Hi Lou
I am picking up positive vibes on WFC and wondered if I could ask for your opinion.
Thanks
John

Hey John,

 Thanks for the assignment! Warren Buffett owns a nice piece of Wells Fargo & Co. (WFC NYSE) so you are following in the footsteps of a giant. Your vibe on the potential for the shares could be driven by rumours of increasing dividends. There is conjecture that the company has the room to goose the cash distributed to owners over the next few years. Nothing lifts a stock like a boost in its dividend.

The charts will provide further guidance to help you with see if your vibe is supported by technical indicators.

The three year chart depicts a stock that has been range bound since late 2009 with support at $23.00 and resistance at $34.00. The downtrend that started in February, 2011 as the shares hit resistance has been broken and have now caught a bounce off support.

The MACD and RSI on the six month chart both signalled the late November move off of $23.25 to the high of $27.25 December 07, 2011. A 17% return in two weeks is a nice little something to enjoy during the Christmas Season!

Currently the stock has met resistance along the 200 day moving average. In addition the RSI and MACD are not generating clear signals at the moment.

Given that you have a gut feeling that has you interested in WFC and that there is new support forming along the 50 day moving average at $25.50 making an initial investment at these levels would not be reckless. Plus you will earn the 1.8% yield while you wait.

Make it a profitable day and happy capitalism!

Hi Lou,
I always learn something via you answers to reader questions. Now I would appreciate your comments re D+H. Stock is going down, down, down. True, cheques are out, but they seem to be compensating with other investments, contrary to Yellow Pages’ management.
Any thoughts re hold/sell of D+H?
Many thanks
Morton

Hey Morton,

Thanks for your kind words and the assignment. Davis + Henderson Corp. (DH TSX) has reduced its dependence on providing personal and business cheques to the customers of financial institutions. The segment represented 90% of corporate revenue in 2006. By 2010 cheque services were down to 46% of sales and lending technology and servicing solutions made up 48%. The forecast for 2011 is for further improvements in the revenue mix.

An examination of the charts will provide some answers to your question.

The three year chart indicates that investors hit the sell button in early March of 2011 as the shares approached $22.00. When I reviewed the 10 year chart on globeinvestor.com it was evident that $22.00 was the all time high. Knowledgeable investors using the tools available to them would have been taking profits when it failed to advance above the previous peak.

What is also visible is the death cross that formed in July and the firm resistance along the 50 day moving average. Every attempt to move higher has failed.

 Finally if you draw a set of parallel lines to bracket the decline from upper left to lower right you can see that a trading channel has formed. If you want to see higher prices for the shares of DH it has to breakout above the upper rail.

The MACD and RSI on the six month chart both generated a series of buy and sell signals which would interest investors who were inclined to trade in the down channel.

 Given that you are deciding between a hold and a sell I would say sell before the end of the year. Take the tax loss and if you really like the story buy it back in 2012. Please consult your accountant for how best to proceed with the loss and buy back.

Make it a profitable day and happy capitalism.

Hi Lou,
I have to say I love your column and read it religiously.

I was hoping you could have a look at Western Alliance Bank for me. I bought in to this bank at about 7.50 on a bit of a flyer after reading an article in the Globe about possible takeover candidates in the banking industry. Between the exchange rate and the stock’s performance it hasn’t been particularly good to me. However I think I am seeing some strength in the stock again. I am wondering whether to hold it longer or move on at this point. I would love to hear your opinion.
Thanks
Eric

Hi Eric,

Thanks for the assignment. Western Alliance Bancorp. (WAL NYSE)  with a market capitalization of $517 million is a small player in the U.S. banking sector. Their operations are centered in Arizona, Nevada, California, and Colorado which have been hard hit since the subprime mortgage debacle hit in 2007.

The first thing that comes to mind is your interest in the stock based on one outcome. There are three things you can do with your money as an investor. You can invest, which means researching companies with a history of earnings and dividend growth. The second opportunity to put your money at risk is to speculate. Speculations is the process of watching as a company develops its prospects over time with no guarantee that they will build a mine, hit a gusher, or bring their new technology to market.

Finally there is gambling. Gambling is putting your money into a company based on one outcome.  In your case it is a potential takeover. There is absolutely no way to evaluate or measure how or if a takeover will happen which adds to the risk.

Let’s see what opportunities exist to get you money out from under this loss.

The three year chart tells the sorry tale of a stock that had traded over $35.00 back in 2006. Unfortunately WAL  hasn’t seen the sunny side of that peak in five years. The shares had been range bound since May of 2010 with resistance at $8.25 and support at $6.75.

WAL broke support in the panic selling that came into the market in August and hit a 52 week low of  $4.44 before it caught a bounce.

The six month chart depicts the lift off  the 52 week low and the advance to resistance at $7.00 along the 200 day moving average. The bounce provided a 48% gain from the lows but still has you nursing a loss.

Given the advance is still intact and that we are now in a period of seasonal strength for banks you should hold on to WAL until January 2012 and see if you can get back to your breakeven point. From there you can decide if you want to continue to hold a small cap bank stock that doesn’t pay a dividend in the hopes of a premium offer in a takeover.

Make it a profitable day and happy capitalism!

Question for you Lou.

I am considering buying some Canadian bank stock. I am interested in the dividend income and, hopefully, reasonable steady growth. Is this the route to go and if so, which banks in particular interest you.

Thank you.
Bill

Hi Bill,

Thanks for the assignment. Investing in the Canadian banking sector has historically been the basis of wealth generation and there is nothing on the radar that would suggest otherwise. After looking at the charts for the major banks the one that stood out was the National Bank of Canada ( NA TSX).

Lets examine the charts and see where we have come from and where we might be going.

The three year chart illustrates the uptrend that started in September of 2010 which has taken the stock from $55.00 to the May 31, 2011 close of $80.95. What I like about the advance is that stock has been hugging the 50 day moving average taking a steady rise to the penthouse of profit.

In researching the sector  I found that NA has produced industry leading annual average dividend growth of 11% over the last ten years. Their dividend payout ration was the lowest in the sector as well. The analysis was conducted by Rob Carrick for the Globe and Mail, in an article published on March 11, 2011. http://www.theglobeandmail.com/globe-investor/investment-ideas/portfolio-strategy/doing-some-dividend-detective-work/article1939102/

The six month chart isn’t indicating that the uptrend is at risk. Now that doesn’t mean that the shares have gone straight up. There have been pull backs that tested support on the trend line but buyers were willing to step up and buy on the dips.

NA has beaten the street in seven of the last eight quarters on an earnings basis. The next report is scheduled for release on August 25,2011 and the forecast is for earnings of $1.74 per share.

Another factor that I like about NA is that they are focused on growing their business in Canada. Some of their competitors have hit rough patches trying to grow in the United States which is great when it works but not so when it doesn’t. The dividend yield on the stock is 3.5%.

The sector is solid and this one looks like the pick of the litter.

MAKE IT A MASSIVE JUNE AND HAPPY CAPITALISM!

What is your assessment Royal bank stock re common shares. It has dropped pretty heavy since the first week of Dec. Is it a hold, sell or buy opportunity right now in your view?

Rob

Hi Rob,

On September of 2010 I filed a  post on The Royal Bank of Canada ( RY TSX) for Amir. At the time the stock was selling off  but put in a nice advance to a high of $57.00 in October. It has recently reversed itself back to $51.00 where it has found some support. The charts will provide a better look at the prospects going forward.

The three year chart illustrates the peak at $62.50 in May of 2010 and the retreat to $48.00 in late August. The stock moved higher into October but is now trading below its 50 and 200 day moving averages. On December 13, 2010 Moody’s cut their rating on the debt at RY because of their capital markets exposure. Bottom line the stock is in a range bound pattern with resistance to an uptrend.

The six month chart depicts the move off the late August lows and the peak in mid October.  Both the RSI and MACD signalled the shift in momentum in October. The sell off in December was triggered by the release of Q4 results that came in below forecast.

The MACD and RSI are both currently indicating that the oversold condition is reversing. The current dividend yield on RY is 3.9% which is attractive enough in today’s environment.

The RY story is currently on of a range bound stock with support at $51 and resistance at $57.00. Long term the stock is well positioned for growth given the relative weakness of the banking sector in the United States and Europe. The company has recently announced acquisitions in London and Asia as it seeks growth outside of North America.

At this point you want to trade the stock in the range for income and watch for breaks above resistance or below support.

MAKE IT A MASSIVE CHRISTMAS AND HAPPY CAPITALISM!

Greetings,

I was wondering what would be your input on Bank Of Montreal. I bought the stock few days ago and it’s down by 6%.
Is it a hold or sell.

My Best,

Vica

Hi Vica,

I posted on the Bank of Montreal ( BMO TSX) on June 3rd of 2009 for Glenn. At the time the stock was on an uptrend and provided good returns into 2010. My post of September 03 , 2010 indicated that the stock had its highs in April and was struggling to get back on track to an upside. 

The hit you took on your purchase came after BMO announced their US$4.1 billion acquisition of Marshall and Ilsley to expand their footprint in the U.S. Marshall and Ilsley is the largest bank in the state of Wisconsin with branches in seven other states and $53.9 billion in assets. The rub on the deal is that analyst surmised that BMO overpaid for the company and then Moody’s jumped in to review the rating on BMO’s debt.

The charts will provide a better sense of  trend, support and resistance.

The three year chart illustrates the range bound trading that BMO has been in since May of 2010 with resistance at $62.50 and support at $58.00. The big advance from the March 2009 lows is behind us and now what  the stock needs to break above resistance is improved results, higher dividends, or both!

The six month chart depicts the range with support at $58.00 and resistance at $62.50. The fact that the stock is trading below its 50 and 200 day moving averages doesn’t suggest a quick return to a sustain uptrend. The stock has oscillated through the range three times in the last six months suggesting that BMO offers opportunities to trade for income.

The MACD has proven a valuable signal generator for opportunities to buy and sell BMO through the range.

Another factor that you can not ignore is the 4.80% dividend yield that the stock offers. In an environment where Government of Canada bonds, the risk free investment, are offering substantially lower returns,  a 4.80% yield looks pretty attractive.

It was easier to consider BMO in June of 2009 when it was in a sustained uptrend. Currently the stock is more of a trade than a hold so make sure your investor profile can profit from the opportunity.

MAKE IT A MASSIVE CHRISTMAS AND HAPPY CAPITALISM!

Hey Lou,

Merry Xmas. I’m looking at the MACD turning up on the signal line on WES-TSX ( a good small co that was bashed by the last downturn) To make a long story short, they have been working away to improve the outlook…they are profitable and Western Financials books are in order with the bottom line perking up.

Can you comment on WES for me? Am I looking at the company the wrong way?

Thanks Lou….all the best in ’11.

Wayne

Hi Wayne,

All the best to you and your’s for the Christmas Season and a healthy and prosperous 2011!

I last posted on Western Financial Group Inc. (WES TSX) on December 23, 2009 for Neil. At the time the stock was in an uptrend and meeting light resistance at $2.60. It made its way all the way to $3.50 a share by March of 2010 but that was as good as it got. Having said that a 35% return in a ninety day run is still okay in my book. The charts will help illustrate a number of good lessons and perhaps provide a sense of direction for 2011.

The three year chart depicts the run to $3.50 from the March 2009 lows but the uptrend was broken in late March of 2010. The sell off took WES to a low of $2.20 in September of 2010 where it caught  a bounce to resistance at $2.60.

One lesson from this chart is to capture profits when available. Once WES broke the uptrend line in March of 2010 its was a call to action. There is also a double top visible at $3.50 which is a reversal pattern indicating that the good times were over. Finally the breach of the 50 day and 200 day moving averages also signalled that the sellers were in control. Capturing profits and preserving capital are central to asset management or as the song says know when to fold em!

The six month chart illustrates the the support at $2.20 where WES caught a bounce and the resistance at $2.60. Over the last three months the stock has been trading in a tight range with support at $2.40 and resistance at $2.60. Volume has been a bit thin. In only twelve days out of the last thirty has daily volume exceeded the average volume  over the last three months.

If you like the WES story you could find an opportunity in the January through April period when financial stocks enjoy a period of seasonal strength. You are right the MACD does appear to be turning higher which would signal the beginning of a shift in momentum to the buy side.

What you must remember when investing in a small cap stock is to take your profits when available and to set realistic expectation. Trees don’t grow to the sky and stocks don’t go up forever.

Happy Capitalism!

Lou,

Heard you talking on the radio to John Oakley on AM640 regarding the U.S. banking industry and it was very informative. What are your thoughts regarding BOA these days? Are they in a position to swallow up some of the smaller players now and go on a run?

Thanks,

Mike

Hi Mike,

Thanks for your question and for listening to the John Oakley Show on AM640. The issue at hand when I was talking about U.S. banks had to do with Fannie Mae and Freddie Mac pushing banks to buy back the mortgages that they bought from the originators that did not meet standard industry issuance standards.

Clearly there was massive fraud in the U.S. mortgage origination business. Forcing the issuer to chew down on the bad paper they passed up the line is one step that could resolve the huge mess in the U.S. housing market. The tug of war between the banks and those that created the securitized bonds has yet to be resolved. If the contest goes to the buyers of the fraudulent mortgages it will force some banks into the hands of stronger players.

I think it would be reasonable to assume that the U.S. banking system will see continued consolidation given that there are over 8,000 banks in the US with over $100 million in assets. To your question is Bank of America (BAC NYSE) one of the stronger players. The charts will give us some sense of the direction that BAC is headed.

The three year chart for BAC shows that it continues to give up ground. I last posted on the company on April 30, 2010 for Vincent.At the time I thought that the stock needed to catch a bounce off of $12.30 to have any chance of reversing the downtrend. Clearly that has not happened.

The stock has been selling off since April of 2010 when it reached its high for the year at $19.86 and I don’t see a lot of support in the current trading range.

The six month chart illustrates the strong resistance along the 50 day moving average and neither the MACD nor RSI are signaling a change in momentum.  There does however appear to be a double bottom forming at $11.00 which warrants continued surveillance. A double bottom is a reversal pattern that could indicate a change in direction to the upside. I  could be giving in to false hope given the trend in place but if you like BAC watch to see if we get a  reversal.

The three year chart for the bank index depicts a sector that is building a base but has not yet begun to move higher. Not great news but at least its not more bad news.

Finally if the likes of Fannie Mae and Freddie Mac are successful in getting the banks to chew down on their bad paper BAC may have to gorge themselves on gut busting volumes. In 2008 they acquired Countrywide Financial which wrote reams of tainted loans. Overall BAC is not what I would call a strong player.

Happy Capitalism

Hi Lou

Your opinion on Canadian bank stocks would be highly appreciated.

Thank you.

Amir

Hi Amir,

Thanks for the assignment.  The charts are indicating that Canadian bank stocks have had a good run but  at worse look to be forming continuation patterns to the downtrend that started after the April highs and at best a range bound pattern moving sideways. Lets get to the analysis and see what we can deduce.

The three year chart for The Royal Bank of Canada (RY TSX) illustrates the end of the uptrend in late April of 2010 and the series of lower highs and lower lows forming a descending triangle. RY is trading below its 50 and 200 day moving averages which would have the astute investor reviewing the rationale for the investment from a capital appreciation perspective. The 3.8% dividend yield speaks for itself.

The six moth chart provides a good view of the current retreat. Note how every advance has met with resistance giving rise to lower highs and lower lows. The MACD does appear to be turning higher but the real question is what will it take to break above the downtrend line?

The three year chart  for the Toronto Dominion Bank ( TD TSX) exemplifies a stock that is forming a descending triangle pattern after a vigorous advance. It has been testing support along its 200 day moving average since it came off the April high.

The six month chart depicts the support at $65.00 and resistance along the downtrend line. A descending triangle is a continuation pattern that poses a risk that support at $65.00 will eventually not hold. The current dividend yield on the shares is 3.3%

The Canadian Imperial Bank of Commerce (CM TSX) is also exhibiting a descending triangle pattern after hitting the highs in April. It has tested support on its 200 day moving average but has met resistance along the downtrend line. There is also resistance at $75.00 that goes back to 2008 that CM has to deal with if its going to make a move above the April high. The dividend yield is 4.7%

The six month chart points to a break above the 50 and 200 day moving averages but the greater concern is the resistance along the downtrend line. The last candlestick on the chart is a hanging man and that usually indicates that an advance is running out of steam.Also represented on the chart is the support at $62.00 forming the base of the triangle.

The Bank of Montreal (BMO TSX) is exhibiting a similar pattern of riding high in April and getting knocked down in May.  BMO is forming a pattern of lower highs and lower lows as it meets resistance along the trend line on the three year chart.

The six month chart points to the struggle the stock is facing as it tries to move higher but fails to break above resistance, most recently on the 50 day moving average. Examine the $60.00 level  which at one time provided support and is now forming resistance.

The Bank of Nova Scotia ( BNS TSX) is exhibiting a range bound trading pattern with overhead resistance at $52.50 and support at $47.50. The 52.50 level has been in place for five years so its going to take a lot to move through it. The dividend provides a 3.8% yield.

The six month chart presents the case of a stock that has been testing support along its 200 day moving average and bouncing to resistance at $52.50. BNS as oscillated in the range three time since May of 2010. Investors that caught the ride and got on and off at the right stops would have generated returns over 20%.

The charts speak for themselves. Canadian bank stocks have some challenges to deal with when it comes to moving higher. They are providing attractive dividends but not much of a case for capital gains. BNS seems to offer the best opportunity to work a range bound stock for trading profits.

MAKE IT A MASSIVE LONG WEEKEND AND HAPPY CAPITALISM!