The Herbalife Torpedo:

A clip from CNBC yesterday - The Federal Trade Commission has opened a formal investigation into Herbalife (HLF)'s operations Wednesday, pushing shares of the nutrition and weight loss company sharply lower. The shares of Herbalife plunged as much as 15 percent after being temporarily halted but gradually recovered from lows and the company said it will fully cooperate with the FTC, saying it "welcomes the inquiry given the tremendous amount of misinformation in the marketplace."

The real gun fight is between hedge fund manager Bill Ackman who accused Herbalife of breaking direct-selling laws in China, its fastest-growing market - and back in December 2012, Ackman raised allegations that Herbalife was a pyramid scheme and made a bet the stock would fall by selling the shares short. Billionaire investor Carl Icahn on Monday said he believes Herbalife is undervalued and said he is satisfied with the company's re-audited results.

I thought we should look at a Herbalife chart in order to see which one of these in-for-a-fast-buck bullies is correct and a P&F (thanks to Stockcharts.com) displays a broken stock – I guess Icahn does not do any point & figure work.

The Potash Torpedo

Last July 2013 I reminded readers the torpedo-like collapse of the potash related stocks was a wake up call for those who may have forgotten that no fundamental or technical study works all the time. The collapse was in reaction to the break up of a Russian-Belarussian potash cartel.

So once again - 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 – as observed last July - if you were long, you just hold on to your original position and wait out the recovery as displayed in our weekly Potash chart.

A look at price momentum:

Price momentum indicators are usually based on a rate-of-change such as a 10-month of 10-week point or percent change - we can also use departure analysis which is the study of the relationship of two or more moving averages. On of the best studies on departure analysis is the RBC Trend & Cycle 5/15/3 histogram. It is a 5-week (or month) less a 15-week (or month) difference smoothed by 3-weeks (or 3-months). Some popular Indicators that are not momentum studies would be one simple moving average (trend following) and OBV which tracks buying or selling pressure (or money flow).  

The table below is my 10-component Global Basket sorted by a one-month change in monthly price momentum – in this example the February MOM vs. the January MOM numbers. The top positive change in price momentum is the Greenhaven Commodity (GCC) which went from a negative January # to a less negative February #. The bottom ranked negative MOM change was the iShares EWJ which went fro a positive January # to a less positive February #. Note the TREND comments and the STRATEGY comments on each of the 10-sectors and note there are only two advancing MOM sectors – not a bullish picture. This table along with the Canadian and US tables are the published in the Getting Technical market letter and are the intellectual property of Information © 2006 – 2014 Getting Technical Info Services All Rights Reserved