Torpedo stocks:

Last Tuesday’s torpedo like collapse of the potash related stocks was a wake up call to investors who may have forgotten that no fundamental or technical study works all the time.

So here is the bad news on torpedoes. There is no fundamental or technical defence against your stock being hit by a torpedo.

The good news is that you have choices on how to react to the torpedo. In other words, do you react and sell now, or do you not react and hold on to your position? The choice you make depends on the nature of the exogenous event.

If the exogenous event is deemed to be just the beginning of a series of unresolved issues such as in the Sino-Forest example, you should sell and don’t look back.

If the exogenous event is deemed to be a one event issue that can be resolved by management, such as the Shoppers Drug Mart Corp collapse of April 2010 you should just hold on to your original position. In most cases the stock in question will pause, build a base and resume the original advance.

The technical rule is that a stock will only react (or torpedo) once in response to a one-issue exogenous event.So in the case of the potash stocks – if you are long, just hold on to your original position.

Trouble now with the NYSE Advance / Decline Line:

Just an update from June 1, 2013 on the NYSE AD Line and just to repeat - according to Stockcharts.com – the Advance / Decline Line (AD line) One of the most widely used indicators to measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. It is usually compared to a market average where divergence from that average would be an early indication of a possible trend reversal

I like the A/D Line although too bad it is not widely used by those younger technicians because like point & figure, it has an old foggy image. The upper plot is the S&P500 and the lower plot is the NYSE A/D line which is a worry now because of the double peaks of mid May and now. Keep an eye on that simple 20-day moving average. There could be a mild correction dead ahead.

Precious metals rebound opportunities review:

On a post July 1, 2013 I assumed there to be opportunity due to the recent bearish stampede out of the precious metal miners which had driven the prices of many miners down to levels that were extreme as measured by per cent (negative) deviation from the mean – in this case a simple 30-week moving average.

The table displayed was the output from a filter run at June 2013 month end that screened a basket of precious metals producers as to their current per cent negative distance from their respective 30-week simple moving averages. The selected basket was sorted by the % deviation number and then divided into four probable outcomes.

Low Risk Recovery Selections: Lowest risk with moderate short term positive returns

Medium Risk Recovery Selections: Low risk with fair short term positive returns.

High Risk Recovery Selections: High risk with above market positive returns

Question of Survival Selections: Very high risk with volatile returns.

The updated table displays the returns over the last 15 trading days with impressive returns. Perhaps the next study should be based on extreme positive deviation from the mean.

A Gold Index Island Reversal:

The technical description of an island reversal is too old to be found in many of the “modern” books on technical analysis.

Originally found in the classic Edwards and Magee Technical Analysis of Stock Trends (1948) the island reversal is, “A compact trading range, usually formed after a fast rally or reaction, which is separated from the previous move by an Exhaustion Gap, and from the move in the opposite direction which follows by a Breakaway Gap. The result is an Island of prices detached by a gap before and after. If the trading range contains only one day, it is called a One-Day Island Reversal. The two gaps usually occur at approximately the same level. By itself, the pattern is not of major significance; but it does frequently send prices back for a complete retracement of the Minor Move which preceded it.

We can see this pattern in a number of gold stocks as displayed in our GDX chart

Shoppers – a mercy killing?

This is a clip from the Globe and Mail published Monday, Jul. 15 2013, 10:02 PM EDT “Canada’s biggest grocery chain and the country’s largest pharmacy will become one company, creating a homegrown juggernaut in the face of stiffer competition from the consolidation of existing players and the entry of a major U.S. retailer.”

A homegrown juggernaut? Get real - Loblaw Cos. Ltd has been a poor investment for years with a 10-yr return of about zero. Shoppers is a high overhead retailer of cosmetics and groceries. They employ that corny old retail strategy of fanning customers through the high margin cosmetics before they can get to the low margin dairy at the rear of the store. Retail is a tough business and will get tougher with more U.S. competition on the way. The Shoppers shareholders have an opportunity to bail – consider this to be a mercy killing.

The Wi-Lan Torpedo

A quote from Bloomberg Jul 15, 2013 6:01 PM ET BREAKING NEWS Wi-Lan Plunges on Trial Loss to Ericsson, Alcatel-Lucent  Wi-Lan Inc., (WIN) a Canadian owner of patents for technology used in mobile phones, plunged the most in seven years after it lost a U.S. patent-infringement trial against Alcatel-Lucent and Ericsson AB. (ERIC).

Wi-Lan fell $1.47, or 31 percent, to $3.25 for the biggest one-day drop since May 2006 and its lowest price since September 2010. In a statement, Ottawa-based Wi-Lan said it was disappointed and reviewing its options with its lawyers.

This is a quote from stockchase.com Bill Carrigan May 27, 2013 “Don’t Buy” This is a company that makes a living through litigation. Fundamentally he does not care for this kind of business. Technically, it is not showing up well. There are better places to be.

On July 11, 2013 Peter Imhof, Investment Strategist at Sprott Small Cap Equity rated the stock as a “strong buy” and I quote from stockchase.com “Starting to come to fruition.  Largest contract Wi-Lan has ever signed.  Thinks they will settle out of court.  95% do.  Thinks they will win.  46% upside from here.  Samsung deal is the largest they have ever signed.  Will move up when you see quarterly earnings”

The real problem was disclosure.  Was this guy talking his book? 

The January Effect in May

According the original authority on seasonality – the Stock Traders Almanac describes the so-called January Effect to be often mistaken for the January Barometer created by Yale Hirsch in 1972, which simply states that as January goes so goes the year. The January Effect refers to the tendency for small-cap stocks to outperform large-cap stocks in January. So that means the smaller company Russell 2000 will out perform the bigger company Russell 1000 or the Dow Jones Industrial Average.

There may be two reasons for the January Effect – one could be tax loss selling in December and the subsequent January recovery and, the other reason could be the sensitivity of the smaller companies to the domestic U.S. economy. In other words a strong smaller company sector is a bullish leading indicator.

So now it is June and the smaller cap Russell 2000 is once again, out performing the larger cap stock indices. We know the tax loss selling reason has passed – so we may now reasonably assume the Russell 2000 is out performing because of a bullish outlook for the U.S. economy and that is the reason why the seasonal trade to “sell in May and go away” may – once again fail to work this year.

Precious metals rebound opportunities

Any group of stocks that have been out of favour for several months will as a group, eventually serve up a recovery opportunity. One example would be tax loss selling in December last year and the subsequent January recovery opportunities as set out in a Getting Technical Interim Update #GT1389 dated December 14, 2012. The 55 stocks selected as a group returned over 15% by mid January 2013.

The recent bearish stampede out of the precious metal miners has driven the prices of many miners down to levels that may be extreme as measured by per cent deviation from the mean – in this case a simple 30-week moving average. The last group of stocks that were driven to historical negative per cent deviation levels were the Canadian bank stocks at the peak of the global financial crisis. In the example of Bank of Nova Scotia (BNS - $56.22) on February 20, 2009 the stock hit a low of $24.45 and printed negative per cent deviation # of -35 %,.( a modern record).

The table displayed here is the output for a filter run at June month end that screened a basket of precious metals producers as to their current per cent negative distance from their respective 30-week simple moving averages. The selected basket was sorted by the % deviation number and then divided into four probable outcomes.

Low Risk Recovery Selections: Lowest risk with moderate short term positive returns

Medium Risk Recovery Selections: Low risk with fair short term positive returns.

High Risk Recovery Selections: High risk with above market positive returns

Question of Survival Recovery Selections: Very high risk with volatile returns.