Month: November 2010

CMI, Cummings (if at first etc.etc.)

Hamilton

My love for diesel engines goes back quite a way. I served in the Dutch navy where I was to become a “stoker”,an officer in charge of the ships engine room which were mostly powered either by steam turbines or diesels.  In most of North America the average person hates diesels, they stink, make a lot of noise, are slow to react and, should you spill a little while fueling the car, you smell like a skunk for a few days. Furthermore one of the few attempts to put these things in a normal passenger vehicle by Buick was a complete engineering disaster. Europe, with a slightly lower standard of living and higher fuel taxes, could not afford to share these sentiments as it needed the much higher fuel efficiency. Almost 1/2 of all vehicles there are powered by diesels. Given that, it must be quite surprising to see the Cummings stock at highs well above those established before the 2d great depression meltdown. After all vehicle production dropped from 16/17 million to 10 million and is now barely above 11 million, all this with fuel prices at the pump at least doubling but without the slightest increase in diesels popularity.

Two months ago I opined that the stock was too high at $85 or so. In the mean time it went even further and got to $96. Here are the charts, then and now.

cmi sept 20 2010 cmi nov 2010

Clearly the stock just charged on despite a dropping RSI and MACD. Now it is approaching , for a second time, the upper channel line and soon will be flirting with that magic number $100, that is,  if it even gets there. In the bigger picture there is more reason to be concerned;

 cmi nov 2010 bc cmi nov 2010 log

The left, normal, chart shows how well this stock has done and in how short a time frame. There is no other time period in which the stock has gained so much, period. Also it has gone well beyond what ANY trend-line would suggest would be resistance, not even a slight hesitation. More interesting is that when looked at on a log scale there is a very distinct rising wedge that has formed over the past 20 odd years ( waves 4 and 2 overlap which may only happen is this particular structure). These tend to be retraced entirely implying a stock value of near zero sometime in the future. Barring that a return to the 4th wave of previous degree at $20 is perfectly normal. For some reason the round number of $100 seems to be very hard to resist,but I would not expect it to reach that, but to play it safe you may want to wait for that and only then short the stock. The stock pays a dividend just over 1% and has a P/E just under 20. Alternatively a put option might do the trick. CAT and DE fall more or less in the same category. Also remember that;

"There are two times in a man’s life when he should not speculate; when he can’t afford it, and when he can." – Mark Twain

RY so far doing as expected.

Hamilton

Last time I suggested this stock should stop its bounce at about $57 and then resume its downward trajectory to , at the very least, $44. So far so good. Here are the charts.

RY nov 2010 RY nov 2010 2

The stock , surprisingly, double–topped at a little over $63 , actually making a new all time high. Surprising because it had traded at just over $25 not that long ago. In any case that raises the question which top was the real one, important only to E-wavers. For the next little while (few years) it fortunately does not matter all that much.

After a 5-wave decline, another 5 wave leg MUST follow (to , at the very least, form an a-b-c correction). Furthermore, whether a new bull market started at the low or whether the bear market is not yet over, either way it is perfectly normal to have a 61.8% retracement (at about $40). A break of $52 would make this , perhaps in many eyes, farfetched scenario, all the more probable.

Emerging Markets EEM, MSEMF.

Hamilton

Your neighbors grass always looks greener and the same kind of phenomenon occurs in the realm of investing. The further away from home, the more exotic the place the better it is. Part of the reason for this – apart from the lack of transparency -is that it takes a relatively small amount of additional investment to drive up the price by a disproportional amount. By the same token, the opposite also applies which is why I think it might just about be time to get to the sidelines. Here are two emerging market ETFs.

eem nov 2010 eem nov 2010 2

Both are close to double topping but are not quite there yet. Notice that ,where shown, both the RSI and the MACD are not confirming the latest up moves. More importantly, even if it is not perfectly clear what count fits the rise since the lows (could be an a-b-c x a-b-c correction or a 5th wave with 5 waves in it), it is fairly clear that there was an expanding triangle of approximately 10 months duration a little past the middle of the charts. These patterns occur only in 4th or b waves and are a.k.a. megaphones for pretty obvious reasons. As with all triangles the markets quite predictable return to , at least, the lowest point in the triangle or about 25+%. Not a good reason to stick around.

By the way, I have been dead wrong on this one before!

SBUX , Starbucks

Hamilton

SBUX april 13 2 SBUX april 13

Back at the lows in April of 2009 I recommended buying Starbucks despite my misgivings about a business model that survives on charging a king’s ransom for a cup of coffee. My target was too low as usual but the idea worked out well (see recommendation in this blog). This was essentially the buy low sell high principal at work. Today the stock looks like this;

sbux nov 2010 sbux nov 2010 2

Now that the stock is up $30 from the low of $5 I would start thinking about selling high and buying low again. No doubt this one is overdone to the upside but this is a momentum stock par excellence. Start taking small short positions and or use options. I do not believe that QE2 will induce too many people to pay up for their lattes except , perhaps, in the proverbial square miles around the trading desks of the world’s financial centers.