When we look at any long-term prospect, we like to get a feel for what the company has achieved in terms of growth over the past decade at least. LKQ Corporation (LKQ), for example, has an enviable record with respect to its 10-year financials. With revenues currently coming in at $12.47 billion over a trailing twelve-month average, this means that the 10-year top-line growth average comes in at almost 20%. Operating profit over the same time frame has a growth average of close to 16.5%. These are very impressive numbers, to say the least.
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If we got a convincing rally above the 10 week moving average this coming week, then crude oil could have just started a brand new intermediate cycle. This coming week will be 33 weeks since that December low last year. We definitely are in the timing band. Lets see what this week brings. $56.22 per barrel is the first line in the sand the crude oil price needs to cross.
Readers who follow our work will know that we are advocates for investing in out of favor stocks. Many times, the problem with investing in ultra oversold stocks is timing. Value investors know that patience is key as many times the respective investment can take months if not years to recover.
The flip-side of the above scenario though is that the investment never recovers. Then instead of having researched or invested in a value play, the risk is that one could have actually invested in something known as a value trap. Many times, these companies can go bankrupt which basically leaves the investor with nothing to show for the initial investment.
Investing in Instruments such as commodities and ETF’s protect against any bankruptcy. A commodity such as gold , oil or natural gas can never trade at $0 as they all have intrinsic value. Furthermore the probability of an exchange traded fund which holds a basket of stocks going to $0 is also practically zero when you think of the diversification in those funds.
One such commodity which we have been watching carefully has been Natural Gas. The commodity continues to drift lower as it seems to seeking out a daily cycle low if not a more broader intermediate cycle low. The lower it goes, the more potential we see in this asset class when the commodity turns in earnest. Therefore from this standpoint, let’s have a look at the its charts to see how they have been cycling. We will start off with the long term monthly chart.
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Here is where we use cycle analysis, sentiment numbers and even Commitment of Traders reports to gauge how broad equity markets are cycling. With respect to the S&P for example, we have been consistently bullish for some time now. As a result, our portfolio contains a basket of dividend paying blue-chip stocks. Whereas may investors have been waiting for a multi-year top in US equities, our analysis has demonstrated that this bull run may have plenty of years to run yet. This could be classified as an edge. The S&P for example printed a multi-year cycle low back in December of last year. That low should now pave the way for significant higher highs in the years to come.
Swing trades are all about the following mindset. It is all about putting ourselves in as many situations as possible where we have limited downside risk but maximum upside. Like risking one to make three. The more viable trades we have in this strategy the better. We use technical tools here such as moving average crossovers, trend-lines, volume and momentum trends in an attempt to gain that edge. We actually deployed a swing trade in AVX Corporation (AVX) recently as shares managed to close above their 200 day moving average. However the firm’s recent earnings numbers caused our trade to get stopped out at $16 a share. We only lost $48 on this trade where we risked $1,300+. We may wait here for a better re-entry but our main focus here is generating more trade ideas
The edge here we believe is investing in companies with strong financials but which also have a keen valuation and low debt. Valuation metrics such as low book, sales, cash and earnings multiple straight away stack the odds in our favor if the respective company is still profitable and not that leveraged. The risk with investing in stocks with very cheap valuations is that they can remain cheap for an extended period of time. For example many traders/investors most likely pulled the trigger on a Bed Bath & Beyond Inc. (BBBY) over the past few months which in hindsight was far too early. Investing against the trend is always risky no matter how strong a firm’s financials may look. It will be interesting to see whether BBBY has finally bottomed here as shares have had a couple strong trading days recently.
Again this is a strategy which we get aggressive with when the conditions stack up. At the moment, the Volatility Index (^VIX) is trading at just over 12. Since we believe that option sellers gain more of an edge than option buyers, we really do not sell option premium unless the VIX is much higher than it is at present. The edge here is in the fact that one can get much further away with respective strike prices which improves the probability of profit on the trades. Many times though (such as now), the risk does not justify the reward when selling option premium. Things can change fast though which is why we always have this strategy on standby.
How The Asset Classes Are Cycling
We wrote a piece recently on the free site stating that we had at least another 10 weeks of higher prices ahead of us in this present intermediate cycle in equities. We still feel this is the case although we still are unsure if the July 18th low will end up being a daily cycle low. We state this because usually at daily lows, we get the 10 day moving average turning down along with the RSI dropping to oversold levels. Neither of these were achieved back on the 18th of last month.
Read the rest of the weekend report and charts here