Silver Due A Short Term Bounce But Lower Price Coming

Silver (NYSE:SLV) lost more than 2.2% today and looks very oversold on the daily chart. Its momentum indicators are in deep oversold territory and short term sentiment is extremely bearish. Usually silver follows gold (NYSE:GLD) but movement is far more volatile. The one worry for silver investors at present is that Gold’s weekly stochastics are still far too high for a hard bottom to be in. Furthermore long term sentiment in gold is still too high to justify a hard intermediate bottom. We will probably bounce out of these conditions but I am still doubtful as to whether we have printed a firm bottom here.

The technicals are the problem. Despite the 19 point move down today in gold, we just don’t seem to be set up for a hard bottom just yet. You want to be buying when the weekly stochastics are heavily oversold. We are nowhere near that point yet.

Nimble traders may look for a short term bounce here but selling options still looks undesirable due to the low levels of volatility in SLV at present. Swing or cycle traders will probably stay out and look for the improved set-up which will probably come over the next month or so.

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S&P500 To Deliver A Lot More Upside

The Robo ratio is illustrating that the market is still nowhere near a permanent top. There are still far too many retail traders who are bearish and are buying puts in the process. This ratio needs to go well under the 50 level in order to print a permanent top. In fact, when all retail traders are on the same side of the boat and buying call options, that is when we will see the largest gains. We are nowhere near this point yet.

So selling options or premium against ones positions doesn’t seem the best course of action right here. The S&P500 (NYSE:SPX) will undoubtedly break out to new highs once again pretty soon and shorts will undoubtedly cover which will only add fuel to the fire. Long positions using a trailing stop seems the best course of action here. Furthermore if one wanted to be sector specific, I believe the tech and biotech sectors will easily outperform the market so some capital should definitely be deployed in those areas.

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Anheuser Busch Inbev Looks Cheap At $113

Companies with strong competitive advantages, strong balance sheets and attractive valuations are essentially the core of what we are looking for. Why? Because if our timing is off, the company’s solid fundamentals should ensure that any potential loss would get rescued. This can work both with long stock positions or option positions that have a bullish stance. The most glaring example of this is in the 2008 financial crisis. Many stocks which had already proven themselves in the past roared back to new highs within a year or two of the bottom. Many of these companies were obviously dividend growth stocks and astute traders/investors used the downturn to double down on these stocks whilst also collect the increasing dividends.

At present, we look to have a nice set-up in Anheuser Busch Inbev before its Q1 earnings (NYSE:BUD) for a variety of reasons.

  • Firstly the stock’s price to book ratio of 2.5 is trading well below its 5 year average of 3.8. In fact, the present book value per share is $44 which is well below the industry’s average 5.0 number along with the S&P’s 3.0 number.
  • Brazil is on the main reasons in my opinion why Anheuser’s volumes have been struggling lately. This is primarily due to the desperate recession this country has been experiencing which actually deepened at the back end of last year. However the first quarter of this year seems to have signaled the end of the recession which has to be encouraging for both the country’s spending habits and Anheuser Busch. Why? Well beer consumption is actually highly correlated with GDP growth meaning that if Brazil can string a few quarters of positive growth together, one would think that consumption would also have to rise.
  • Over the next five years, analysts are expecting an average earnings growth clip of almost 20%. Furthermore with gross margins remaining over 60% and revenue growth (32% growth rate in its latest quarter) expectations very bullish, I think it will be only a matter of time before the stock returns back towards former average book ratios. The company is the number 1 global brewer and its scale is unmatched in this industry. Expect plenty more acquisitions and consistent cost cutting measures. Its gross and operating margins remain unmatched in the industry. In one way, this stock is a good play on global economic growth. The stock looks cheaper than the market here and is paying out a higher dividend of 3.6%

The stock may blast through its 200 day moving average before earnings are announced or it may drift back down to short term oversold conditions. Long exposure is recommended here before a nice expected move.

 

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AmerisourceBergen’s Sentiment On The Floor Before Fiscal Q2

AmerisourceBergen (NYSE:ABC) announces earnings on the 4th of May where $1.71 will be the number looked for. I see this stock undervalued compared to its historic means. At present, the stock is trading with a price to book ratio of 8.3 and an earnings multiple of 13.6 which are well below to what we are used from from this stock. The stock just seems to be bouncing out of oversold conditions at present and sentiment is near record lows. Implied volatility in the stock is rising as earnings approach which is why probably the best course of action here is to get long before the shares rally out of these present lows.

This I believe is a mistake option traders can make from time to time. Although volatility works against the option seller as a stock approaches earnings, sentiment can quickly rise if the price of the shares rally aggressively before earnings.  We aim to pick stocks that are selling at price extremes and use volatility and sentiment in our favor.

Source : Sentimentrader.com

What investors need to focus on here is that the pharmaceutical industry is not going to decline any time soon. Just look at the amount of large caps either paying obscene acquisition prices or are scouring the marketplace for potential candidates. Furthermore the sheer scale of the three major pharmaceutical distributors ensure that this market is pretty much tied up to the extent that it would be very difficult for new entrants to break in here. This means AmerisourceBergen holds a distinct competitive advantage. The perceived risk is that the US government over time will gain more control over the prices of drugs. This could potentially brings down AmerisourceBergen’s margins but I feel we are light years from a scenario like this unfolding. Big pharma has probably the most powerful special interests in the world that thwart any potential fundamental government intervention. This is why I remain interested in the likes of AmerisourceBergen & McKesson Corporation(NYSE:MCK)

So does one wait for higher option prices before putting on a volatility trade before earnings or just getting long now ? Potential trade-setups would be covered calls, selling naked puts or put spreads or the classic Jade Lizard for the neutral to slightly bullish trader.

 

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Has Crude Oil Printed An Intermediate Bottom ?

From a cycle standpoint, crude oil remains very difficult to read at present.  Although sentiment and momentum indicators looks pretty oversold at present on a short term basis, I still am unsure if we printed an intermediate low in March or one still lies ahead of us. Presently the commodity is definitely due a bounce especially with equities powering forward over the past few trading days. If you are going play oil at present, probably the best play is to place a hard stop just below the recent lows just in case an intermediate low still lies ahead of us.

What is definitely bullish is that the energy stocks (NYSEARCA:XLE) have rallied along with equities over the past few days. The (NYSEARCA:XLE) ETF definitely looks like it has printed an intermediate bottom as its decline since December of last year has been steep to say the least. Sometimes both miners in the metals sector and energy stocks in the energy sector can bottom before the actual commodities. Are we getting the same setup here? Let’s investigate this one..

Look at where the slow stochastics are in energy stocks. This is only the second time they are at this level since the bear market bottom last year. A bottoming sign ?

Therefore if oil has bottomed, it means that the lows in March was indeed an intermediate degree low. Long term sentiment in oil just didn’t get to similar levels in August and November of last year. Now this may be completely normal. The bear market oil suffered for half of 2014 and 2015 was cruel to say the least and sentiment readings illustrated this. If we indeed print an intermediate low in March, we either have a daily cycle or half cycle low with us at present. Furthermore the March lows should hold which means downside risk could be limited.

Source : Sentimentrader.com

If this is a brand new intermediate cycle, we are now in the fourth week which would have meant the last intermediate cycle would have been around the 19 week mark. This is definitely short for an intermediate cycle and usually means that the next cycle would go longer than the standard 25 weeks. The good news is that although sentiment has not dropped to levels we saw last month, the recent decline in the price of crude means that the March stop is only about $2 away.

So what is the best way to play this move? One could easily go long the likes of (NYSEARCA:USO) or (NYSEARCA:UCO) and place a tight stop below the lows on the 25th (Tuesday) From a derivatives standpoint, there isn’t any significant volatility in the above mentioned ETF’s at present so selling premium may not be the preferred choice. What one could do is use upcoming earnings in the likes of Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation(NYSE:XOM) and sell puts as volatility here is elevated and energy stocks should follow oil if crude has printed an intermediate bottom.

 

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Novartis Is Worth At Least $80-$85 A Share

In our portfolio as of late, we have refrained from selling option premium for a few reasons. Firstly after the French election over the weekend, the volatility index CBOE Volatility Index (INDEXCBOE:VIX) really contracted and actually collapsed by 27% on the the 24th of April. Furthermore because of the likelihood of the the S&P500 (NYSE:SPX) breaking out of consolidation period it has witnessed since early March, the risk here is to the upside in my opinion

Implied volatility in our Novartis AG (ADR)(NYSE:NVS) position just was not enough to risk losing our shares through a potential covered call trade. In any event I still see this company as undervalued and I believe the biotech sector continues to demonstrate that it will follow if not lead equities higher.

Novartis to me is at least worth $80 a share and today’s earnings could catapult the shares towards that number so we will hold until the stock at least reaches our target price. I believe the best course of action at present in the equity space is to hold stock as the S&P500 feels that it wants to charge higher. In fact, its latest rally could be the start of a brand new intermediate cycle I feel, especially if we get some follow through in this rally. If one is adamant on selling option premium, I would skew trades to the upside as the last thing you want is to have multiple short calls in the money.

We will know whether we have a brand new intermediate cycle or a daily cycle on our hands pretty soon in the spiders. If this is another daily cycle, price should follow over quickly from here as the momentum indicators and short term sentiment are both overbought. However if we have started a brand new intermediate cycle on our hands, price will ignore short term overbought conditions and will rally to new highs.

Source : Sentimentrader.com

Irrespective of how Novartis’s first quarter earnings turn out, I feel this company has plenty of competitive advantages to ensure it will continue to grind higher. Its pipeline, existing patents and sheer economies of scale all point to future share price gains for Novartis. Furthermore the company has almost 5 times more equity on its balance sheet compared to its debt and is currently paying out a strong dividend yield of 3.64%. One of the most important metrics to watch in companies operating in this sector is free cash low. Why ? Well enormous sums of capital is always needed to develop any firm’s next range of drugs.

Pfizer (NYSE:PFE) springs to mind as a huge cash flow generator in this space and so is Novartis. Last year Novartis generated $8.59 billion in free cash flow on net incomes of $6.7 billion. Remember the stock reached $105 a share back in the Summer of 2015 ( which was a sector-wide top) but the fundamentals remain intact. Meaningful diversification in areas such as heart failure and oncology will drive the company forward where Novartis will be able to charge top dollar prices for its innovative drugs. I have said repeatedly that I like biotech’s fundamentals and Novartis is one of the strongest operating in this sector at present.

 

 

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Procter & Gamble To Report Favorable Fiscal 3Q17 Numbers

Procter & Gamble (NYSE:PG) definitely has a wide moat and seems to be moving in the right direction after its much publicized move into becoming a much more responsive and nimble consumer product manufacturer.  Despite the company’s top line having dropped from $82 billion in 2012 to just over $65 billion in 2016, sales are expected to flatten out this year and then grow at a nice clip thereafter.

Sentiment at present in the stock is pretty pessimistic which is surprising when one takes into account how earnings have been growing. In fact, the company’s trailing twelve month earnings average is $5.47 at present which is well ahead of the $3.69 print, the company reported in its latest fiscal year. This really is where investors should be focusing their attention. Why? Because if we go back to 2012 when Procter & Gamble topped out on revenues, the company brought in $10.75 billion in net income with an operating margin of 15.9%. In 2016, the company as mentioned turned over $65 billion but reported $10,508 in bottom line earnings. This number equated to a an operating margin of 20.6% which is the higher operating margin percentage in well over a decade. Lower sales but similar earnings means much higher profit margins which is just what the doctor ordered.

I just feel the market hasn’t benefited the stock as of yet for the turnaround the company is undergoing. Investors should remember that the company has held onto the 60+ brands that essentially made the company and those proven brands already make up over 90% of the firm’s bottom line. By becoming laser focused on where the company feels are its best opportunities will ensure increased productivity as more capital will undoubtedly be put behind core brands in the areas of marketing and innovation.

Emerging markets proved difficult for Procter & Gamble to wrestle with over the past few years and the failure to win market share with new products in these jurisdictions was one of the principle reasons why the company decided to transition. Therefore instead of competing with stiff competition in these markets, P&G will now deploy more of its resources around its winning brands with the aim of renewing products faster and much better than before. Remember that the company is already well established in the blades and razors market and baby care markets to name but a few.

Through elevated cash low and probable better upgrades, Procter & Gamble will continue to market its successful products hard and I don’t buy the argument that the company’s earnings could become capped in years to come due to how successful Procter & Gamble is in some areas. Although the company’s Blades and Razors market share stands at well over 60%, Baby Care stands at 30% or under along with other markets such as Fabric Care and Feminine Protection. Suffice to say that there is still plenty of room to grow in the company’s core brands and because of the elevated focus in these areas, there should be meaningful cost savings to boot.

Technically, when sentiment dropped to pretty bearish levels at the start of this month, the stock rallied back to overbought conditions. We have a very similar setup at present as the stock goes into earnings on the 26th of April next. Analysts are looking for $0.94 which would be a $0.08 gain over the same quarter of 12 months prior. However since sentiment is so mute at present, I believe we have a low risk setup here.

Volatility is relatively mute for option traders as we approach earnings. We may get a further spike up but at present, we seem to be trading (volatility-wise) around the mid point of the range over the past 12 months (14.5%). The premium just isn’t there at present in the options to justify long exposure. We are still dealing with a $90 stock here so any option contract is going to be potentially worth $9,000 if one takes possession of the shares.

However I just feel that this company has been caught up in the struggles of the consumer products industry and is trading lower than its fundamentals state at present. Analysts are expecting earnings growth to increase over the next three years at least which is bullish from a share price appreciation point of view. The real question is how does one value the new streamlined Procter & Gamble. With a present forward price to earnings ratio of 21, its valuation is only slightly ahead of where the the S&P500 (NYSE:SPX) is trading at present. However with a dividend yield of over 3% and a very strong balance sheet, I would argue that Procter & Gamble is a better play than the general market at present. Why? When stocks make strong trending moves like we are seeing at present, you want to be long underlyings with strong balance sheets and strong competitive advantages. Procter & Gamble ticks the boxes here because of the momentum it has built in metrics such as earnings and margin growth.  A long bullish stock position prior to earnings looks to be the best set-up here.

 

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