Author: Ken Croker

The Biggest Debate in Europe: Brexit

The people of the United Kingdom have a perplexing decision to make on June 23. They must decide whether to stay in – or leave – the European Union. The upcoming vote, commonly referred to as “Brexit”, is expected to be a close one.

Above is a recent poll by Forex Capital Markets. The “remain” side wishes for Britain to stay in the European Union (EU), and the “leave” side wishes for Britain to exit. As we can see, the two sides are neck and neck in poll standings. With the popular opinion virtually split, let’s hear some arguments from each side:

Arguments to Leave the EU

Currently, the EU is burdening Britain with laws and regulations. These include excessive regulations on British businesses in areas like health, employment rights, etc. The EU also forces Britain to let in migrant workers from poorer European countries. These migrant workers then compete with British workers for jobs in unskilled labor. This drives down wages for the British working class. By leaving the EU, the UK can remove bureaucratic regulations, limit unnecessary immigration, and thus take back control of its economy. This is why people like Boris Johnson, Michael Gove, and Donald Trump support the “leave” side.

Arguments to Remain in the EU

Britain must remain and contribute to the EU- rather than abandon it- to protect its world status. According to the CIA World Factbook, the EU has an annual GDP second only to the United States (https://www.cia.gov/library/publications/the-world-factbook/fields/2195.html), making the union an economic powerhouse. If Britain were to leave the EU, then it would certainly have much less economic status than it does now.

Britain might also encounter a serious recession if it leaves the EU. Because of its enormous economic power, the EU is currently a major trading partner of Britain. If Britain leaves, it might see a significant reduction in trade, which could cause an economic downturn. Overall, staying in the European Union will be much better for Britain’s future. This is why people like David Cameron, Barack Obama, and Angela Merkel support the “remain” side.

Comparison to the Grexit Movement

The Brexit debate is quite similar to the Grexit controversy that occurred a year ago in Greece. Like Brexit supporters, campaigners for Grexit wanted increased control in their country’s borders. They wanted less of their laws made by the European Union and more of their laws made by their own governments. However, there is a key distinction between Brexit and Grexit. Greece was just considering leaving the Euro currency while Britain is considering leaving the European Union altogether. This is because Greece still needed the European Union to help revive its crumbling economy, while Britain may be able to survive on its own. Ultimately, the Grexit movement failed as Greece decided to remain a Euro currency member. As for the Brexit issue- we will have to wait until June 23 to find out.

– Ken Croker

Which side of the Brexit debate do you support? Leave a comment in the section below!

Golden and Death Crosses

Level: Beginner

A golden cross is a basic bullish pattern that forms when a shorter term moving average “crosses” above a longer term moving average. An example would be if ABC’s 15 day moving average rose above it 50 day moving average. Many technical analysts interpret this pattern as a sign that a new trend is forming or that the existing trend is getting stronger. A rise in volume immediately after the cross helps confirm the pattern.

Death crosses are the exact opposite: when the shorter term moving average crosses under the long term moving average. Death crosses are regarded as a bearish sign, and they, like golden crosses, are often confirmed with a rise in volume after the cross.

MACD

Level: Beginner

Moving Average Convergence Divergence, or MACD is a tool that can identify entry and exit points in a particular trade. It does this by determining when a trend begins and when it ends. Understanding this concept does, however, require a basic knowledge of Exponential Moving Averages (EMA). If you are unacquainted with EMAs, just give Michael’s minute blog on moving averages a good read. It should teach this concept sufficiently. That being said, the most commonly used MACD is calculated as follows:

MACD = 12 day EMA – 26 day EMA

Analysts then usually take a 9 day moving average of the MACD called the signal line. This signal line is then usually plotted alongside the MACD chart. This graph reveals trends that investors use to trade. When the MACD crosses above the signal line, traders take this as a bullish sign and they tend to purchase shares in the stock. When the MACD falls below the signal line, traders take this as a bearish sign and they usually sell their shares in the stock.

Traders also look for other trends in this graph. When the security’s price veers away from the MACD, it is called a divergence. Investors see this divergence as an end in the current trend. However, this method can often generate false trading signals.

Normally when the MACD diverges dramatically higher from the signal line, it suggests that the stock may be overbought. Normally, the market will correct itself and bring the price back down again. However, the market may not “correct itself” if the company’s fundamentals have made a drastic change.

Enjoy Your Trading!

Market Summary – 11/23/2014

Hello RHS Finance Club members! The following information is brought to you by our VP, Ken Croker, and our President, Michael Trehan.

The market had modest gains ending November 23. Here’s a breakdown of the major indices this week:

  • S&P 500: Up 1.2% for the week, after a large gap up on Friday.
  • Dow Jones: Up 0.51% for the week, large gap Friday
  • Nasdaq:  Up 0.24% for the week, breakaway gap on Friday

Let’s break the market down into sectors: Telecommunications was hit hard, with Verizon (VZW) down almost 2.5% for the week. Energy had a nice run this week, with XLE up 3.3%. Technology was a laggard, with XLK closing up only 0.36%. Basic materials outperformed, with XLB seeing a 2.75% pop.

Predictions:

  • Energy will retrace slightly, with a long run upward
  • Facebook is still consolidating and may experience a large move in either direction
  • Disney looks ripe for a long term entry, which Michael has done so through LEAPS (education blog on that later).
  • Goldman Sachs has a setup similar to Disney, and may also be an entry-candidate.

– Michael Trehan, Pres. and Ken Croker, VP

Volume

Level: Beginner

This is a beginner level education blog, which means that this is a topic that is introductory and has been covered by our club long before. These should be review and an easy read. Intermediate level articles might contain content intriguing to officers, but not too advanced topics. Advanced blogs are reserved for Michael Trehan for now.

Volume is a powerful tool used by many technical analysts to measure other traders’ level of interest in a particular stock.  In addition, it can be used to confirm trend continuations or reversals. It is calculated as follows:

Volume = Shares Traded / Time period

Now let’s further simplify some of the terms here.

  • Shares Traded: The number of shares that were either bought or sold (it does not matter which you use, the number will be the same) throughout the time period
  • Time Period: The amount of time being tracked (e.g. 1 hour, 1 day, 1 week)

For example, if 5,000,000 shares of ABC were sold over the week, then its average volume for each day would be 1,000,000. Keep in mind that the number of sellers must equal the number of buyers. If it does not, the price will move up or down until it does.

Technical analysts regularly use volume to determine the strength or weakness of a market move. As an example, one day XYZ shares increased considerably. If the volume for that day was high, it means that tons of buyers wanted the shares. This buying pressure created a strong uptrend which was difficult for bears to fight. However, if the volume was low, it means that buyers did not want ABC shares that badly. The only reason the stock moved up that day was because there were few sellers to keep the price down. This created a very weak trend which could easily be reversed if some sellers enter the market. With this in mind, several events can cause tremendous buying or selling pressure: an earnings report, a manufacturing recall, etc. This pressure then causes the volume to spike.

Many websites like FINVIZ and StockCharts automatically display the volume when a ticker is viewed. The volume appears as a bar chart at the bottom of the display. In addition, the volume bar will be either green or red, depending on the performance of the underlying stock that day.

-Ken Croker

P/E Ratios

Level: Beginner

Michael: Welcome to our third issue of the education blog! Notice that there is a line above that tells you the level of the education blog. Beginner means that it is intended for everyone, and usually the topics stay in line with our meetings. Intermediate is for officers and anyone else who is ahead in the meetings, while Advanced is for me to introduce or discuss topics that are currently out of the scope of the club. Our topic this time around is the P/E ratio. Ken will explain to you in simple language what the P/E ratio tells you, how it is calculated, and how it is used.

Ken: The Price-to-Earnings (P/E) ratio is a powerful tool that we can use to determine, on a basic level, how other investors feel about a certain company. To be more specific, it is a fundamental analysis ratio that measures how much money investors are willing to pay for one dollar of earnings. Low P/E ratios suggest that other investors are not as confident in a company as they should be and have therefore oversold the stock. On the other hand, high P/E ratios suggest that investors are overconfident in a company and have therefore overbought the stock. However, a single company’s P/E ratio by itself is useless. In order to gain insight on a company, we must compare its P/E ratio to that of other companies operating in the same sector (type of product or service). The P/E ratio is calculated as follows:

P/E ratio = Share Price divided by Earnings Per Share (EPS)

EPS = Net Income divided by Number of Shares

Translating that financial jargon into English:

  • Net Income: The amount of money the company earned (usually in the past year)
  • Average Outstanding Shares: The total number of a company’s shares owned by investors, whether retail or institutional

For example, XYZ had a net income of $200 million last year. XYZ has 100 million shares of stock, each priced at $50. The EPS for XYZ Inc. would be $200 million / 100 million =  $2. Since the price is $50 and the EPS is $2, the P/E ratio would be 25. Let’s compare them to ABC, who operates in the same sector. ABC, with 50 million shares, made $150 million last year. Its EPS would therefore be $150 million / $50 million = $3. Each share is currently trading at $45, giving ABC a P/E ratio of $45 / $3 = 15. The P/E ratios of XYZ and ABC show that investors are willing to pay more for XYZ’s earnings than ABC’s earnings. Investors could also be valuing XYZ more than they should, causing XYZ’s stock to fall when the market corrects itself.

Therefore, P/E can be a powerful tool determining when a stock is overvalued or undervalued. However, just because a company’s P/E ratio is relatively low or high does not mean it is undervalued or overvalued. A company could be reporting outstanding earnings, but if it is taking on massive amounts of debt to get there, investors will not be as excited. This lack of confidence will drop the price, thus lowering the P/E ratio. When making trading decisions, use the P/E ratio in accordance with other fundamental ratios for the best result.

– Ken Croker