“January Effect” – Ignore it!

…Why do you invest your hard earned cash in the stock market? Ask yourself this question. Please think very hard and write down your answer before you continue reading.

Is it for retirement, for income, for real estate, your kid’s education, etc…?
Whatever the reason, I am sure you have a set of rules to play by before dumping thousands of dollars into the market. If you do not have a solid set of rules to follow before you invest, how do you know when to buy and sell? Under what circumstances do you buy and sell. What are the determining criteria that you use to make those final decisions that can affect you and your family?

Here at MSW, we follow rules and we try to eliminate emotion or at least keep it a bare minimum which allows us to invest intelligently. Without our philosophy, we would be aimlessly throwing money in all directions, hoping and praying for profits. We would most likely listen to hot stock tips and jump on the bandwagon of every new trading system or theory that came across our desks and computer screens.

The point of this article is to remind our community members to steer clear of the hype behind so called special situations that don’t play into your developed trading system that was designed to fit with your personality and emotions.

I have been hearing a lot about the “January Effect” in recent weeks and I cringe every time I hear some talking head try to convince me to buy beaten down shares in companies that will bounce in the first two weeks of the year. I see too many people jump at the opportunity to change their investing beliefs because some guy on the other end of computer wrote an article claiming to make you lots of money in the first two weeks of the year.

Be strong and ignore the noise coming from every direction. Instead of looking into there theoretical bounces that may or may not occur, take the time to review last year’s trades and document the good and bad aspects of your portfolio. Look for your best trades and see why they were the best trades. Study your poor trades and understand where you made the mistake. Correct those mistakes in the coming year.

Be honest with yourself and note the areas that you need work and continue to polish your strengths. Don’t abandon what is working because a talking head on television tells you his system works in only 15 minutes per day two days per week.

Stick to one system that works and try to consolidate the strongest features of that system to your advantage and ignore the hundreds of other systems and indicators that can be found on every investing web site on the net.

We focus on price and volume here at MSW, which is all you need to become a successful trader. Establish strong or accelerating fundamentals and then confirm a quality trend on the charts and you will reap returns better than 99% of the general population.

Stay focused in the New Year, start fresh and think positive! Instead of reading 100 books this year on 80 different trading systems, reread a few essential books that focus on one system that best suits your style of investing.

Piranha

BUFFALO WLD WING (BWLD)

...This blog entry will answer a question from a potential community member about a particular stock. BWLD currently sits at $36.16 at 12:00pm.

BWLD made my daily screens on Monday night with the breakout from the weekly cup with handle (handle higher than normal) on volume 264% higher than the 50-d average.

BWLD made my screens as a young IPO last December at 23.05 (check back in the archives to locate actual post – weekly screen for last December).

I liked the stock last year and watched as it ran up to the mid $30’s before it started to form its first base which it broke out of last night.
It looked good last night but the action is the complete opposite today as the stock has reversed course in above average volume. If the stock breaks below the pivot point of $35.24, it would be a sell in my book if you bought yesterday. You can use a cushion of 7% below $35.24 but I would personally sell immediately as something is wrong. It could be the downgrade that was issued today but I don’t pay much attention to analysts as they are usually wrong or late in their assessments.

As for fundamentals, ROE is lower than preferred levels at 7-8%. A key number here would be 15% or higher. Income levels have rose along with sales year-over-year but they are not superior growth numbers.

I would wait to see what happens today and watch the next few days to see if the stock can shake off the bad news or if it has problems not yet determined on the fundamental side that the technical side is giving us clues to consider. Reversals after strong breakouts are negative, especially when they undercut the pivot point.

Piranha

MarketWatch Inc. (MKTW) Analysis

…I was recently asked about MKTW – a stock that made our weekly screens on 11/21/04 at $18.05. Here is how I analyzed the stock for the screens.

MKTW is currently forming a:
Flat Base:
A basing stock that has weekly closes within a few percentage points of each other on below average volume. A flat base must last at least 7 weeks in duration. Our research shows better success with flat bases lasting 12 weeks or longer. The pivot point will come on huge volume as the stock breaks out of the tight flat base range.

The recent action of MKTW is amazing to watch. It has made a few daily screens and one weekly screen recently. If it breaks out on large volume, it’s an instant buy within 3-5% of the pivot. The real question is: Is it a buy right now?

Let’s look at the numbers:

Income past 3 years:
2001: -76 mil
2002: -9 mil
2003: +2 mil

Looks good but I see a red flag

Revenue past 3 years:
2001: 45 mil
2002: 44 mil
2003: 47 mil

Profits have soared but sales are stagnant. Revenues have not moved much at all, the company has slashed operating expenses to allow a profit to be made. In my experience, companies that slash expenses can only maintain stock growth for a short period of time. At some point they must increase sales which in turn will increase earnings. Earnings power is the underlying factor in stock movement.

Earnings are supposed to jump 186% in FY 2005 and that has moved the stock recently. If MKTW can make or beat the numbers analysts are predicting, the stock will breakout and will be a buy.

We are looking for FY 2004 earnings to be $0.15
Analysts are predicting FY 2005 to be $0.43.
The market is always working 6 months ahead. If the stock keeps moving, this means earnings will continue to go higher as will the stock.

Some other less important numbers:
ROE – 3.76% (low – should be over 15%)
Float is high (23.7 million compared to 25.9 million outstanding shares)
Insiders own 8.51% (very low – not a critical factor)
Fwd PEG ratio – over 2 (very high)

In conclusion, MKTW made my screens based on future expectations and chart setup. I also ran a screen based on EPS rating and relative strength on IBD. It passed all of these tests so I included the stock based on the final chart analysis (my personal feeling based on what I see).

I am yet to find a stock that is perfect or passes every screen out there. In this case, I see the future anticipated growth and realize that stocks move on expectations and recent strength (i.e.- Relative strength versus the S&P 500). MKTW shows up solidly in both categories. When I do a full analysis, I must provide all numbers that I research including the important gross profit and revenue numbers. If things work out as expected, revenues should jump drastically in FY 2005. I was just pointing out the negatives I see. Overall the stock is positioned better than most in this group.

Remember, stocks move approximately 6 months ahead of actual numbers. MKTW has moved based on analyst estimates and company targets. If and when those numbers are met or exceeded, the stock will justify the prior movement.

Look for the current base to play out for another couple of weeks. A breakout at that point would be positive for the current flat base. Also, the stock carries some good company (sister stocks), that also weighs into my screening process.

Speculative Stocks and why they are Dangerous

…A few weeks ago I spoke why I didn’t include Sirius Satellite stock on the daily or weekly screens. To refresh, I noted two important points:
1. The company has yet to turn a profit
2. I have established positions in companies that show a profit and potential.

This is not to say that Sirius can’t continue its climb as the stock is an excellent spec (speculation) play. There is plenty of money exchanging hands in Sirius but it’s not backed by earnings or cash flow.

Today is a perfect example why members of this community should stay away from speculative stocks. As bad news hit the wire (downgrades from two firms), the stock tanked with an opening gap-down (visit the Philosophy and Education section for further information on gap-downs) and continued with weakness throughout the day. Strong stocks with strong earnings can also fall fast when bad news hits the wire but they usually make up this ground in the following days and weeks. Sirius may make a strong comeback but the odds are currently against the stock that fell over 20% on the largest volume ever (over 500 million shares).

We also feature a chart showing a gap-down in our Technical Analysis section of the community.

Most of the recent action surrounding Sirius comes from the Howard Stern announcement last month. Keep in mind that Howard is not scheduled to take to the microphone until 2006, more than a year from now. Until he starts his show and subscriber numbers are increasing, this stock is pure speculation.

A domino effect always occurs in speculative stocks when bad news hits the wires; this is because “dumb money” becomes scared and they start to sell creating a windfall of activity. It is one of the most dangerous situations to be wrapped into when everyone is trying to sell and the number of outstanding shares far exceeds the number of investors willing to buy.

Overall, Sirius is still in decent shape according to the charts. It has not reversed any major trends and has not broken any major support lines. Until the stock breaks support, it has the potential to regain the momentum of the past few weeks.

Piranha