will this occur? Time will tell. The tend is currently set to continue lower.
I actually wasn’t too surprised by Friday’s move lower. If you recall the week leading up until Thursday saw some very bullish moves. Friday’s downward swing took out those positive movement from earlier in the week. Today’s negative trend puts the market in more unsecured waters. I read this as a confirmation that their is greater concern in the near-term and that market sellers are gaining the upper hand.
On a final note, I think times like this are great lessons for investors. Right now you might be asking yourself, “What should I do to protect my investments?” Buy, sell or hold? Where do I turn? This is sort of like being in a hurricane and asking how to save your house. Once you’re in the storm it’s much more difficult to react than prior to being in the storm. How can this be avoided?
In short, you either set stop orders to help you get out of positions based on certain rules, be proactive in terms of setting target prices (whether it be for ETFs, individual stocks or other funds) or develop hedges within your portfolio to counter negative price movements (short positions).
Again, your success of protecting your property isn’t while a storm is going on, it’s prior to the storm hitting.
The Friday trading session for U.S. markets was rather interesting. The news coverage of the market’s reaction to the Brexit was overdone. The market, as measured by the S&P 500 was down roughly 3% at the close. It was a decent drop for one day, but not all that wild compared to how the media was reacting.
Looking at the market from a technical viewpoint, the movement down hit against a level of support that has been in place for a while. In April the price range was tested and held, then in May the market retraced to the level and support held again. Today we find the market back at that level.
Monday is just as big of a day for the market as today’s post-Brexit was. Why? If the market holds within the support level, this will signal a short-term bullish case for investors. If the support level is broken, then we could see a much heavier sell off. How much of a sell off? It would not be surprising to see the market retrace back to where it bottomed out during in January and February earlier this year.
The direction the market takes off of this sell-off depends on how institutional investors view the additional risk the Brexit throws into the market. How much is tangible calamity and how much is exaggerated political posturing that makes good television? It’s not that the Brexit is a minor event, but, as an investor, you must answering the question of does it some how fundamentally change the path and current assumptions built into current economic projections? What are the near-term implications versus what are the longer-term implications?
Today’s election in Britain should give you an idea of how volatile a market can become in a very short period of time. Since the start of the week the market has been punch drunk on assurances that the leave vote would fail in Britain. Throughout today and into after-hours trading certainty remained. A significant amount of money bet long on the assumption that a vote to remain would reinforce the status quo and bring a higher level of certainty to the market. That was shortly shattered as votes started being counted. Whether it’s the general market or currency trading, the market got a rude awakening when what was assumed to be an open and shut case turned into the exact opposite.
As an investor, dealing with this situation would have been near impossible to get right. A little over a week ago all we heard from polling and the media was that the leave vote has gained strength and then for about the last week the opposite was the case. The market sided with the most recent trend believed; a stay vote victory. Major financial publications, such as the Wall Street Journal’s Barron’s weekend publication led the charge. Confidence continued to build.
The confidence that was built has now crashed. Investors on the wrong side of the trade are going to move to get out and other investors will pile on to sip from the downstream of market momentum. The situation is ripe for an overreaction in the opposite direction versus the positive reaction seen throughout this week. Uncertainty is a dangerous animal in the investing world.
Again, as I have said before, the fact that we have a greater share of risk-adverse investors in investments with greater risk profiles creates a situation where average volatility can lead to exacerbated levels of volatility in a short period of time.
Here’s to an interesting Friday.
Often times we hear debated the market’s ability to accurately reflect the health of the economy. Though a certain level of distortion exists throughout the market in terms of how well or how bad things are on Main Street, Wall Street does ultimately come to reality with the boots on the ground economy…even if it’s only a momentary reconciliation.
The purpose of a bear market is to bring the excesses that were borne in the bull market’s period back in line with reality. It’s sort of like fruit on a tree; at a certain point the level at which the fruit is ripe becomes ideal. That precise point is hard to know and the spectrum of ‘ripe’ may last quite a while. At a certain time the stage of being overripe arrives and shortly after rotten takes it place. The bear market has set in.
Bear markets are a natural and healthy process in our economic growth. They are not simply a trading phenomenon. Bear markets exist in the real economic world. If we look at the energy market and particularly oil, we see that high prices brought the development of new technology (fracking) into the market and an expansion of exploration and extraction. Greater supply was eventually created, which drove down prices to such an extent the glut in supply put a number of newly producing rigs out of production. A reconciliation with the new reality had to occur. That which was sweet in the oil industry became too sweet and bear market arrived.
As in everyday life, the party does not last forever. Heck, even the level of excitement at a party does not stay constant. Bear markets should not be feared, they should be understood.