Reiterate Overbought Stock Signal 5/24/13

Two weeks ago, our stock market overbought / oversold indicator flashed a bearish signal.  At the time, the S&P 500 was 1627.  Today, the S&P closed at 1649.60, so this signal has been a loser, to date.  Over the years, the overbought / oversold model has been a good performer, but at some point, good systems will "throw in the towel" and cut their losses (-- and get back on the main trend).

• Currently, the Overbought stock signal is still bearish.    
• The long-term indicator remains bullish.
• The short-term trend is up.  
• Thus, our positions have been dictated by our short-term model.  

Note that the overbought indicator looks like it may flip to neutral to slightly bullish soon, so visit our blog regularly (or connect to our twitter).  

Happy Memorial Day weekend.  

Gold Continues Sell-Off 4/15/13

Gold continued the extreme sell-off it saw on Friday, when it dropped from about 1565 to 1500 (basis the June 2013 futures contract).  Over the weekend and into the New York opening on Monday, April 15, 2013, gold is seeing a breathtaking drop to the 1400 level.  This drop of about 10% shows why traders often have risk management approaches in place and act first -- and ask questions later.  Gold is now at two-year lows (at the lows of 2011 and 2012).

In futures trading, trend-followers are often seen as "reactive" -- but technical traders who follow trends have also seen their approaches be "predictive."  Other precious metals such as silver and platinum, and related markets such as the Aussie dollar are also selling off in sympathy.

More on the technical selling from the CME:

The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract (see below) in what proved to be only an opening shot. The selling took gold to the technically very 
important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders minds it stood as a formidable support level... the line in the sand. 

Two hours later the initial selling, rumoured to have been routed through Merrill Lynch's floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market - it had the hallmarks of a concerted 'short sale', which by driving prices sharply lower in a display of 'shock & awe' - would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called 'stopped-out' in market parlance - probably hidden the unimpeachable (?) $1540 level.

The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able feel the impact. The estimated 400 tonne of gold futures selling in total equates to 15% of annual gold mine production - too much for the market to readily absorb, especially with sentiment weak following gold's non performance in the wake of Japanese QE, a nuclear threat from North Korea and weakening US economic data. The assault to the short side was essentially saying "you are long... and wrong".

Read more here:
http://www.cmegroup.com/education/market-commentary/metals/2013/04/pre-open-gold_3564.html


And why is gold selling off?  Some say it is the result of China's latest round of economic numbers (China GDP), and others report that stories of Cyprus selling gold reserves (related to the Greek crisis) is hitting the gold market.

The Example of Kodak (Trend is your friend)

The sad story of Kodak, once a powerhouse and film monopoly, has made the rounds lately, as the stock has dropped to around a dollar a share, from the mid-teens just 3 years ago, and the mid-20's 4 years ago.  The stock peaked at around 80 in 1999.

With a large cash hoard just a few years ago, and such a good brand name, many investors are surprised that Kodak declined so much over the past few years (even with the rise of the digital camera).

Click here to look at the chart.  The 3 or 5 year chart shows the big decline.
http://data.cnbc.com/quotes/EK/tab/2

Forbes had a good article on some of the history about Kodak -- why some believed they would succeed, and the story of some of their failures:

When Kodak was founded in 1888, quality was its “fighting argument.” It gladly gave away cameras in exchange for getting people hooked on paying to have their photos developed  — yielding Kodak a nice annuity in the form of 80% of the market for the chemicals and paper used to develop and print those photos.

Inside Kodak, this was known as the “silver halide” strategy — named after the chemical compounds in its film. Kodak had a fantastic success formula that keyed off of international distribution, mass production to lower unit costs, R&D investment to introduce better products, and extensive advertising to make sure consumers knew about Kodak’s superior quality.

Read more here:
http://www.forbes.com/sites/petercohan/2011/10/01/how-success-killed-eastman-kodak/

Many believed that Kodak, with it's cash flow and cash supply, would be able to recover from digital cameras.  One of the most highly-respected investment gurus, legendary Bill Miller of Legg Mason also believed in Kodak.

Maverick value investor Bill Miller has apparently sold his stake in Kodak (EK). Filings show that the manager of the Legg Mason Capital Management Value Trust (LMVTX), who put together a 15-year winning streak against the S&P 500 through 2005, sold 18.2 million Kodak shares late last year and during this year’s first-quarter for about $3.89 each on average.

The fund realized a $551 million loss through the divestiture, according to a report by Bloomberg.

At one time, Miller owned nearly a quarter of Kodak’s shares. He and other Legg Mason fund managers reportedly held onto the shares for more than a decade, even after Kodak suffered big losses.

Read more here:

http://blogs.barrons.com/focusonfunds/2011/06/28/legg-masons-bill-miller-unloads-kodak-buys-apple-pfizer/

It's actually interesting to us -- how different types of investors and traders can outperform the markets using various strategies.

One moral of the story, for us -- is that no matter what we "think," we will follow our trading systems and trading strategies (that we have researched, based on decades worth of data).  We generally follow trends, and use tight risk management controls.  In this case, following the trend may have helped some Kodak investors...