Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

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Short Term Indicators in Point and Figure Charting

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In this week’s Mullooly Asset Management podcast Tom and Brendan wrap up their talk about indicators. In previous weeks they have discussed long and intermediate term indicators. Long term indicators are a confirming indicator of where the market will be headed for the long term. Intermediate term indicators are used to tell us if we should be on offense or defense at the present time. They can apply to the market anywhere from a few weeks to a year into tShort Term Indicatorshe future.

This week’s topic is short term indicators. These indicators can hint where the market is heading in terms of days or weeks. Many times the short term indicators spill over into the intermediate and long term indicators. The primary purpose of short term indicators is to determine entry and exit points for different markets. This means they can show us good points to get into certain markets, and good points to take money out of other markets.

There are five different short term indicators that we use at Mullooly Asset Management. The first is the bullish percent for all mutual funds. The bullish percent for all mutual funds has short, intermediate, and long term charts, so this indicator has been in our discussions for three weeks now. More  indicators include the 50 day moving average and the 150 day moving average for the New York Stock Exchange. These averages are 10 weeks and 30 weeks respectively. We also look at the hi-Lo for the New York Stock Exchange. This is the number of stocks making new highs versus the number of stocks making new lows. The last short term indicator we look at is advance/decline. Advance/decline is the number of stocks advancing versus the number of stocks declining.

Like we do with intermediate and long term indicators we use these short term indicators to keep an eye on the X’s and O’s. We specifically look for buy and sell signals, and make our moves accordingly. These five indicators all move independently most of the time, but when they move together it can create a strong direction for the short term.

You can download this podcast for free on iTunes!

Short Term Indicators in Point and Figure Charting Podcast Transcription

Money Market Funds No Longer Insured?

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I had several calls this week from clients regarding money market funds and government insurance.  Essentially, the conversation would go something like this:

“Tom, I heard recently that the government will no longer be insuring money market funds.  Should we do something about this?   Should we be concerned?”

And I would reply “you DO know, that money market funds were never insured before last fall…right?”

“Really?”

It’s true.  Most money market funds were not insured before the fourth quarter 2008.   Oh sure, there were “insured” money market options/choices around before 2008.  But their yields were so low, you needed a microscope to see them.  And in case you did not know, the actual technical name for money market funds…ALL money market funds…is “money market MUTUAL funds.”  Which is why you get a prospectus when you open a money market account.

The objective of a money market mutual fund is to maintain its’ $1.00 per share price, and return you a few bucks in interest/dividends.  Make sure all those assets they were invested in added up to $1.00 every night.  That’s it.  Their marching orders: Keep that $1.00 price per share.  Or die.

And last fall, a few money market mutual funds had some trouble maintaining their $1.00 per share price.   Their assets get priced every business day.  More on this part in a moment.

Anyway…when the “financial crisis” spilled over into 2009, the Government continued to extend their “insurance” on money market funds.  That coverage will cease in October 2009 (very soon).

Part of the reason why interest rates on money market funds fell to zero was because:

  • The Fed aggressively cut interest rates — and promises to keep them low, at least for the present time
  • There is no incentive to pay a higher rate to attract deposits — all money market funds essentially became the same everywhere
  • What’s the price (yield) for safety?

Knowing that the “government backstop” of money market funds may not be renewed in October, I instructed TD Ameritrade (during the month of August) to move all money market assets from their traditional money market fund (which carried the government backstop) to an FDIC insured money market fund.  There is no cost or transaction charge involved in this move.  It was done strictly for peace of mind.

Why did the government have to insure money market funds in the first place?

The answer: Lehman Brothers

Don’t misunderstand: Lehman Brothers themselves did not kill the safety of money market funds.  It was “allowing Lehman Brothers to go under” that dragged money market funds with them.  Like it or not, Bear Stearns and Lehman Brothers were two major players in the commercial paper market.

And commercial paper is what “drove the bus” called money market funds. 

You didn’t really think money market funds were just T-bills, did you?
So…how was it that a money market fund at a bank or brokerage firm would be paying (for example) 1% and an outfit like ING could pay 3%?

Hmmm.   Exactly what WAS in that money market over there? It certainly wasn’t all treasury bills.

But I digress.  Lehman Brothers was not only a market maker/facilitator for the commercial paper market.  They also borrowed heavily to fund their day-to-day operations with commercial paper.

OK, so remember a moment or so back when I wrote “a few money market mutual funds had some trouble maintaining their $1.00 per share price.   Their assets get priced every business day”?  Here is where things fell apart:

Lehman was a big player in the commercial paper market (as were all the big banks, along with GE Credit, Ford, GM and AIG, and others).  When you manage a money market fund, and your balance sheet is choking on stuff like short term financing notes (commercial paper) from companies that may not open for business the following Monday…well…what do you think you can sell those investments for?

A lot less than you paid for them.

Which is why suddenly, money markets assets stopped “adding up” to $1.00 per share.   It’s like walking home with a lousy report card in your hand.

Bad.
Taking Bear Stearns and Lehman Brothers out of the commercial paper market is like taking the umpires off the field in a Little League game.  All that’s left are little kids who don’t know the rules.  Actually, it’s not fair to compare those two companies with umpires.  But a Little League game without umpires looks like disorganized chaos.  And that’s when Uncle Sammy pulled up to the field, and change the rules.

Point and Figure Helps Manage the Risk

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The other day, I spent time talking on the phone with a friend of mine (who also happens to be a client).  He is undergoing treatment for a serious illness and taking some time off work, so I am delighted that we have some time now to catch up.

I have to tell you, I really like this guy.  I have learned (over the years) we have much in common: kids roughly the same age, his wife used to work for the same company I did (but in a completely different capacity).  Also, he is a good athlete — and umm, well, I like sports.  Over time, I’ve learned there are many common threads where our lives cross paths.

Wait a second…what does this have to do with point and figure analysis?

Everything.

I really believe I would have never met him if it weren’t for point and figure analysis.  See, like many folks, he was referred to me — by another client.  If I didn’t use the point and figure approach in managing the risk for my clients, I am not sure  he would be my client today!

Time out.

Look, prior to learning point and figure analysis (in 1997), I was just like every other financial adviser out there.  The game plan, as directed by the home office, was “gather assets, place the assets with a money manager — or in mutual funds run by “professionals,” then go find more assets.”

When I was a financial adviser, there were many of those “episodes” where Toto pulled back the curtain and exposed the “Wizard” of the marketing department.  You know what I mean…new product launches (like new mutual funds) would crash and burn, limited partnerships would blow up, stock recommendations would go straight down.  I got tired of watching people’s investment accounts getting blown up — through no fault of their own.

It’s a wonder anyone made money.

There wasn’t “one defining moment” in my 16 years as a broker that pushed me to change.  It was more like a “body of evidence.”  And in 1997, I started looking at alternatives to “fundamental analysis.”

Let me put it this way: a company can deliver record revenues, record earnings, record profits, raise the dividend twice and announce three stock buybacks in 2 1/2 years.

Fundamentally — that company was doing everything right…right?
But that stock dropped from $60 per share to $22 per share during that same time.

Sooooo…how would you like to own a stock that was doing everything right, but getting carved by two-thirds all the while?

Funny thing, you probably DID own it!
See, the stock is General Electric (GE) from 2000-2002.

You say you didn’t own that stock back then?  Ummm…OK.

Oh, say…did you happen to own any mutual funds back then? Did you know GE was one of the most widely held stocks in ALL mutual funds back then?

Hmmm.  Oh well, onward…

Know this: fundamental analysis does have a purpose.  But fundamental analysis will never tell you when to get out. Which is precisely what people have needed to know — especially over the past two years.

What I was able to show my friend — in screenshots — is how the market has moved from a “negatively trending market” to a “positively trending market.”

For the first time in about a year and a half!

That darn chart makes it crystal clear there are times you should be “in the market,” and times when you should be “out of the market.”

Fundamental analysis will never tell you when to get out.  Never.

My friend and his wife (and many other people) spent a significant portion of 2008 with most of their money out of the market…in a time where the major averages fell 35% to 40%.

With all they have going on, I’m happy they sidestepped a lot of potential damage.

And what about you…what’s your story?  Is getting a game plan for your investments important today?

This is precisely why I use point and figure analysis… point and figure simply measures price.  And price IS the ultimate indicator — as it reflects changes in supply and demand.

In my opinion, point and figure is the best indicator of risk… which, incidentally, is what we do at Mullooly Asset — we manage the risk in your investments.

Feel better my friend, you are on my mind.

TARP Funds Returned by NJ Bank, Is It a Good Investment?

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The Treasury Department said Friday that Sun Bancorp Inc. of Vineland, New Jersey, repaid $89.3 million, money it originally received on Jan. 9.  They gave back the TARP money.  Does that make it a good investment?

Sun Bancorp has sufficient funds to complete the redemption.

Additionally:

“When the Capital Purchase Program (which is part of the Troubled Assets Relief Program, or TARP) became available to well capitalized and healthy financial institutions like Sun, it was a positive partnership between the government and business to stimulate the economy through additional lending and community support,” said Thomas X. Geisel, president and chief executive officer of Sun Bancorp.

Geisel continued: “The partnership then became politicized, the rules and regulations changed, and the dynamics of the partnership substantially shifted.  These changes significantly restricted the way we support our customers and communities, as well as the way we run our business.”

Sun Bancorp was well capitalized by regulatory standards before accepting the CPP investment and will continue to be well capitalized under the same standards after the redemption.

Great.

I’m sure the Bank did not appreciate the Government getting into their business anyway.  Neither would too many businesses.

But here is where it gets interesting:

The Company also issued a Warrant to purchase 1,543,376 shares of its common stock to the Treasury Department at an exercise price of $8.68 per share.  According to the Company, they expect the Treasury Department to liquidate the Warrant following the full redemption of the Preferred Stock.

Part of the TARP deal was return of the money, plus interest, — plus warrants — to purchase shares in the bank.  1.5 million shares of the bank.  This represents nearly 7% of the entire shares issued.   They can exercise the warrants at $8.68, the stock closed Friday at $7.00.  This creates significant overhang in the stock.  I say that because a major stockholder (the US Government) will be looking the sell shares as the price moves up over $8.68.

So what does the chart look like?

Sun Bancorp-April-2009Wow.  The story sounds great, but the chart looks terrible.   This is a stock that is stuck in a long term negative trend.  And that trend will not change until the stock can break through that red overhead resistance line.  That line is currently sitting at $11, a long way from $7.00.  And in between $7 and $11, there is a significant amount of stock that will be for sale starting as soon as the stock moves beyond $8.68.  This is a good example how we have to “marry” fundamental work with technical work.  The fundamental story sounds compelling.  The technical story looks ugly.

Good for Sun Bancorp, but I’d rather find somewhere else to put money to work.

Getting Help For Your 401k: The Process

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How to get help with your 401k from Mullooly Asset Management.

This process will also help you with your 457 deferred compensation plan — or your 403(b) annuity at work.

First, if Mullooly Asset Management has never worked with an employee from your company before, we will need to get the list of investment choices available to you in your plan.  You can fax them to us at (732)223-9600, or you can send us the link to the website (if we don’t need a password), or you could copy and paste the list into an e-mail or Word document.

We are not looking for your specific investments, or your most recent statement! What we need is an inventory — a list — of all the choices available to you within your plan.

We will need a day or two to review the choices available in your plan, take a look at the charts, and come up with a game plan.

We will then call you back — or set up by convenient time for us to speak — and review the best performing choices available to you in your plan at the present time.  This phone appointment should take no longer than 15 minutes.

Unlike financial planners or others in the investment advisory business (many use asset allocation pie charts), the recommendation you will be given will be based on what is working — right now — and are the best choices available in your plan today.  One of our core beliefs is “when the charts change, we change.”

We will then alert you — usually by e-mail — when it is time to add, subtract, move money into, or out of — a particular investment in your 401(k) plan.

There are some years where we might make three or four changes.  There will be other years where we make significantly more changes.  The whole concept is to keep your money invested in the strongest asset classes at the current time.

Since Mullooly Asset Management is a fee only investment advisory firm, we have no product or investment to sell you.  We take a fiduciary obligation to manage your money strictly with your best interests in mind.  Unlike brokers (employees of brokerage firms) and some financial planners (who may work on a commission basis, or a “fee-plus commission” basis), a fee only investment advisor’s only income comes from the fees generated by offering advice.

Therefore, it’s in everyone’s best interest (the Fee-Only advisor and the client) to avoid large risks and losses.

After we have had a chance to review the choices available in your plan, we encourage you to meet with us over the phone and be sitting in front of a computer with Internet access.

We use computer-sharing software.  This will allow you to see the charts of the choices in your 401(k) plan, as we describe the process to you.  This will also give you a visual demonstration of how we manage the risk for our clients.  We can usually accomplish everything on our agenda in less than 15 minutes over the phone with you.

We are not going to judge your prior investment performance.  We are primarily concerned with which investments are working today in the plan — and how to invest your money properly right now.  Since the future is unknown, it is a waste of time to predict what markets will do in the future.

At the conclusion of the call, if you are satisfied with what you’ve heard, we would be delighted to send you an investment advisory contract for you to review and sign.

Relative Strength Signals Reveal Underlying Market Themes

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Looking at relative strength changes really helps to drive home underlying themes in the market. As I have been saying for several weeks, there are only a few sectors that have been going up — most sectors have been just treading water — and some sectors are completely falling apart.

Here are some recent relative strength changes, you tell me if you can spot the underlying themes:
New relative strength buy signals: Dominion Resources, Cross Timbers, Cal Dive International, Natural Gas and Worthington Industries (a steel stock).
New relative strength sell signals: Bank of America, more local and regional banks (too many to list), Enstar and Fortis (insurance companies), Black & Decker and Pier One Imports.

Remember that relative strength signals tend to last approximately two years (some longer, some shorter). By the look of things, I think this may be round two for the financial stocks (banks, brokers, insurance companies). And it doesn’t look like oil and other commodities are done yet either.