Break Up or Break Down? Four Stocks At Critical Levels

As the S&P 500 makes new highs, these stocks are lagging behind and hesitating near former highs. If these four stocks can break beyond their former highs it will keep the uptrends alive. Failure to reach new highs though will create large topping patterns which will ultimately lead to much lower prices.

Time Warner Cable (NYSE:TWC) has been struggling to get above the $143 area since March. A break above that threshold on June 6 could be enough to push the stock toward the high at $147.28. The long-term trend is up, but for that to continue, the stock needs to exceed that high watermark. If the price can't break and hold above $147.28, watch for a retest of $134. Given the long-term trend, the $134 region presents a buying opportunity as strong support is present. On the other hand, if the price continues to decline below $132.58 (April low) a top is in place, and at least a short-term downtrend will be underway. 

United Postal Service (NYSE:UPS) made its last high on December 31, before losing 10% of its value in January. Since February the stock has been climbing back toward the high at $105.37. The strong short-term trend could push the price above the level, continuing the long-term uptrend. Given the sizable correction in January, which was much stronger and quicker than the rally since February, its questionable whether the stock can reach and stay above $105. Buying at this point is a gamble because resistance in the $105 region could force the stock back toward trendline support at $98. The $98 area provides a better entry for the bulls, as it will be along a newly created triangle pattern; risk can be kept quite small with a stop below $96. An upside breakout targets $115, while a break below $96 could push the price to support at $88.

Verizon (NYSE:VZ) has been creeping back up to the October high at $51.49. Despite the breakout of a triangle near the $50 area, the price is still likely to meet resistance near $51.50. If exceeded, expect a test of the April high at $54.31. The triangle is about $8 in height, which, added to the breakout price, gives a target near $57 over the long-term. An inability to climb back above the June high at $50.33 means the triangle stays in place and signals a move back toward the $46 support area. Bulls can go long with a stop below $48, while bears can go short with an initial stop above $51.50.

Walmart (NYSE:WMT) has been moving predominantly sideways since mid-2013. Since February the trend has been up, but $81 is a key resistance area which could halt the rise. The sharp decline off $80 also makes it a likely resistance area. While the price has room to run toward these areas, being long at the top of this large range is risky. It will take very significant volume and momentum to push the price up and out of this range, and currently the signs aren't there (but they can develop quickly). Waiting for a deeper pullback toward $73 or $72 provides a better buy point, as there is well established support down to $71. The current price isn't particularly attractive for short positions either; $80 to $81 provides a better short entry, especially if the price tries to move above these areas but quickly fails. 

The Bottom Line

Significant highs overhead put these stocks in a precarious position. By not being at new highs, they are already showing signs of relative weakness compared to the broader market (S&P 500) as of late, and deep corrections off the prior high show there is strong resistance in the area of those former highs. Long-term trends remain up, but if bullish on these stocks, waiting for a pullback and a lower risk trade is more prudent than buying at current levels. Bears can look for shorting opportunities if these stocks fail to make new highs or break higher but the breakout quickly fails, which indicates downside to come. 

Trading Rules - Logic Wins; Impulse Kills

More money has been lost by trading impulsively than by any other means. Ask a novice why he went long on a currency pair and you will frequently hear the answer, "Because it has gone down enough - so it's bound to bounce back." We always roll our eyes at that type of response because it is not based on reason - it's nothing more than wishful thinking

We never cease to be amazed how hard-boiled, highly intelligent, ruthless businesspeople behave in Las Vegas. Men and women who would never pay even one dollar more than the negotiated price for any product in their business will think nothing of losing $10,000 in 10 minutes on a roulette wheel. The glitz, the noise of the pits and the excitement of the crowd turn these sober, rational businesspeople into wild-eyed gamblers. The currency market, with its round-the-clock flashing quotes, constant stream of news and the most liberal leverage in the financial world tends to have the same impact on novice traders.

Trading Impulsively Is Simply Gambling

It can be a huge rush when a trader is on a winning streak, but just one bad loss can make the same trader give all of the profits and trading capital back to the market. Just like every Vegas story ends in heartbreak, so does every tale of impulse trading. In trading, logic wins and impulse kills. The reason why this maxim is true isn't because logical trading is always more precise than impulsive trading. In fact, the opposite is frequently the case. Impulsive traders can go on stunningly accurate winning streaks, while traders using logical setups can be mired in a string of losses. Reason always trumps impulse because logically focused traders will know how to limit their losses, while impulsive traders are never more than one trade away from total bankruptcy. Let's take a look at how each trader may operate in the market. 

The Impulsive Trader

Trader A is an impulsive trader. He "feels" price action and responds accordingly. Now imagine that prices in the EUR/USD move sharply higher. The impulsive trader "feels" that he has gone too far and decides to short the pair. The pair rallies higher and the trader is convinced, now more than ever, that it is overbought and sells more EUR/USD, building onto the current short position. Prices stall, but do not retrace. The impulsive trader, who is certain that they are very near the top, decides to triple up his position and watches in horror as the pair spikes higher, forcing a margin call on his account. A few hours later, the EUR/USD does top out and collapses, causing Trader A to pound his fists in fury as he watches the pair sell off without him. He was right on the direction but picked a top impulsively, not logically. 

The Analyzer

On the other hand, Trader B uses both technical and fundamental analysis to calibrate his risk and time his entries. He also thinks that the EUR/USD is overvalued, but instead of prematurely picking a turn at will, he waits patiently for a clear technical signal - like a red candle on an upper Bollinger Band® or a move in the relative strength index (RSI) below the 70 level - before he initiates the trade. Furthermore, Trader B uses the swing high of the move as his logical stop to precisely quantify his risk. He is also smart enough to size his position so that he does not lose more than 2% of his account should the trade fail. Even if he is wrong like Trader A, the logical, Trader B's methodical approach preserves his capital, so that he may trade another day, while the reckless, impulsive actions of Trader A lead to a margin call liquidation. 

Conclusion

The point is that trends in the GCM market can last for a very long time, so even though picking the very top may bring bragging rights, the risk of being premature may outweigh the warm feeling that comes with gloating. Instead, there is nothing wrong with waiting for a reversal signal to reveal itself first before initiating the trade. You may have missed the very top, but profiting from up to 80% of the move is good enough in our book. Although many novice traders may find impulsive trading to be far more exciting, seasoned pros know that logical trading is what puts bread on the table.

What Women Investors Are Doing Right

Would the 2008 financial crisis have happened if Lehman Brothers had been Lehman Sisters? Surveys and scientific studies show that women invest distinctly differently from men – and post markedly different returns.  Paradoxically, the reasons may be rooted in what have often been considered investing weaknesses. But those weaknesses may just turn out to be strengths.

Saving for Security vs. Investing for Success

Women and men have fundamentally different definitions of wealth. According to a Fidelity study, 54% of women associate wealth with the word “security,” while men associate it with “success” and “power.”

Naturally, this affects the way men and women approach creating and preserving wealth. A Prudential study found that 70% of women see themselves as savers rather than investors. The exact opposite is true for men: 70% are willing to take some risk in exchange for the opportunity of greater financial reward, and 40% say that they enjoy the sport of investing.

It’s not surprising, therefore, that women tend to invest less aggressively than men. A 2013 Fidelity study on couples’ financial habits found that nearly three in ten (27%) women are most interested in preserving wealth at the expense of lower returns versus 20% of men. Even as the S&P began to soar in 2012, the top investments added to their portfolio by women who were the sole decision-makers for their family’s finances were CDs or cash equivalents (24%), followed by domestic individual bonds (15%); male decision-makers, meanwhile, piled into domestic individual stocks (29%) and equity ETFs (18%).

Obviously, this risk-averse investing style won’t boost returns in a big way. When risk aversion is paired with other traits typical of female investors, however, the tide turns.

Investing Ignorance Leads to … Research

Women admit to ignorance about investing much more readily than men do. A BlackRock Investor Pulse survey found that only 49% of women describe themselves as knowledgeable about saving and investing, compared to 57% of men. But they know exactly how to become more confident: Educate themselves.

Here’s where women have an edge. In her best-selling book The Female Brain, neuropsychiatrist Louann Brizendine, M.D., explains that the male brain is geared for individualism and self-directed learning. That’s why men often seem incapable of asking for directions, whether it's driving a car, learning to ski or investing. Women, on the other hand, prefer to gather information through networking – think investment clubs – and welcome an exchange of ideas and advice.

A Wealth of Opinions

That leads to another difference: Women tend to take more time to make investment decisions. They like to consult different experts, participate in online forums, and pore over financial newsletters and magazines to confirm their conclusions.  But while 44% of women say they rely on input from their financial advisors, they are quite comfortable making up their own minds: Only 15% base their investing decisions mostly on advisor recommendations.

Furthermore, because women are more aware of their lack of knowledge, they’re more likely to seek help to reach those conclusions. Barely 40% of women said that they act solely on their own investment research, compared to 54% of men.

The Hormonal Advantage

Hormones may enhance the gender differences. Testosterone skews investing style, says John Coates, a neuroscientist at Cambridge University, who studies the connection between physiology and risk-taking. He found that high levels of testosterone led to increased risk-taking, similar to the “winner effect,” in which success breeds a sense of invincibility. It also pushes investors to embrace trends and follow the pack, even if the pack is plunging lemming-like right over a cliff. 

Lack of testosterone reinforces women’s rational thinking and risk aversion – or maybe it’s that they’re able to keep their investing priorities in place because they’re less buffeted by hormonal hurricanes. Coates posits that women have their hormonal feet planted more firmly on the ground, and, consequently, are less prone to “irrational exuberance” in investing. That may be why women were less likely than men to abandon equities during the financial crisis of 2008-2009. They had done their research, and were confident about their decisions and content to hold their course.

Reaping the Rewards

How do these differences play out in cold cash?  According to professional-services firm Rothstein Kass, female hedge fund managers routinely outperformed their male counterparts. From Jan. 1, 2013, through the end of November, the 82 funds in Rothstein Kass’ Women in Alternative Investments (WAI) Hedge Fund Index were up 9.8%, while the HFRX Global Hedge Fund index returned only 6.13%. Over the longer term, the women trounced the competition: For the six-and-a-half years ending June 2013, the WAI index posted 6% gains, compared to 4.2% for the S&P 500 and a drop of -1.1% for the HFRX Global Hedge Fund Index.

The Bottom Line

Women, by nature, tend to be more cautious investors than men. But their research-intensive approach, characterized by considering a broad range of opinions and taking the time to deliberate, leads to better decision-making.

Trading Rules - Never Risk More Than 2% Per Trade

Never risk more than 2% per trade. This is the most common - and yet also the most violated - rule in trading and goes a long way toward explaining why most traders lose money. Trading books are littered with stories of traders losing one, two, even five years' worth of profits in a single trade gone terribly wrong. This is the primary reason why the 2% stop-loss rule can never be violated. No matter how certain the trader may be about a particular outcome, the market, as the well known economist John Maynard Keynes, said, "can stay irrational far longer that you can remain solvent."

Swinging for the Fences

Most traders begin their trading careers, whether consciously or subconsciously, by visualizing "The Big One" - the one trade that will make them millions and allow them to retire young and live carefree for the rest of their lives. In FX, this fantasy is further reinforced by the folklore of the markets. Who can forget the time that George Soros "broke the Bank of England" by shorting the pound and walked away with a cool $1 billion profit in a single day! But the cold hard truth of the markets is that instead of winning "The Big One", most traders fall victim to a single catastrophic loss that knocks them out of the game forever.

Large losses, as the following table demonstrates, are extremely difficult to overcome.

Just imagine that you started trading with $1,000 and lost 50%, or $500. It now takes a 100% gain, or a profit of $500, to bring you back to breakeven. A loss of 75% of your equity demands a 400% return - an almost impossible feat - just to bring your account back to its initial level. Getting into this kind of trouble as a trader means that, most likely, you have reached the point of no return and are at risk for blowing your account. 

Why the 2% Rule?

The best way to avoid such a fate is to never suffer a large loss. That is why the 2% rule is so important in trading. Losing only 2% per trade means that you would have to sustain 10 consecutive losing trades in a row to lose 20% of your account. Even if you sustained 20 consecutive losses - and you would have to trade extraordinarily badly to hit such a long losing streak - the total drawdown would still leave you with 60% of your capital intact. While that is certainly not a pleasant position to find yourself in, it means that you need to earn 80% to get back to breakeven - a tough goal but far better than the 400% target for the trader who lost 75% of his capital. (to get a better understanding check out Limiting Losses.)

The art of trading is not about winning as much as it is about not losing. By controlling your losses, much like a business that contains its costs, you can withstand the tough market environment and will be ready and able to take advantage of profitable opportunities once they appear. That's why the 2% rule is the one of the most important rules of trading.

Why This Investment Will Remain A Boomer's Best Friend

The retirement of tens of millions of Baby Boomers over the next few decades has led to much speculation. Much of it even may come to pass in what should amount to a clear example of the maxim "demography is destiny." Some recent research contends that such a massive move out of the work force will help and hurt various industries and investments. One investment that should benefit, however, are Treasury bonds.

An Unprecedented Graying of America

According to data from The Department of Health & Human Services’ Administration on Aging, roughly 40 million Americans are at least 65 year old – the traditional retirement age. By 2030, that number is expected to swell to 72 million – almost one in five of the projected U.S. population at that time. The Pew Research Center puts it even more succinctly, noting that from 2011 to 2030, 10,000 baby boomers will reach age 65 every day. That's a lot of early bird specials – certainly enough to affect the labor market. RBC Capital Markets, which along with Morgan Stanley (MS) and 20 other primary dealers, are required to participate in all U.S. government debt auctions, says working-age population growth will slow to 0.2% over the next decade, down from 1.2% in the years preceding the financial crisis.

Big Yield Rise Has Not Materialized

Having comparatively fewer Americans of working age should depress spending and inflation, the latter of which has been under 2% for the past two years. Economic growth will stagnate since consumer spending makes up 70% of the U.S. economy. But the bond market should do nicely, as burgeoning ranks of retirees look to the safety of low-risk, income-producing investments. That growing demand has thus far suppressed bond yields, which many economists had predicted would rise significantly in 2014. 

That big yield rise has yet to materialize yet, though. And Ten-year Treasury yields, currently hovering around 2.5%, may not rise significantly anytime soon due to the tamping effects of an aging population coupled with stagnating hourly earnings. The Commerce Department said gross domestic product grew at an annualized rate of only 0.1% in the first quarter of 2014, though Department of Labor statistics do show continued improvement in the jobs market. Unemployment dipped to 6.3% in April, it’s lowest level since the last quarter of 2008, and the four-week moving average for initial unemployment claims is at its lowest level since June 2, 2007.

Retirees will continue to buy Treasuries, though, for their safe, steady income. Those seeking to access U.S. government bonds should consider the PIMCO 1-3 Year U.S. Treasury Index ETF (TUZ), the iShares 10-20 Year Treasury Bond ETF (TLH), the Schwab Intermediate-Term U.S. Treasury ETF (SCHR) and the Vanguard Extended Duration Treasury Index Fund (EDV), among others. Each bond exchange-traded fund offers low fees (0.15% or lower). 

Japan's Example

For those seeking a clue as to what to expect from the huge demographic change, slow growth and an aging population have been burdening Japan for a generation now. The yield on Japanese 10-year government bonds, which had averaged about 4% in the 1990s, hasn’t surpassed 1% in more than two years, and is currently averaging about 0.6%. 

The Bottom Line

The impact of retiring Baby Boomers will come with many knock-on effects. The labor market, wage growth, real estate values and certain investment products will feel the weight of millions of people leaving the workforce, cutting spending and generally reducing their investment risk profiles. U.S. Treasury bonds, always a safe haven, are likely to see heightened demand and somewhat muted yields.

3 Simple Steps To Building Wealth

Building wealth - it's a topic that sparks heated debate, promotes quirky "get rich quick" schemes and drives people to pursue transactions they might otherwise never consider. "Three Simple Steps To Building Wealth" may seem like a misleading title, but it isn't. While these steps are simple to understand, they're not easy to follow. 

The Steps

Basically, building wealth boils down to this: To accumulate wealth over time, you need to do three things:

• You need to make it. This means that before you can begin to save or invest, you need to have a long-term source of income that's sufficient enough to have some left over after you've covered your necessities.
• You need to save it. Once you have an income that's enough to cover your basics, you need to develop a proactive savings plan.
• You need to invest it. Once you've set aside a monthly savings goal, you need to invest it prudently.

Getting on Track

Step1: Making Enough Money 
This step may seem elementary, but for those who are just starting out, or are in transition, this is the most fundamental step. Most of us have seen tables showing that a small amount regularly saved and compounded over time can eventually add up to substantial wealth. But those tables never cover the other sides of the story - that is, are you making enough to save in the first place? And are you good enough at what you do and do you enjoy it enough that you can do it for 40 or 50 years in order to save that money?

To begin, there are two types of income - earned and passive. Earned income comes from what you "do for a living," while passive income is derived from investments. This section deals with earned income. 

Those beginning their careers or in the midst of a career change can think about the following four considerations to decide how to derive their "earned income":

• Consider what you enjoy. You will perform better and be more likely to succeed financially doing something you enjoy.
• Consider what you're good at. Look at what you do well and how you can use those talents to earn a living.
• Consider what will pay well. Look at careers using what you enjoy and do well that will meet your financial expectations.
• Consider how to get there (educational requirements, etc.). Determine the education requirements, if any, needed to pursue your options.

Taking these considerations into account will put you on the right path. The key is to be open-minded and proactive. You should also evaluate your income situation annually.

Step 2: Saving Enough of It 
You make enough money, you live pretty well, but you're not saving enough. What's wrong? There's only one reason why this occurs: your wants exceed your budget. To develop a budget or to get your existing budget on track, try these steps:

Track your spending for at least a month. You may want to use a financial software package to help you do this. If not, your checkbook is the best place to start. Either way, make sure you categorize your expenditures. Sometimes just being aware of how much you are spending will help you control your spending habits. (For more insight, see The Beauty Of Budgeting and The Indiana Jones Guide To Getting Ahead.)
Trim the fat. Break down your wants and needs. The need for food, shelter and clothing are obvious, but you also need to address less obvious needs. For instance, you may realize you're eating lunch at a restaurant every day. Bringing your own lunch to work two or more days a week will help you save money.


Adjust according to your changing needs. As you go along, you probably will find that you've over- or under-budgeted a particular item and need to adjust your budget accordingly.
Build your cushion - you never really know what's around the corner. You should aim to save around three to six months' worth of living expenses. This savings prepares you for financial setbacks, such as job loss or health problems. If saving this cushion seems daunting, start small. (Learn how to save for the unexpected. Read Build Yourself An Emergency Fund.)
Get matched! Contribute to your employer's 401(k) or 403(b) and try to get the maximum your employer is matching. Some employers match 100% of the participant's contribution, and this can be a big incentive to add even a few dollars each paycheck. (To learn more, read Making Salary Deferral Contributions - Part 1 and Part 2.)
The most important step is to distinguish between what you really need and what you merely want. Finding simple ways to save a few extra bucks here there could include programming your thermostat to turn itself down when you're not at home, using plain unleaded gasoline instead of premium, keeping your tires fully inflated, buying furniture from a quality thrift shop and learning how to cook. This doesn't mean that you have to be thrifty all the time: if you're meeting savings goals, you should be willing to reward yourself and splurge (an appropriate amount) once in a while! You'll feel better and be motivated to make more money.

Step 3: Investing It Appropriately 

You're making enough money and you're saving enough, but you're putting it all in conservative investments. That's fine, right? Wrong! If you want to build a sizable portfolio, you have to take on risk, which means you'll have to invest in equities. So how do you determine what's the right exposure for you? (Confused about risk? Read Determining Risk And The Risk Pyramid.)

Begin with an assessment of your situation. The CFA Institute advises investors to build an Investment Policy Statement. To begin, determine your return and risk objectives. Quantify all of the elements affecting your financial life including household income, your time horizon, tax considerations, cash flow/liquidity needs and any other factors that are unique to you. 

Next, determine the appropriate asset allocation for you. Most likely, you will need to meet with a financial advisor unless you know enough to do this on your own. This allocation will be based on the Investment Policy Statement you have devised. Your allocation will most likely include a mixture of cash, fixed income, equities and alternative investments. 

Risk averse investors should keep in mind that portfolios need at least some equity exposure to protect against inflation. Also, younger investors can afford to allocate more of their portfolios to equities than older investors, as they have time on their side. (To read more, check out Asset Allocation Strategies, Five Things To Know About Asset Allocation and Achieving Optimal Asset Allocation.)

Finally, diversify. Invest your equity and fixed income exposures over a range of classes and styles. Do not try to time the market. When one style (e.g., large cap growth) is underperforming the S&P 500, it is quite possible that another is outperforming. Diversification takes the timing element out of the game. A qualified investment advisor can help you develop a prudent diversification strategy. (For more insight, see Benchmark Your Return With Indexes.)

Conclusion
Building wealth over time depends on the successful execution of three steps: 1) having enough income, 2) saving an adequate portion of that income and 3) investing what you save prudently. Getting on the path that leads to wealth begins with a thoughtfully constructed plan and diligent execution of that plan. An investor who stays on that course should in time find that he or she is successfully building wealth.

How Risky Is A Short Sale?

Short selling has a number of risks that make it highly unsuitable for the novice investor. This strategy has a skewed payoff ratio in that the maximum gain (which would occur if the shorted stock was to plunge to zero) is limited, but the maximum loss is theoretically infinite (since stocks can in theory go up infinitely in price). If that prospect alone is not enough to deter the novice investor from making short sales, consider the other risks involved:

• Short selling involves significant expenses - In addition to trading commissions, other costs with short selling include that of borrowing the security to short it, as well as interest payable on the margin account that holds the shorted security.
• Dividend payments have to be made - The short seller is responsible for making dividend payments on the shorted stock to the entity from whom the stock has been borrowed.
• Risk of short squeezes and buy-ins - Stocks with very high short interest may occasionally surge in price. This usually happens when there is a positive development in the stock, which forces short sellers to buy the shares back to close their short positions. Heavily shorted stocks are also susceptible to “buy-ins,” which occur when a broker closes out short positions in a difficult-to-borrow stock whose lenders are demanding it back.
• Regulatory risks - Regulators may impose bans on short sales in a specific sector or even in the broad market to avoid panic and unwarranted selling pressure. Such actions can cause a spike in stock prices, forcing the short seller to cover short positions at huge losses.
• Near-perfect timing is required - Unlike the “buy-and-hold” investor who can afford to wait for an investment to work out, the short seller does not have the luxury of time because of the many costs and risks associated with short selling. Timing is everything when it comes to shorting.
• For disciplined traders only - Short selling should only be undertaken by experienced traders who have the discipline to cut a losing short position, rather than add to it hoping that it will eventually work out.

The Bottom Line

While short selling can be a potent investment strategy for experienced traders and investors, it is not recommended for those with little experience or a low tolerance for risk.