S&P Top in? "Summer" Rally finally over?

Update 2-19-2010
Updated Count doesn't change much just allows for more upside wiggle room. But, the good news is the market looks to be reaching the end of its counter trend rally and I still expect that sell off soon. $1150 new high is now the ultimate stop loss point but just ahead is the 62% retrace which is a prime rejection point.





Update 2-16-2010
It is very hard to stay bearish on days like today, but that is what 2nd waves are supposed to do and that is why you must have rules to trade by. 2nd waves are supposed to convince everyone that went short that they made a mistake. This looks to be occurring now. I have attached an updated chart with very little changes from the last one except the added days. The Sell Area in red is still in tact from the Feb 1 update and until this area gets violated, that sell signal is still valid. I am staying short until a breach of $1105. Right now is a very high risk reward as the next move should be down and down hard if my counts are correct. I will be adding to my short position with a tight stop of ~2% higher or ~$1110 with the expectation of the market falling below $1045 imminently.

Other things that keep me happy about my short position...
1) Negative divergences are robust today as shown on the bottom of my chart
2) Very choppy action the last week would be very hard to count as impulsive
3) Volume is nothing spectacular over the same period.
4) Market should move quicker in the direction of its prevailing trend which it did from the January top.
5) My sell area is still above current prices (theoretically keeps my position in the black)

Compare this chart to the original posted.





Update 2-1-2010
[I have updated the linked chart. Potential bottom on Friday with the correction starting today. The down move lasted 8 days, so a correction of 3-5 days could be expected. With the extensions downward, the target retrace and 3rd of a 3rd area has moved downward about 15 points. Therefore I am expecting to add some TZA to my longer term portfolio around $1100. If the move up easily takes out $1105 then I will hold off until $1120 to add even more. As before, prices can move up to $1150 before the down move count is invalid, so a pretty large room for error, but the ensuing move down should more than make up for it.]

Update 1-27-2010 10:30am
[Market looks to have extended its waves, but this does not change the total theme, just pushes the timing out another day or two]


After last week's sell off and then a new low today there is good evidence of a completed 5 wave count on the S&P500. What this means is the top could finally be in.

The attached chart is a continuation of the one I built yesterday which had us in the 4th wave triangle of an extended fifth wave. I was hoping for a fall below that triangle to complete the 5th wave of the 5th wave extension, which happened this morning. With that and the so far decent bounce in the markets, the 5 wave move down could be complete.

That means a counter-trend correction wave would be underway, which so far looks as such. Of course I will know more as the market reveals its pattern. But, with the five waves down and the pretty high confidence that they are impulsively down, I will be shorting the market in the target area outlined on the chart in red. At the minimum I expect another five wave move down after the completion of this correction, and given the size of this first five wave move down, the next one should generate at least another 5% move.

I will be adding some more TZA to my account probably tomorrow as an anchor and then try to nail the top in the target red area with another slug. I will have a first stop above $1125 (black area) as I don't think the market should penetrate the 3rd wave quick move down from Wednesday morning keeping in mind that retracements can have a tendency to retrace back to the area of the prior 4th wave which tops out at $1122.84. Ultimately if a new high above $1150 is put in then my count is wrong and I will cut all losses.

As always the link in the title is of a live chart which can be checked at your convenience.

Good Luck

GMR Update

I sold all of my GMR shares yesterday with the big run up in price the last 2 weeks. The reason for the big rise is of course unknown, but there have been a few analyst upgrades and some articles in some papers about the cold weather increasing the need for tankers. Contrary, I read an article this week in the FT about the significantly hot temperatures in the southern hemisphere which could mean less need for oil and tankers in the coming winter...who knows. That's why I don't invest based on the press or other analyst's work. I do my own diligence when investing; it's the only way to make sure my interests are 100% represented!

Also, looking back at other share price runs on big volume for GMR, one occured in May and another in August and October which all eventually peaked out on the volume then sold off to give the run all back.

Regardless, I don't like what their latest earnings report says, and I particularly don't like them raising more debt (why are they raising debt and why at such high rates?). There also has been very little news since that announcement which would most likely mean either a deal or some more bad news; the same way the company was quiet before yanking the dividend and becoming more gloomy.

At $8.25 I am taking my profits and will revisit the company if the price falls below $7 again where my existing cost basis is. I think the stock is too expensive with the knowledge I currently have. See below for some quick math on that.

I posted some comments on the yahoo finance message board summarizing my thoughts. In particular there is solid support around $7 for this stock, so that is why I waited to sell until yesterday instead of when the earnings report came out.

I have copied my message board posts below...

12-16-09
Post 1
I apologize for not being caught up on this stock. When I heard the conf. call I sold most of my shares with the announcement of the semi surprising divy drop, but havent done the deep dive analysis needed. The surprise to me was the additional debt needed.

Some quick math below...
This all comes down to how much the ships are worth TODAY and will be in the next few years? That is a way to come up with the terminal value and assume what can pay off the debt principals. As long as the company's Enterprise value is less than its "market" book value (terminal value) plus future cash flows (which I have assumed at a generous $50MM/year) I am okay continuing to hold this stock.

Quick math after new debt and current price says EV~$1.64B and assuming $50MM/year FCF discounted at at least 15% (rate now way up with increased debt load) says in 5 years FCF is only worth $167MM today. That means the fleet needs to be worth well more than the $1.3B the latest Q has (needs to be worth at least $1.5B) to support thh current share price.

I am disappointed and have sold a bulk of my shares. I think the writing on the wall was when the CEO was leaving and took the huge $20MM or whatever it was bonus.

I am way behind on this stock, but did the company disclose how they were going to use the $300MM debt? If my memory recalls this rate is well beyond the existing debt on the books of around 5-6% which I assume is because it is not backed by the assets, which the quick math above would support. Also, if it is true the company is using the debt to maintain the divy, then no thanks...paying 12% to give me a tax effective 4% yield is hideous.

On the surface I need to be convinced that my cash flow estimates are wrong, or that they are using the new debt for something more than "surviving" or dividends.

I keep trying to give this company one more quarter, but with the latest surprises, I believe its time is up.

On the positive side there does appear to be strong support at any price below $7.00.

Post 2
I agree with some of your points, but at what discount rate are you willing to accept that "things might improve in 2010-2011"? That is potentially at least 2 years from now and 3 years from earlier this year when things started heading south. Your discount rate must be at least 15% now since the company just issued at 12%...that's a lot of time value.

If things truly are going to get better, don't you think the markets would reflect that?

I am not trying to argue, just saying that I think there needs to be more solid footing to buy this stock than "the cycle will turn upwards" as that upward turn may not come for 3-4 years and it almost certainly will not be anything like the one of 3 years ago.

Also, in times like these most companies are scaling back debt, and GMR is approaching crazy debt coverage ratios (EBITDA/interest)--it's as if the company was just levered up as if it was private equity owned!

I wonder how secure 2010's contracts are and at what rates???