Sulaman Chaudhry and Andy Cole send: Last week was very interesting for a number of reasons, the main one being that many of our trendlines remain intact:

The S&P 500 has been forming a rising wedge over the past six months now, and is eventually going to be forced to breakout to the upside or the downside within the coming months. There are two things we need to take note of here: the first being the negative divergence we are seeing in the MACD, the second being the increase in selling volume over the past few days. Looking at this objectively, this is definitely bearish for the markets.

As we mentioned a few days ago, we have seen gold (ETF: GLD) consolidate a bit over the past few days. On a daily chart, the GLD formed a double top, and proceeded to break out of an uptrending channel that had been in place since two weeks ago. We would look for a bit more selling in the GLD from here.

Similarly, the UUP dollar ETF has experienced a double bottom over the past week or so and looks to be headed higher from here. Again, we mentioned the heavy increase in volume on the UUP in the last post, and it looks as though that did prove to be a short-term bottom. Keep an eye for clues such as this to help determine future trends.

Subscribe to our feed using your favorite service:

After Buffett’s investments in a handful of major railroads – Union Pacific (UNP), Norfolk Southern (NSC), and most notably Burlington Northern Santa Fe (BNI) – the industry garnered plenty of attention. The attractive industry dynamics and a myopic focus on the major players makes me interested in the small number of publicly traded regional railroads – among them Kansas City Southern (KSU) and Genesee & Wyoming (GWR).

Why railroads? Foremost, it’s an industry with significant tangible barriers to entry, and it provides a vital economic service. Although fixed asset investment is substantial, I also believe that the general consensus underestimates the variability of the typical railroad’s cost structure – yes, there’s operating leverage there, but there is also room to reduce headcount as unit volumes decline. Below is a graph of quarter-over-quarter revenue growth compared to QoQ operating expense growth for two major carriers (Norfolk Southern and CSX), one larger regional (Kansas City Southern) and the short-line amalgamation G&W.

A fixed asset business is going to have scale, but there’s still a fair degree of correlation for those companies. For the quarterly dataset going back to the beginning of 2006, the slopes vary from 0.51 (NSC) to 0.87 (GWR), so some flexibility exists in aligning expenses with revenues.

Next is a list of several metrics used to compare the four railroads, focusing primarily on their track infrastructure. Although other equipment is needed to operate a railroad, the real economic asset I’d be buying is the network.

A few explanations: there’s a strong correlation between revenue per track mile to market value per track mile. I chose to use enterprise value in addition to market cap, since these rails all have some level of debt attached and the end results cluster around 2.5x revenue per track mile. Also, the capital spending necessary to maintain the track network is important, and for the larger and more continuous players, spending is substantially higher than for a fragmented short-line company like G&W.

One red flag that makes me tread with caution is that railroad stocks have generally seen a robust recovery since the March lows, though I’m wary of mentally anchoring to those prices. On the whole, the rail industry has several positives about it – so even if a cross-section of some stocks don’t show any great bargains, it’s an understandable industry with competitive advantages, and that means good returns can be obtained at the right price.

Subscribe to our feed using your favorite service:

Sulaman Chaudhry and Andy Cole send: Hope you all had a great weekend. Let’s look at a few charts:

The S&P looks to be forming a rising wedge of sorts. A break to the downside would definitely be bearish, but until that happens, which it most likely will, the trend is up and continues to be for now.

After that high volume breakout on the Gold (ETF: GLD) chart a few weeks ago, we’ve seen a nice bit of consolidation around that 100$ level. For those traders banking on a move past 100$, this is definitely healthy in order to have a sustained move higher.

The head and shoulders that we have been on top of since February is still in play. A break above 100$ should lead us to a target price of 115$ on the GLD over the course of a few months.

There was a strong surge in volume on the U.S. dollar (ETF: UUP) last Friday. Whether this will form some sort of short term bottom remains to be seen, but it’s something to keep an eye on.

Finally, take a look at Hecla Mining (HL). This stock has seen a surge in buying volume over the past few weeks as it completed a cup and handle breakout, which was no doubt influenced by the pennant breakout in gold. We would look for a retest of $3.90 on the downside as nice entry position.

Subscribe to our feed using your favorite service:

Sulaman Chaudhry and Andy Cole send: Well after a somewhat extended and very much needed summer break, we getting down to business again. As you have probably noticed, we’ve seen some volume come back into an otherwise dry market, and we are beggining to see some very defined trends starting to form. Let’s take a look at a few charts and see what we can break down:

We have seen some volume come back into this market over the past few days. However, given yesterdays action, the signs do not look favorable heading into the remainder of the year. We’ve had a massive rally bottom to top, and it is safe to say that we are due for a correction sooner or later. Also, take not of that broadening formation on the S&P 500, as that could be a possible area of support in the coming weeks.

In our last market analysis, we mentioned the posibility of a bear flag formation on a monthly chart. As of right now, that observation still stands, especially given the general lack of volume on this rally.

Gold (ETF: GLD) broke out of a triangle formation that had been developing over the past few months. The volume across the Gold sector was tremendous today, and it looks at though $1000 could be within reach very soon.

Gold had a huge move today, breaking a number of technical resistance levels. Volume is flowing into anything Gold-related these days, and it is slightly foolish to not have at least some part of your portfolio dedicated to this sector.

The Gold Miners ETF (GDX) looks to be in the forming an ascending triangle over the past few months. There is signifigant resistance at $42.5 and it is likely we will see some consolidation before that level is broken. A break above it, though, should lead to some increased buying.

The U.S. Dollar (ETF: UUP) continues to see selling pressure. Volume has actually increased, though, over the past few weeks. Could it be a short-term bottom? Or just consolidation before another move lower? Time will tell, but odds are this move lower is far from over.

And that’s about it from here. We leave you with this:

Congress members hard at work debating the budget. So much for change.

Subscribe to our feed using your favorite service:

Read the rest of this entry »