In the past month, gold and gold stocks have been on a rollercoaster ride. Gold declined as much as –4.59% while gold stocks, as represented by the Philadelphia Gold and Silver Stock Index (XAU), declined –17.88%.
Although there has been a recovery of sorts, we cannot be sure that the decline is over.
Posted in 50% principle, Edson Gould, gold, gold bugs, Gold Stock Indicator
Tagged members
On May 19, 2015, we did a downside review of Green Mountain Coffee Roasters (GMCR) based on the work of Edson Gould. At the time, GMCR was trading at $88.69. Our downside assessment was as follows:
“As can be seen above, the price of GMCR has declined below the conservative and mid-range downside targets of $110.08 and $81.40. The acceleration of the current decline seems to indicate that achieving the $52.71 extreme downside target is very likely.”
On August 6, 2015, GMCR declined as low as $52.40. This falls well within the indications that were provided by Gould’s Speed Resistance Lines [SRL] at $52.71. We closed our downside assessment of GMCR with the following comment:
“The fact that GMCR is prone to extreme moves up and down suggests that the extreme downside target is the point at which to start assessing risk and accumulating shares.”
Now that GMCR has fallen below the extreme downside target of $52.71, we think now is the time to review GMCR as a going concern for a potential transaction.
The Setup
Assuming that an investor is willing to accept total loss of funds, now is a great time to review the fundamentals of GMCR and determine if it will survive on its own or ultimately get acquired. Below is the updated SRL based on the work of Edson Gould.
Our best guess is that buying GMCR in three stages on the way down is the most “prudent” approach. For those interested in the stock but don’t like the prospect of catching a falling knife, we’ve outlined three potential starting points for investment at $40.66, $31.33 and $23.04. We’d suggest investments of 50%, 25% and 25% of allotted funds.
Again, this recommendation is not for the faint of heart. Additionally, it is safest to assume all money put to this stock are a total loss and requires a significant amount of due diligence before any commitment is made. From a historical standpoint, a retest of the prior low ($17.25) is not unusual.
On April 26, 2012, we posted an article titled “A Warning For Chesapeake Energy Stockholders”. In that article we said the following:
“While it appears that Chesapeake Energy (CHK) has seen all the punishment that could possibly lay ahead, we’re concerned that the previous technical pattern in the period from 1993 to 1999 is about to repeat.”
The period from 1993 to 1999 saw (CHK) decline from as high as $27 to under $1.00. The 2012 article was written when CHK was at $18.10 and had already fallen more than –66%. So far, CHK is on track to replicate the decline achieved from 1993-1999. The next downside target for Chesapeake Energy is $4.50.
Posted in CHK, downside, Edson Gould, speed resistance line, SRL
In April 2012, we published an article titled, “What Does Warren Buffett See In IBM?” At the time we concluded the article with the following thought:
“…just imagine what IBM will look like after falling to a 52-week low.”
A reader of our article took exception to the idea of IBM declining in price with the remark:
“I have no idea why you think you could buy IBM on a 52 week low. There is nothing fundamental about the company that would lead one to think that might happen. IBM is a difficult company to short because people who own it primarily intend to hold it for a longer term, do not trade on margin, and do not sell their shares based on fear (Momintn. What Does Warren Buffett See in IBM? April 19, 2015. link.).”
Since our article, IBM has declined from $207 to $161 with upside movement being limited to $213.
In spite of the price decline of nearly –22% since 2012, IBM has increased the dividend by +53%. This has resulted in a situation where the price of IBM has becomes very compelling from a value perspective. As indicated in our original article on IBM, the growth of the dividend has become an overpowering force which is creating a stock that could eclipse all expectation for long-term investors. This leaves aside the topic of IBM share repurchases which Warren Buffett discussed in his 2011 shareholder letter.
Our premise of IBM’s valuation is narrowly perched on the work of Edson Gould’s Altimeter. Below is an update of Gould’s Altimeter since our April 2012 article.
According to Gould’s Altimeter, IBM is now undervalued below the levels of the 2008 low. We think that a value investor would have fun pouring over the data to determine the actual value of IBM. Gould’s Speed Resistance Lines [SRL] indicate that the conservative downside target for IBM is $130. However, we think a process of accumulation at the current price, and below, is a prudent long-term strategy.
Posted in Altimeter, Edson Gould, IBM, SRL
We’re always hopeful and expectant about the future prospects of any investment that we make. However, that doesn’t mean that we’re going to ignore the most pressing matter when investing which is assessing the downside risk. Below is the downside risk assessment for Hospitality Properties Trust (HPT) based on the work of Edson Gould.
The first tool of Gould is the Altimeter. This assesses a stock based on the stock price relative to the dividend that is paid. In this case, HPT has come off of a recent high near 70. This high matched the high of late 2006, the subsequent decline brought the stock price down nearly –80%. We don’t think that it is realistic to believe that HPT will decline as in the period from 2006 to 2008. However, we’ve outlined in red a low that we feel is reasonable if a decline were to take place. This low is at the $21 level where there appears to be a common retracement point.
If worse comes to worse, HPT could decline to point A or $13.00. If a repeat of the housing crisis were to take place then HPT could decline as low as point B or $4.67.
The other tool that Gould used was the Speed Resistance Line [SRL]. The SRL is ideal for stocks that increase significantly out of proportion to the general stock market. As HPT has increased nearly twice that of the S&P 500, we feel that the SRL is the most appropriate assessment for downside risk.
In this case, the SRL indicates that the conservative downside target is $26.22. In the previous decline of 2006 to 2008, HPT declined to the previous low set in 1999 at slightly below $5.00. However, as we mentioned before, we don’t think that this time is anything like the rise and fall of the housing bubble. Therefore, we’re looking for HPT to successfully breach the $26.22 level and retrace to the $18.86 level before a possible rebound. Our experience has been for HPT to adhere to the ascending lines for most stocks that we have covered in the past.
Who is Edson Gould?
"Edson Gould spent over 60 years working in and studying financial markets. Gould studied the arts at Princeton, engineering at Lehigh (from where he graduated in 1922), and finance at New York University. In 1922, after working for a short time at Western Electric, he joined Moody's Investor Service as an analyst and later was editor of Moody's Stock Survey, Bond Survey, and Advisory Reports. In 1948, he began at Arthur Wiesenberger & Company, where he developed and edited the well-known Wiesenberger Investment Report and became a senior partner. He also was Research Director at E. B. Smith (which later became Smith Barney), and worked for Nuveen."
(source: Market Technicians Association. Gould, Edson Beers, Knowledge Base. Accessed April 26, 2012. link MTA reference.)
"Market technician Edson Gould always laughed at the idea of having a significant influence on the stock market, but his predictions were the most precise around. He pinpointed major bull markets and prophesied bottom-out markets as if he had his own peephole into the future. But in place of a crystal ball and wacky off-the-cuff schemes, his were smart, intensely researched and time-tested theories that made him a legend in the investment community."
(source: Fisher, Kenneth L.. 100 Minds That Made the Market. Business Classics, Woodside, CA. 1993. page 320.)
Posted in Altimeter, Edson Gould, HPT, speed resistance line, SRL
On October 25, 2011 when Green Mountain Coffee Roasters (GMCR) was trading at $63.85, we projected conservative and extreme downside targets of $59.93 and $37.21, respectively. Subsequent price action for the stock brought the price as low as $17.11. After achieving the downside target the stock rose as high as $158.87 by November 2014. The potential gains of acquiring GMCR below either downside target was +165% and +326%.
The problem with this modeling of the past is having the fortitude of buying the stock and watching it fall –66% before the subsequent rise. Can you handle a decline of –50% or more in your investments? If you can’t sleep at night with losses of –50% or more then don’t bother reading any further as what follows is speculation of what would happen if history were to repeat (NOTE: history does not repeat).
Alternate reading on portfolio losses of –50% or more by Charlie Munger.
Posted in Edson Gould, GMCR, speed resistance line, SRL
On April 30, 2015, in after-hours trading, LinkedIn (LNKD) declined –20.95% from the closing price of $252.13 to $199.30. with such a decline, it is worth considering what the downside risk would be according to Edson Gould’s Speed Resistance Lines (SRL).
The above chart shows the current SRL downside targets based on the peak price of $276.16:
What is most relevant in this SRL is the downside targets from the previous peak at $256.14. At that time, LNKD had the following downside targets:
In the prior decline, LNKD fell to slightly below the midpoint target at $133.19. This suggests that the current slump should go below the conservative downside target of $187.68. Going below the $187.68 level should get the stock price to the ascending midpoint target of $139.87. Those interested in LNKD should consider the stock in stages at or below the ascending $139 level with an acceptance of a decline to the ascending $92.06 level.
Worth noting is that anyone who had a standing stop loss order with their broker, say below $250 or $240, will be forced out of their position once the stock market opens on May 1, 2015 at whatever the opening price is as long as it is below either of the sample levels. At $199, investors with stop loss orders will take a severe beating even though they may not have been involved in the after hour activity.
Posted in Edson Gould, LNKD, speed resistance line, SRL
On February 25, 2015, when Lumber Liquidator was trading at $57.23, we said the following:
“Those interested in LL and willing to perform appropriate due diligence could engage in a three phase purchase plan beginning below $39.81, $31.64 and $23.47. Investors, as opposed to speculators, should be willing to accept that there is no compensation for the wait when holding LL and that the decline to the ascending $23.47 level is a real risk.”
In fact, Lumber Liquidator blasted below the $39.81 support level and has rested at the $31.64 support level and started to move higher as seen in the chart below.
We’ve intentionally left out the move up from $38.83 to highlight the extent of the decline and the high level of coincidence with the supports levels that we had outlined in the previous month. All that remains is the decline to the $23.47 level.
While famous short-sellers have the ear of influential media to talk their book and ensure their profits, we only have price action to work from. For this reason, it is well worth noting another coincidence that relates to Lumber Liquidator and futures price on lumber as seen in the chart below.
The coincidence of Lumber Liquidator (LL) declining significantly at the same time as the futures price of lumber (as traded on the Chicago Mercantile Exchange) seems difficult to ignore. Investors should take note of the fact that in three prior periods indicated in blue, LL has lost a minimum of –35% and as much as –53% when the price of lumber declined –33% or more.
So far, from December 2013 to March 2015, the price of lumber has declined –23% while LL has declined as much as –67.49%. Much of the decline in LL has been exacerbated by concerns related to quality and sourcing of the flooring. However, the current decline is only slightly out of alignment from what has happened in the past.
We say slightly because we’re excluding the peak in lumber at 395.50 when LL was trading at $62.19. While lumber was trading lower and not to exceed the $395.50 (considered a bear market), LL gained another +92.05%. If Lumber Liquidator’s decline was measured from the February 15, 2013 peak in lumber at $395.50, the decline in the stock price would equal –37.56%.
Assuming we aren’t on the cusp a new bear market, the decline in LL has been overdone and an individual willing to accept the downside risk to $23.47 should consider implementing a three phase purchase plan. An investor must keep in mind that the conservative upside target is $80.53 which is the new “limit” for the stock instead of the previous $119.44. In addition, the downside targets now act as upside resistance level as was the case when LL could not sustain the $53.68 level prior to the recent collapse.
Posted in Edson Gould, LL, lumber, speed resistance line, SRL
Below are the downside targets using Speed Resistance Lines [SRL] for Lumber Liquidator Holdings (LL) and Boston Beer Company (SAM) based on the work of Edson Gould.
Lumber Liquidator (LL) has declined from the peak of $119.44. Gould’s SRLs suggest that from the peak price, LL has a conservative downside target of $53.68 and an extreme downside target of $39.81.
On February 25, 2015, LL was unable to sustain a price above the ascending $53.68 level with a decline of over –17%. Our best guess is that LL will decline to the ascending $39.81 level, which currently approximates $49.50 price. Those interested in LL and willing to perform appropriate due diligence could engage in a three phase purchase plan beginning below $39.81, $31.64 and $23.47. Investors, as opposed to speculators, should be willing to accept that there is no compensation for the wait when holding LL and that the decline to the ascending $23.47 level is a real risk.
Boston Beer Company (SAM) is the brewer of Samuel Adams beer and a multitude of other “craft” beers. Today SAM declined –10% on an earnings miss. Below is the SRL for SAM.
Our expectations for SAM are not very high as the last time that the stock was able to achieve the conservative downside target of $70.13 was in 2011. Since that time, SAM has faltered but not fallen. In spite of this fact, we’ve outlined the conservative downside target of $180.12 and the extreme downside target of $107.99. Investors should note that a decline to the ascending $180.12 level is an ideal buying target with a follow-up purchase below $141.25. As with Lumber Liquidators, SAM is bet on growth in the stock price and not much else.
The relative strength of each company (long-term viability) is what makes these stocks compelling and worth considering at the appropriate predetermined price.
Posted in Edson Gould, LL, SAM, SRL
On February 12, 2015, news of Expedia (EXPE) buying Orbitz (OWW) combined with the earnings release by TripAdvisor (TRIP) has resulted in OWW increasing +21.83% while TRIP has increased by +23.76%. This cannot be good news for Priceline (PCLN) shareholders as the likelihood of the company overpaying for TRIP grows.
Our February 6, 2015 Nasdaq 100 Watch List had the following review of TripAdvisor and Priceline:
A couple of stocks that have caught our eye are Priceline (PCLN) and TripAdvisor (TRIP). Both stocks are low in price relative to their March 2014 peaks.
There has been some recent talk about PCLN absorbing TRIP in a buyout. Below is the relative price difference between PCLN and TRIP. In the last year, mid-November 2014 was the best time for PCLN to leverage the stock price to buy TRIP while July 2014 was the worst time to use stock to buy TRIP.
While PCLN has changed on a relatively small basis over the last year, Ctrip.com (a company that we correctly analyzed on December 2011) has had a tremendous amount of relative price change over TRIP in the last year.
While TripAdvisor (TRIP) may not be the best investment over Priceline (PCLN) on a fundamental basis, the potential for a buyout of TRIP may make good investment sense due to the need to eliminate a competitor or to take advantage of existing clients, assets or infrastructure. Things could get worse for the market overall, pushing all of the stocks in the sector down. Barring a general market correction, investors probably have until the middle of December 2015 for a deal to be hammered out if the stock price doesn’t recover from the current levels.
We remain confident that TripAdvisor is the best relative value in the competition elimination game for the sector. In reality, Ctrip.com acquiring TRIP is very unlikely. However, we believe that with the recent jump in the price of TRIP, Priceline will feel the burn and get into a rampant bidding war for TRIP. This could result in TRIP being acquired for well above the most recent 52-week high of $110.
Below are the downside targets along with the conservative/extreme upside targets for TRIP based on Gould’s Speed Resistance Lines. Non-members of our site wishing to view the upside/downside targets can send an email to nlo@newlowobserver.com.
On January 29, 2015, Qualcomm (QCOM) announced that a “…key customer passed on new chip…” On the news, QCOM stock fell as much as –12%.
On October 12, 2012, we posted the following SRL for Royal Gold:
We said the following of the above chart:
“The SRL for Royal Gold at $44.62 doesn’t seem outlandish given what has already occurred in the previous declines from prior peaks. The X marks the first decline after a “minor” parabolic move that was later exceeded on a larger scale to point A1, B1 and C1. Additionally, the X reflects the minimum retracement from the top and has provided consistent support for the price for RGLD.
“We’d consider buying RGLD if it declines to either of the support levels of X3 or C2. The movement of RGLD has been consistent with the price of gold (GLD) which is in stark contrast with gold stocks as represented by the Philadelphia Gold and Silver Stock Index (^XAU)....”
On July 12, 2013, we said the following of RGLD:
“RGLD has fulfilled almost all of our expectations for downside risk since October 2012. Although we’d much rather see this stock reach the extreme downside target of $33.28, we feel that purchases at the current level and below would be consistent with asset accumulation and wealth building, in contrast to those who were considering the stock at or near the October 2012 levels.”
So far, Royal Gold has adhered to the SRL outlined on October 12, 2012 and July 12, 2013 as displayed in the chart below.
Royal Gold has a mid-range upside target of $100.39 and an extreme upside target of $133.85 based on Gould’s Speed Resistance Line. However, the upside targets are somewhat immaterial when considered from the context of buying based on values.
Posted in Edson Gould, RGLD, SRL
On February 9, 2012, we posted Edson Gould’s Speed Resistance Lines (SRL) for Clean Harbors (CLH) with the downside risk for the stock. At the time, the downside targets were:
Since that time, we’ve revised the downside targets to reflect the following minor changes.
A visual of the downside targets reveals the value of Gould’s SRL.
So far, CLH has adhered to the SRL that was initially outlined in 2012. If we consider the period of 2007 to 2009, when the stock fell as low as $20.54 and extend that same decline to the current period, then CLH could decline as low as $41.40. This assumption is predicated on the stock market not experiencing a precipitous decline from the current level. A broad market decline would easily bring CLH to the ascending $23.43 level in the SRL.
While the fundamentals are not glowing for CLH as it goes through the process of spinning off its oil and gas services unit, which could “…take more than a year for the spinoff to be completed…”, there are expectations that the current actions will refocus the company.
Speculators, those willing to accept the downside risk of –36%, could purchase CLH with 25% of intended funds at $45.10 and $41.40. The final purchase would be at $31.00 or below. Investors, those willing to hold for 5 years or more, would want to re-assess CLH at $34 and below.
Posted in CLH, Edson Gould, speed resistance line
In the period from 2002 to 2009, the NYSE Oil and Gas Stock Index (XOI) presents us with a possible template for what to expect in the current decline in the same index. Below is Gould’s Speed Resistance Lines (SRL) for 2002 to 2009 of the XOI Index.
The above chart shows the conservative downside target of 1,326.48 and the extreme downside target of 543.36. The mid-point of the downside targets is 934.92. In the case of the XOI index, it managed to achieved the conservative and mid range for the index. However, the extreme downside target was not achieved. The full extent of the decline is indicated in red at the 761.30 level.
Our guess is that the XOI index will accomplish a similar pattern of “performance” on the downside in the current run as was the case in the 2002 to 2009 period. We’ve charted the progress of the XOI Index in the period from 2008 to the present with Gould’s SRL.
The conservative downside target of 1,454.79 has been constructed while the mid-point of 1,015.10 is also indicated. However, we did not include the extreme downside target of 575.41. We did indicate in red the 812.08 level which was the extent of the decline in the period from the 2008 high to the 2009 low.
Suffice to say that we expect the XOI index could easily fall to 1,015.10 and subsequently to the 812.08. Those interested in the oil sector should start initiating positions at or below the ascending 1,015.10 level. Two funds that trade in line with the XOI index are PowerShares DB Oil ETF (DBO) and Direxion Daily Energy Bull 3x (ERX). One ETF that trades the opposite of the XOI index is the Direxion Daily Energy Bear 3x (ERY).
Posted in downside, Edson Gould, speed resistance line, SRL, XOI
On January 17, 2014, we posted Edson Gould’s Speed Resistance Lines for Best Buy (BBY) in an attempt to determine what the extent of the decline might be. From that posting we said the following:
“Best Buy has had a history of resting [at] the extreme downside target, currently at $14.78. However, we have split the difference and placed an intermediate downside support level of $22.34. Again, this is not a recommendation to buy or sell Best Buy, instead, it is an attempt to observe how closely the stock will adhere to the SRLs indicated in the chart.”
Nearly one year later, we can see that although the historical trend had been for BBY to decline to the extreme downside target ( at $14.78), the estimate of $22.34 was a fair assessment of downside risk as the stock has managed to vacillate at or above the ascending $22.34 level seen below.
The quality of Gould’s SRL has been fairly consistent and reasonably accurate. We look forward to introducing additional SRLs of stocks that have established a declining trend to determine downside targets. The conservative upside target for BBY is $44.85.
Posted in BBY, Best Buy, Edson Gould, speed resistance line, SRL
