17 March 2011 Accumulation Distribution
17 March 2011 Accumulation Distribution
A couple of people did ask, so first off, the wine we had last night was a 2007 Roger Sabon Châteauneuf-du-Pape Cuvée Prestige. It was deep dark and delicious. This is an old world wine so it does not have the big over the top tannic structure of an old world wine. It was soft and layered, but was till a smooth chocolaty, earthy, smokey, and rich glass of wine. It’s about $45-50 retail and it is worth a lost in your collection. It will be better by next year and should pour well into the 2020s.
Today we had a little upwards adjustment in our market correction. This is not unusual and just as you see a sell off after three days of gains, there might have been some perceived buying opportunities today so people (And from the looks of the volume, some fund managers.) found some possible bargains.
In describing the action today with a good friend, we got into the discussion about accumulation and distribution. On almost any given day in the market there are only 5 categories of market movements, and it is really important to identify them. Why? BECAUSE 75% OF A STOCKS PRICE IS DETERMINED BY THE MARKET OR SEGMENT TREND. The trend is your friend. Write that down and memorize it. Here are the 5 type of days in the market. We will look at the Dow because everybody talks about the DOW.
There is the up day with heavy volume. Take a day like September 17,2010. Look at the chart below.
You can see the big spike circled. The horizontal red line on the bottom is the 50 day average volume in shares traded. When you see the colume go 25% above the volume average you can almost guarantee it is the big boys and girls buying or selling. When the market goes up on big volume like September 17, It is called an accumulation day.
The next scenario is the market is up on light or below average volume. In the chart below you see December 21 and 22, 2010.
You can see both days are recovering from a couple of sell off days. So the market was up but there was no “conviction”. Apparently none of the big boys wanted to join in the pre-Holiday festivities so my guess would be it was retail traders like me cleaning up their portfolio before years end.
The next set up would be little change in the market number up or down on average volume. We have couple to point out on the chart below.
September 29, 2010 as it was down less them .2% and November 19, 2010 as it was up less than .2%. These are the epitome of sideways days.
The next scenario is the market being down on light or below average volume. December 27, 2010 (circled) below, had virtually no volume on a slightly down day. That is typical of the week between Christmas and New Years. This year was especially bad because of the nasty snow storm.
Then to round out our scenarios, we have the days we all dread a big down day on heavy volume. This is called a distribution day. Below, fresh in our memories is the 16th of March 2010.
That is a picture perfect distribution day. I have marked 10 distribution days in the last 18 trading days. (The little hash marks on the Bottom of the page.) That is not a good sign, but you can see what the market DID after about 5 distribution days (March the 5th) the market was only down about 2% from its high. We called the rally over and got out on the 7th of March which helped keep about 4% of the correction currently in place.
So when will it be over? I don’t know, but if you watch the numbers and the volume you can count the accumulations days and distributions and have a good feel for when you should brush off your watch list and get back in the game.
ANTI Pick of the DAY
Ok we are going to go out on a limb here and pick a real LULU. Yeah Lululemon is a really hot stock. Lululemon Athletica Inc. engages in the design, manufacture, and distribution of athletic apparel and accessories for women, men, and female youth in Canada, the United States, and Australia. The company's apparel products include fitness pants, shorts, tops, and jackets for healthy lifestyle activities, such as yoga, running, and general fitness. Its fitness-related accessories comprise an array of items, such as bags, socks, underwear, yoga mats, instructional yoga DVDs, and water bottles. The company sells its products through its retail stores; independent franchises; and a network of wholesale accounts that includes yoga studios, health clubs, and fitness centers, as well as directly through e-commerce. As of January 31, 2010, it operated 124 company-owned and franchise stores under the lululemon athletica and ivivva athletica brand names. Lululemon Athletica Inc. was founded in 1998 and is based in Vancouver, Canada.
Now this company has been making women look great in their form fitting exercise clothes and have been handsomely rewarded. However as we think gas is going to 4-6 dollars a gallon, and this line of apparel is truly discretionary with a capital D. They beat estimates yesterday but took a hit as forward looking statements warned about slower earning growth. Today was a 4% distribution day and if I was hedge fund or mutual fund manager and heard the weak forward looking comment coupled with the price of gas and other commodities, I’sd be taken some profit.
This has short or put written all over it, BUT do your homework. Shorting and putting is risky business. Make sure our facts are correct. The stock closed at 76 and change today. There is a significant reisitance line at about $74.50. This could easily correct to $65 a share. If you have some insomnia, here is some math to help you fall asleep. Don’t read this while you are driving.
Their current P/E ratio is 41.06. The market is closer to 14. So let’s do that math. Based upon forecasted earnings next year of $1.86 for the year and a market P/E of 14, the stock could sell down to 26 dollars a share. Ok, let’s not get crazy, after all their Price to Book value is 16.86 making the core value of the company $4.52 cents a share. Whoa! We are going the wrong way. Well let’s look at the target price average. Uh ho! That is 73.56 a share mmmmm. That is why we have our ANTI Pick Of The Day.
The market is in a correction, we have a CEO that is telling us things won’t be quite as nice as in the past. We have an overvalued stock no matter how you look at it. The best way to play this might be to buy some $75 April PUTs as close to $3.50 a contract as you can. Let’s see what happens.