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Traders Are Making a Big Mistake Right Now

1/28/2014

MARKET CONDITIONS

Get ready for a one-day-wonder rally. The S&P 500 is down over 3.6% from its high earlier this month. Most of that decline happened late last week and continued yesterday. As a result, lots of folks are calling this the start of the long-awaited correction; and lots of traders are shorting stocks aggressively into the market's weakness. Those traders are making a mistake.

Let me be clear, I do think the market is in the process of forming a long-term top. And I think stocks will be lower in the months ahead. But I'm not shorting stocks right now... not after the market has already been smacked down hard over the past week. And not after so many short-term technical indicators are showing extreme oversold conditions. Selling stocks short into extreme oversold conditions is a sure-fire way to lose money... fast.

During bear markets and during correction phases in bull markets, stocks often experience "one-day-wonder"-type rallies. These are the huge, one-day, rocket-shots higher that happen out of nowhere after the market has hit oversold levels, when it looks like it's ready to fall off a cliff, and after traders have loaded up on the short side.

Folks looking to buy stocks rush into the market worried that they've missed the bottom. Traders who bet too heavily on the short side rush to cover to try to minimize their losses. And stocks pop violently higher.

We're set up for one of those one-day-wonder rallies right now. Take a look at this chart of the S&P 500 plotted along with its 50-day moving average (DMA)...

This is the fourth time over the past year the S&P 500 has dipped below its 50-DMA and looked like it was ready to collapse. On the three previous occasions, stocks managed to rally and go on to make new highs.

This time may be different, especially if you believe as I do that stocks are forming an important long-term top. The S&P 500 may not rally back and make new highs this time around. But it is due for a rally.

Look at the two-day relative strength index (RSI) and the full stochastics – two measures of overbought and oversold conditions – at the bottom of the chart. Both of those indicators are in "extreme oversold" territory. Stocks have rallied off those conditions each time this happened before. It's likely we'll get a rally this time around, as well. And any sharp rally from this point is going to cause a lot of pain to traders who got aggressively short over the past couple days.

Rather than sell stocks short into extremely oversold conditions, it's better to wait for the inevitable oversold bounce. Traders can then short stocks as they approach obvious resistance areas, like the 50-DMA.

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How To Collect 10.7% In Income From A Stock Yielding 1.2%

1/25/2014

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Amber Hestla

MARKET CONDITIONS

I love Amber Hestla's no-nonsense approach to investing. She takes the complexities out of perceptions shared by both investors and brokers when it comes to achieving realistic gains in the market... particularly with Blue Chips. I sometimes get the puppy dog gaze when I tell people that if they aren't realizing at least 18% annually then something is wrong... and that's being very conservative! You don't need a lot of money... just a lot of "know how". A precise and commonsense approach as described below will help you achieve if not surpass 18% annually.

By Amber Hestla

For 41 weeks in a row, the options trades I've recommended to my readers have been profitable. And on average, my readers are collecting 7.5% in "Instant Income" every 48 days. So far, we're 32 for 32 when it comes to closed trades. How am I doing it? It's actually pretty simple... but it requires some investors to leave their comfort zone.

Options are one of the most misunderstood corners of the financial world. Many investors steer clear of options because they have a reputation for being risky, but that's not always the case.

My strategy involves selling options on undervalued stocks. And as we've mentioned selling "put" options is one of the most effective income strategies in the world.

But today, I want to tell you about a different strategy -- selling covered calls.

A covered call strategy involves selling call options on stocks that you own. This allows you to generate income from selling options while benefitting from the potential upside by owning the stock. The downside risk is partly reduced by the income generated from selling options, which offsets potential losses in the stock.

If you're a little confused by that, don't worry. An example of a trade you can make today should help clear things up.

Aetna (NYSE: AET) is one of the largest health insurers in the nation. It is also a value stock that is trading with a price-to-earnings (P/E) ratio of about 13, about average for its industry. Despite the average valuation, AET is expected to grow faster than other large insurers, with earnings growth expected to average 10% a year over the next five years.

As health insurance stays in the news, traders can be expected to look at companies like AET, and the stock could be volatile. That creates an opportunity for short-term gains.

AET has recently traded around $67.75. Traders can buy 100 shares of AET and immediately sell a call option expiring in January with a strike price of $70 for about $1 per share, or $100 per contract, since each contract controls 100 shares.

A call option gives the buyer the right to buy 100 shares of stock for a predetermined price (the strike price) at any time prior to the expiration date. Call sellers have an obligation to sell the shares if the buyer exercises their right to buy the stock, which they will do if the stock price is above the strike price when the option expires.

In this case, if AET is above $70 when the call expires on Jan. 17, the buyer will exercise the option and you will have to sell your 100 shares at $70. Your profit on the trade will be equal to the difference in the sale price and the purchase price ($2.25 in this case) plus the option premium of $1 for a total of $3.25 per share. That would be a return of 4.8% in about two months, or 54 days to be exact.

If AET is below $70 in January, you will have the opportunity to sell another call option and generate additional income. The current price of the option is about 1.4% of the stock's price. Selling an option for that amount every 54 days would generate income of about 9.5% a year. AET also pays a dividend for a yield of 1.2% a year. The combined income of 10.7% a year is almost nine times as much as owning the stock alone -- that's a 790% increase in income. And this income could offset any potential losses in AET.

Covered calls, and options selling in general, are versatile strategies that can reduce risk, allow you to benefit from short-term market moves and generate income all at the same time.

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5 Sweet Energy Picks From T. Boone Pickens

1/25/2014

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T. Boone Pickens

MARKET CONDITIONS

After graduating from Oklahoma State with a geology degree, T. Boone Pickens knew that energy was the sector for him. In his 60-year business career — first as a corporate raider, then as a legendary oil man — Pickens has become one of the most successful institutional managers focused on the oil and natural gas markets. Through various funds at BP Capital, T. Boone Pickens has amassed quite a fortune — estimated to be worth around $950 million — and has become an outspoken proponent of American energy independence.

When Boone talks, investors should listen.

While T. Boone Pickens is outspoken and appears regularly on financial television, the latest window into his thoughts comes from BP Capital’s latest 13F filing. Despite being dated for the end of the third quarter, the filing gives regular retail investors access to what the celebrated oilman is thinking. And that means grade-A stock ideas. Here are five of Pickens’ best-looking holdings.

#1.

Exxon MobilIt seems that Warren Buffett isn’t the only one seeing the value in integrated oil giant Exxon Mobil’s (XOM). Through the third quarter, T. Boone Pickens initiated a new $6.77 million position in Exxon, making XOM stock the second-largest holding in BP Capital’s portfolio. It’s easy to see why Pickens would want to “put a tiger in his tank.”

After suffering under dwindling production, XOM has trailed its peers like Chevron (CVX) in the returns department. However, this past quarter, Exxon finally saw its critical production numbers increase. And with a slate of new projects coming online in the next few years, that trend should continue. Meanwhile, the integrated giant continues to mint cash flows — which it has been graciously giving back to shareholders via hefty buybacks and dividends.

Yet, at just 12x forward earnings, XOM shares are one of cheapest options in the energy sector, not to mention the broader stock market.

Given its growth profile, leadership position, and propensity to produce billions in cash flows, investors should be seriously looking at this “reasonably-priced high-quality bond” with both eyes open. Following Pickens’ lead could result in big returns over the long haul.

#2.

T. Boone Pickens continues to be ecstatic over the hydraulic fracking boom and shale oil/natural gas. As such, many of his stock picks play into shale production growth. One of the newest is a $3.4 million position in E&P firm EQT Corporation (EQT).

EQT produces natural gas and related natural gas liquids (NGLs) from the Appalachian Basin, better known as the prolific Marcellus Shale. The firm owns roughly 560,000 acres in the Marcellus alone and has 14,000 productive wells in the entire basin.

Those generously producing wells have helped EQT report some stellar earnings over the last few quarters. Its third-quarter adjusted earnings came in at 58 cents per share — more than double the amount earned from the same period last year. Aside from production gains at EQT, the firm has benefited from its “drop-down” relationship with its pipeline subsidiary EQT Midstream (EQM). That has relationship has provided plenty of tax-friendly distributions back into EQT’s bottom line.

While it isn’t the cheapest stock, EQT shares do represent one of the major leaders in the Marcellus. It’s no wonder why Pickens loaded up.

#3.

When private equity firm Apollo Global Management (APO) started selling, Pickens started buying. Pickens has added 150,000 shares of Athlon Energy (ATHL) since it went public back in the beginning of August — a value of $4.4 million.

The mid-cap producer focuses its activities oil and liquids-rich natural gas reserves in the Permian Basin. That strategy has suited the new company well, as regional production and higher oil prices have helped ATHL trounce earnings estimates for two consecutive quarters. For the latest quarter, Athlon managed to realize a 109% increase in adjusted earnings as well as see a 69% increase in daily production volumes.

Since going public, ATHL has gone straight up and has returned a staggering 60% for investors who bought in at the IPO price of $20.

But given the awesome production and earnings gains that ATHL has already put in, it’s safe to say that there’s plenty opportunity for more as the company matures. For investors like Pickens, that could mean a lot of money.

#4.

Everyone loves a turnaround story. For T. Boone Pickens and BP Capital, that story happens to be oil service firm Weatherford International (WFT). Pickens increased the size of his position by 44% during the past three months.

The smallest of the big four oil service stocks, Weatherford has been rocked by an accounting investigation — going back six years — and major debt issues. Those problems have caused WFT to trail behind several of its rivals — both big and small.

However, things could finally be looking up for WFT. The firm recently settled those nasty accounting issues and has gotten serious about cost controls to remove its $9 billion worth of IOUs. At the same time, WFT is exploring options for land drilling rig business unit. As drilling has gotten more efficient, the number of drilling rigs focused on land are piling up. That has caused the business unit to be a huge drag on WFT’s earnings over the years. One solution being proposed by Weatherford is to spin off the business via an IPO. All in all, these moves could finally put some spark back into WFT shares.

#5.

Dwindling crack spreads over the last two quarters have hurt the refiner’s margins — including industry stalwart Valero Energy (VLO). Sensing a bargain, T. Boone Pickens increased his stake in the nation’s largest independent downstream firm by 163%, adding another $2 million to his position.

That could be a smart move now that things are getting better at VLO.

First, those crack spreads are beginning to widen once again. The sheer amount of oil production is overflowing storage depots and is causing West Texas Intermediate prices to fall versus international standard Brent. That price difference means that margins will be on the uptick at VLO once again. Even more so as Valero has moved to exporting gasoline and other refined products in spades.

Then there is the firm’s pending midstream IPO to consider. The new MLP subsidiary will help VLO realize huge benefits and tax-deferred distributions once it gets cooking.

With a forward P/E of less than 10, investors are getting a huge deal on VLO shares — especially when considering its story is on the uptick. Following Pickens’ lead into Valero could be one of the best plays of the New Year.

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The 5 Best Vanguard Funds to Buy Now

1/25/2014

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MARKET CONDITIONS

There’s no big secret behind the success of Vanguard funds — investor assets flock to Vanguard thanks to the company’s dedication to straightforward investing and low-cost products.
Don't just get Vanguard's low costs — get high quality, too.

Vanguard Total Stock Market Index (VTSMX) recently became the largest mutual fund in the world — helped in large part by a rotation out of bonds and into stocks over the past few months. However, you can bet investors were drawn to the Vanguard fund over other products thanks to its bare-bones 0.17% expense ratio, too.

The simple truth is that most mutual fund companies exist to make a profit for themselves as well as investors. However, Vanguard’s structure is unique and allows it to basically offer its products at a price that reflects the cost of doing business — without showing a profit.

Investors benefit as all mutual funds are offered as no-load products, with no marketing or distribution fees charged to investors, and the funds in general tend to have low overall expense ratios.

But low cost isn’t all that Vanguard funds have going for them — Vanguard provides quality, too. Here, we look at some of the most compelling offerings of this industry giant:

#1.

Vanguard Capital Opportunity (VHCOX)
represents a fine second chance for investors to access a great stock-picking team.

VHCOX was reopened this year to new investors who invest directly with Vanguard and features a low-turnover approach to growth-stock investing.

Managed by Pasadena-based PrimeCap, this Vanguard fund has changed over time, morphing from a midcap fund into a large-cap offering over the years. Still, the results have been solid, with the fund up 38% YTD and up 11% annually over the past decade, placing it in the top 4% of its Morningstar category and attracting $11 billion in assets.

As is typical with other PrimeCap products, healthcare names are prominent and represent 37% of the 123-stock portfolio, while technology holdings account for 34%. Recent top holdings include Biogen (BIIB), Amgen (AMGN), Roche (RHHBY), FedEx (FDX) and Eli Lilly(LLY).

VHCOX charges just 0.48% annually, or $48 for every $10,000 invested, and a low 9% turnover also helps minimize drag on the fund’s returns.

#2.

Vanguard Selected Value (VASVX) is dedicated to finding undervalued companies in the midcap space that have upside potential over time. Vanguard uses two managers on this fund, and with fine results. Barrow, Hanley, Mewhinney & Strauss LLC manage the bulk of assets with the firm of Donald Smith & Co. Inc. also contributing to the team.

The combination has led VASVX to 37% returns this year, and over the past 10 years, this $7 billion Vanguard fund has gained an annualized a little more than 11%, placing it in the top 6% of its Morningstar peer group.

As I have stated before, Wall Street doesn’t follow most medium-sized firms with the same intensity that they analyze larger, better-known stocks. This creates opportunity for stock-pickers and investors.

VASVX is a relatively focused portfolio that consists of just 66 stocks at present, including top holdings Royal Caribbean (RCL), Micron (MU), Omnicare (OCR), Cardinal Health (CAH) and Hanesbrands (HBI). Vanguard Selected Value charges just 0.38% in annual expenses.

#3.

Vanguard Dividend Growth (VDIGX) is a fund that focuses squarely on solid firms that have the “ability and willingness” to grow dividends over time.

This $18.3 billion fund has been managed by Don Kilbride of Boston-based Wellington management since 2006. His style of investing is to focus on firms that are fundamentally solid businesses — not necessarily firms that simply pay outsized dividends. This leads him to companies that are growing at a moderate pace while throwing off some income for investors while they wait. These firms tend to hold up relatively well in a downturn — this fund lost 26.6% in 2008 compared to a 37% plunge for the S&P 500 that year.

Healthcare accounts for 20% of VDIGX’s 52 holdings, and consumer discretionary names take up another 17%. Mr. Kilbride prefers to own a focused group of large-cap stocks, leading to top holdings such as UPS (UPS), McDonald’s (MCD), Microsoft (MSFT), Walmart (WMT) and Cardinal Health.

VDIGX is up 29.2% YTD, and has returned an annualized 9.7% during the past decade. This performance places it in the top 4% of its Morningstar large blend category. Expenses for this Vanguard fund are 0.29%.

#4.

Vanguard is a fund family that consistently promotes the value of its index fund offerings. However, while Vanguard Small-Cap Value Index (VISVX) is one of its lesser-known options, it continues to post solid results.

This Vanguard fund seeks out undervalued, out-of-favor names in the small-cap world; it currently holds more than 800 companies. VISVX is dedicated in large part to financials, which account for 29% of the portfolio. Clearly this fund is a good way to play the continuing recovery in this sector.

Recent top holdings include Towers Watson (TW), Genworth Financial (GNW), Hanesbrands, Jarden Corp. (JAH) and Fidelity National Financial (FNF).

VISVX is up 32% so far in 2013, and has appreciated by an annualized 10% over the past decade. As an added and unexpected bonus, VISVX pays some dividend income, to the tune of 1.9% over the trailing 12 months.

The fund has a reasonable $3,000 minimum to get started, and the same goes for VHCOX, VASVX and VDIGX. Expenses are just 0.24% annually.

#5.

For investors that prefer an ETF platform, Vanguard Mid-Cap 400 Growth ETF (IVOG) is a compelling option featuring dynamic stocks in medium-sized companies.

IVOG, which tracks the S&P MidCap 400 Growth Index, is made up of more than 200 high-growth names including Alliance Data Systems (ADS), Affiliated Managers Group (AMG), Tractor Supply (TSCO), LKQ Corp. (LKQ) and HollyFrontier (HFC).

This product is a fairly new Vanguard offering, garnering just $261 million in assets, yet results have been strong. While IVOG is tracking the market at roughly 27% year-to-date, it has returned 16.3% annualized over the past three years, placing it in the top 28% of its Morningstar category. Expenses run a low 0.2%.

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