Fundamentals

The DIA (SPDR Dow Jones Industrial Average ETF), which currently trades a 12 times earnings is historically low for the average. The weak dollar could push earnings higher as most of these companies are growing their international earnings faster than U.S. earnings. This could cause the earning to mislead investors into thinking that earnings are growing when in fact the dollar is just cheaper allowing international companies to boost profits without boosting sales.

Technicals

Looking at the chart above, you can see the current trend is almost identical to the trend that crossed 11,000 in April. The current trend has yet to pull back or have a correction and stochastics trading at 93, the market looks to be overbought. Be aware: stochastics can be oversold or overbought for long periods of time. If you believe the Dow is going higher watch around the 11,200 level. If you believe the Dow is going lower watch the 10,700 level.

Other Factors

Jobs, jobs, jobs! If the job recovery doesn’t pick up, the market will stall out. Main street is still hurting no matter what the market is doing. Retail investors don’t want to be in stocks but rather in bonds. The so called “Currency War” that some are referring could really come back to hurt Americans and the U.S. Dollar. The dropping U.S. Dollar will make import prices higher, along with higher gas prices. Remember when looking at stocks or ETFs to look at more than just stocks, take a look at what else that could affect the potential stock or ETF.

Is Now The Time For Stocks

Stock Mutual fund inflows since May have been net negative, but could that be part of the “Sell in May, and go away” theory? The S&P that currently trades at 13X trailing twelve months (ttm) earnings might seem cheap to some, while others may say the earnings of the past twelve months are artificially inflated by government intervention. If you are in the bullish camp, look at individual stocks and make them give you a reason for buying them. The S&P 500 is still unable to stay above 1150 and until then the market looks range-bound.

Are You Afraid Of Stocks?

If you are afraid of stocks, the game is not over; you can still buy many different types of bonds. Although the returns are meager on bonds, they can and sometime will beat the overall stock market. Just remember as with stocks, the riskier the bond is, the more of a chance you have at losing money. Bonds are a great way to add income to your portfolio but some stocks and/or ETFs yield more than bonds.

Whichever way you decide to go whether long/short stocks or bonds, keep your portfolio diversified and have cash ready to make your next move.

Many stocks are trading at single digit P/E ratios and valuations that make the market look cheap. Although I am not too much into fundamental investing, I have to consider fundamentals when trading. Value investors are working overtime right now trying to distinguish whether these valuations are of actual value or whether they are pointing to a weaker earnings outlook.

What Am I Doing?

Sitting it out for now. If I am not in the market, I can’t lose money. I see companies hoarding cash, retailers reporting mixed numbers, employment not improving, and terrible housing data. The technicals of the markets say there is more room to the downside but with any earnings season around the corner, volatility is the only certain thing in the markets. Some stocks will win and others will lose, I will sit on the sidelines and wait.

Citigroup (C)

Citigroup is in a turn-around phase and once it pays back the government, this stock has the potential to move much higher. This stock is a longer-term trade or more like an investment, which could see a double in price action over the next few years.

SciClone Pharmaceuticals (SCLN)

SciClone is a Chinese pharmaceutical company that operates mostly in Asia but sells its primary drug ZADAXIN in 30 different countries. SciClone Pharmaceuticals recently had a big upgrade, which has driven up the price. SciClone Pharmaceuticals has many products in testing phase which once completed could drive the stock higher, easily reaching the $5/share mark.

Conexant Systems (CNXT)

Conexant Systems is a semiconductor company that recently reported a less than expected earnings loss. The stock currently has a PEG ratio of 0.33. Conexant closed today at $3.64. Although the trend is down, the stock may find support at around $3.00 as the 200 DMA will support the price. This stock is a trade and not an investment: place stop losses and be prepared to take profits quick.

Xinyuan Real Estate Co (XIN)

Xinyuan Real Estate is a Chinese property management company that also engages in residential real estate development. This stock trades at less 3.86 times forward P/E and at a PEG ratio of 0.14. If you believe in the Chinese real estate bubble, stay away from this stock or take it for a quick trade. The stock is currently selling at a discount to book value and presents a promising trade for a couple points.

Global Ship Lease (GSL)

Global Ship Lease leases container ships to various container-shipping companies with long-term contracts at fixed rates. The company is selling at less than book value with the current price/book ratio of 0.66 and a P/E ratio of 3.22. Global Ship Lease has 17 ships currently on the water with two more coming at the end of 2010.

Trading penny stocks significantly increases your risk. Most of the companies listed are microcap companies that can also increase risk. Please research these stocks before making any purchases. Consider penny stocks speculation and allocate the appropriate funds to them.

DISCLAIMER: I do own shares of SciClone Pharmaceutical.

The Trading Platform

Lightspeed’s trading platform is an all in one package. Lightspeed is one of the few brokers to offering a great charting package within their platform. Their platform is not for beginners, strictly for the experienced active trader. You can see a basic layout of their platform below.

If you do not understand or have problems with the desktop trading platform, they also have a web trader platform that will seem familiar to anyone who has ever used any online broker. Their web trader platform also provides a good amount of fundamental analysis.

Pricing and Commissions

Stocks – $0.00395 per share plus market center fees.
OTC BB and Pink sheets – $10 per order.
Options – $0.50 per contract, no minimum order.
Futures – $0.50 per order plus exchange fees.
Minimum Account Opening Funds – $2,000

For a full list of fees listed here.

Overall, Lightspeed is a solid broker with cheap commission and a great platform to trade from. If you are looking for a new broker, I would advise you to get Lightspeed a try.

Investing/Trading Products Available

Stocks, ETFs, options, futures, bonds, warrants, mutual funds…and so on (click here for full list). Interactive Brokers offers everything that a retail investor can trade. With Interactive Brokers, you are not limited to just U.S. investments as Interactive Brokers allows trading in 80 different markets.

Trading Platform

Interactive Brokers has a variety of trading platforms to trade from whether using their desktop platform, web trader platform, or their mobile platform, you will always have a way to get out of a trade whether at your computer or not. As for their software, executions are great allowing you to enter orders on charts or order tickets. Their charting software offers very basic technical analysis tools, so a charting program (QuoteTracker, which is free, or a paid program like eSignal) is almost mandatory when using Interactive Brokers for technical trading. Interactive Brokers is geared toward the active trader so fundamental investors will have to do their research somewhere else.

Fees

Interactive Brokers is one of, if not the, lowest cost brokers. There is a minimum of $10,000 to open an account. Depending on what you products you trade, some additional fees may apply for data feeds. See a full list of fees here.

Overall, Interactive Brokers is the best broker for active traders and is quickly becoming a favorite among passive investors.

ETFs Available To Trade Free Now

Schwab US Broad Market ETF (SCHB)
Schwab US Large-Cap ETF (SCHX)
Schwab US Small-Cap ETF (SCHA)
Schwab International Equity ETF (SCHF)

Available In December

Schwab US Large-Cap Growth ETF (SCHG)
Schwab US Large-Cap Value ETF (SCHV)
Schwab International Small Cap ETF (SCHC)
Schwab Emerging Markets Equity ETF (SCHE)

Are Charles Schwab’s ETFs Right For You?

If you are a investor looking for longer-term investments or trades and like using indexes; then these ETFs are worth looking at. For traders and shorter-term investors, the volume is too low for me to recommend them. When trading stocks and ETFs (other than the Schwab ETFs listed above), commissions rates are $8.95 – $19.95, depending on the amount of trades placed.

Understand that commission free trading is nice, but with Charles Schwab, you are limited to a few ETFs that you can trade. If the volume rises in these ETFs, it might be worth looking into. For now, the products are too limited and commissions on other ETFs and stocks are higher than most online brokers.

Get more information on opening an account and Charles Schwab ETFs @ www.schwab.com.

Beta, Beta, Beta.

The S&P 500 SPDR (SPY) has a beta of 1, while stocks and ETFs are calculated using an index to compare the correlation. Any beta over 1 means a stock or ETF outperforms its benchmark index. A stock with a beta of 2.0 will usually go up twice the amount of the benchmark that tracks it but also goes down at the same rate. Stocks and ETFs with a negative beta trade inverse to their benchmark index and are useful in hedging long positions.

The more confident you are of a markets direction, the higher beta stocks and ETFs you want in your portfolio. In an uncertain, choppy market, you should stay with lower beta stocks and ETFs or stick to the indexes.

Pairs Trading

When used correctly, beta is an easy way to outperform (and underperform) a benchmark but can also be a tool to hedge your investments. Buying a stock with a higher beta and shorting a lower beta stock is one way to hedge your investments in an upward trending market. In a downward trending market, just reverse the trade selling the high beta stock and buying the lower beta stock.

Things To Remember

• Beta is calculated on past performance.
• Beta can hide negative correlations.
• Beta, alone, should never be used to buy/short any security.

Use beta wisely and always have stop orders.

Stop Orders

A stop order turns into a market order when the price level or percentage is breached, getting you out of a stock or ETF as soon as possible at the market price.

Example: You buy 10 shares of a stock at $10.00 and enter a stop order for 10 shares at $9.00 (or 10%, some brokers do not allow percentage.) The stock moves around before heading lower and breaching the stop set at $9.00. Your stop order now becomes a market order selling 10 shares at the market price.

Stop Limit Orders

A stop limit order is much like a stop order, expect when the stock breaches your stop price/percentage, it creates a limit order instead of a market order.

Example: You buy 10 share of a stock at $10 and enter a stop limit order to sell 10 shares when the price hits $9.00 and for the limit order, you enter $8.75. The price of the stock hits $9.00, which then creates a limit order to sell 10 shares at or above $8.75.

Note: With stop limit orders, if the stock gaps down overnight, you run the chance of not getting your order filled.

Trailing Stop Order

Trailing stop orders are for those who want to limit their losses and lock in profits without actively monitoring the stock market. A trailing stop order is a stop order that moves up with the price of the stock.

Example: You buy 10 shares of XYZ stock for $10.00 and enter a trailing stop order at $1.00 below the buy price. Your trailing stop order moves up with the price of the stock, never allowing your stop order to trail the price of the stock more than $1.00.

Trailing Stop Limit Order

A trailing stop limit order, like the trailing stop order, limits losses while locking in profits. A trailing stop limit order turns into a limit order upon breaching a specified price level.

Example: You buy 10 share of XYZ stock for $10.00 and enter a trailing stop limit order of $1.00 for the stop and $1.25 for the limit. If the stock never goes up and starts falling, you should get out at $8.75 or higher. As with the trailing stop order, a trailing stop limit follows the stock up never allowing your stop to lag the price of the stock more than stop limit, in this case $1.00. Now, say the stock moves up to $12.50, then turns around and starts dropping. The stock hits your trailing stop, which is now at $11.50. In theory, your limit order will get you out at $11.25 or higher.

NOTE: Like the stop limit order; if the stock gaps down, you take a chance of not getting your order filled, as the bid is lower than your limit.

Placing Your Order

Different brokers offer different types of stop orders and some broker have limitations on certain types of stops such as limiting trailing stop orders by only allowing you to place them if you have more than 100 shares. The stop order can be placed either on the bid, the ask, last price etc. Be sure to place the order according to your plan or research.

Shorting Stock and ETFs

Stop orders work with shorting stocks as well. Instead of the stop being below the price of the stock, it is above it. If you are shorting stocks, I highly recommend that you place some type of stop order.

Pay Attention To Volume

If the stock or ETF that you are trading or investing in has low volume, a stop order or trailing stop might get you out at a price way lower than expected. When trading lower volume stocks or ETFs, you should consider using stop limit and trailing stop limit orders.

Head And Shoulders Pattern

A head and shoulders pattern is one type of reversal pattern that indicates an end to an uptrend and a beginning to a new downtrend. Look at the picture below (current S&P 500 chart with a head and shoulders pattern) before I explain a head and shoulders pattern and how to calculate where, based on the pattern, the market, stock, or futures, etc. is going.

Head And Shoulders Pattern Explained

The left shoulders forms in a natural uptrend as the stock makes new highs then falls back (or corrects to what will be called the neckline, this will be the first point of the neckline) before pushing higher to make new highs (head).

After making new highs, the security then falls back from the head to previous lows where it finds resistance. This resistance is from the prior pull back.

The security will start to push higher, and will be unable to make new highs. It is as this time you will notice the formation coming into play. This upward push is the beginning of the right should and is unable to get through the highs created in the left shoulder. It is at this time that you need to connect the two pullback points to create the neckline.

Confirmation of the pattern comes when the security passes through and holds the neckline. Traders will start getting into short positions at this time. As you can see from the chart above, the S&P 500 has not yet broke the neckline. The upcoming week will be an important week as to whether the uptrend is over.

How To Calculate The Potential Move

In an equation, it looks like the follow:

Neckline – (High Point in Head – Neckline) = Price Target

Using the image below (DOW Head and Shoulders Patter), take the high point of the head which is roughly 8,800 and the neckline which is about 8,200. In short, you can expect to see a 600-point move to the downside.

8,200 – (8,800 – 8,200) = Price Target

This gives a price target of 7,600 on the DOW. I recommend that you get out before taking out the target unless the markets or a security (whichever you are trading) is falling apart.

Things To Keep In Mind

• The volume is normally highest in the left shoulder. As the stock reaches new highs (in the head), it is usually not supported by volume.
• The neckline does not have to be perfectly horizontal, it can slightly move up or down.
• Shoulders should peak around the same price.
• You do not have to get short positions but should at least lighten up your holding(s) and buy them at cheaper levels.
• Head and shoulders patterns can be used with all types of securities, whether an individual stock or index futures.