Friday, July 10, 2009

Daily Wrapup For July 10th

"Another down week for stocks" - a Friday headline that's becoming so familiar as to become monotonous. The three major averages were down on the week, yet again, as the bad economic news keeps piling up net of the good. A dead-shoots belief is becoming the near-term consensus. Oil was down a little. Commerce Secretary Geithner hoped to brighten our weekends by claiming that the stimulus is working and on the right path. Bears, like Gary Schiller, are once again getting their views aired on Yahoo! Finance's Tech Ticker.

The cutoff for the lowest P/E quintile of stocks tracked by Google Finance's Stock Screener dropped, to 9.56. My estimated dividend yield for S&P SPDRs, as derived from Yahoo! Finance data, rose a basis point to an even 3.00%. Applying those P/E and yield criteria, and getting rid of ETFs, companies with market caps of less than 500M, and ones with yields of 10% or more, left the Low P/E Bin with eighty-four stocks in it: a drop of three from yesterday's. Once again, the Bin membership shrunk with a shrinking market.

Here are today's changes, as dash-listed below:

- Bank of Hawaii Corporation
- Merck & Co., Inc.

- BP Prudhoe Bay Royalty Trust
- CenterPoint Energy, Inc.
- Dover Corporation
- Harte-Hanks, Inc.
- Textainer Group Holdings Limited

Both of the Arrivals got back to the Bin on the rebound. Bank of Hawaii, a recent Arrival, got back through its shares slumping 1.71% today. Merck, usually a Low P/E Bin mainstay, got out of the Bin last Monday and fell back in today: its stock dropped more than 2%.

The reasons behind the five Departures make for a mixed bag. Prudhoe Bay got chucked out because its yield rose to (exactly) 10%. Textainer was removed because its market cap fell below 500M. The other three got out for a happier reason: P/E expansion.

The Departure that rose the most was Dover Corporation; it gained 2.50% today. It was the beneficiary of a Deutche Bank upgrade to "Buy," on the basis that two of Dover's markets - oil rigs and semiconductors - seem to be bottoming. One of the traders' rules for low P/E Bin stocks, as explained in David Dreman's Contrarian Investment Strategies: The Next Generation, is to take a closer look at any low P/E stock that shrugs off a "sell" recommendation and/or leaps up on a "Buy" recommendation. Deluxe Corp. qualifies more than Dover in the leap-up department, even if Dover's balance sheet is solid and Deluxe's isn't.

Like all trading rules, though, it can't be applied mechanically. In the relatively short time I've been monitoring Bin stocks, I've noticed that stocks that leap up do drift back down later. This tendency is especially evident for Bin stocks that "gap up," or whose lowest price on a certain day is greater than the previous day's high. (A "gap down" is the reverse.) The relevant technical-analysis rule is "A gap will be filled," or a stock that gaps up (down) will eventually fall (rise) to the point where the stock will sell for less (more) than that previous day's high (low.) Using this rule in a cautionary way suggests waiting on both Deluxe and Dover, which does give some time for a close look at each.

The other rule, about a stock that shrugs off a sell recommendation, has to be handled with more care. I got my fingers badly burned on Tesoro because I used that rule in a very naive way. A day after a "Sell" recommendation was issued for the stock, post-market close, it was up 2.75%. The S & P 500 was up only 0.436% on the same day. Naively, I had assumed that the downslide for Tesoro had come to an end. It hadn't: the stock's plummeted by 16.7% subsequently, due to conditions for oil refiners growing even worse. So, if the rule "put on target list if stock rises or stays flat in spite of downgrade" is to be used, it should be applied over a much longer timeframe than a day. Had I waited a week, or more, I would have avoided having my foot getting caught in my mouth. Evidently, my anchoring bias had gotten the better of me: it hadn't occurred to me that "low" can easily be followed by "lower."

On this 'whoa-ful' note, that's all for today's Wrapup. Thanks for reading, and enjoy any opportunity that comes with the near-term or not.

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