3 preventable high-yield disasters

Yield-seeking investors shouldn't forget to check the charts.

By MoneyShow.com Dec 14, 2011 2:56PM

(© Kyu Oh/Photodisc/Getty)By Tom Aspray, MoneyShow.com


For most of 2011, with Treasury yields so low, the search has been on for safe, sizable dividends. This explains why the SPDR Diamond Trust (DIA), which tracks the Dow Industrials, is up 4.3%, while the Spyder Trust (SPY) is down 1.2%.


Of course, dividends are not included in these performance numbers, but the demand for large-cap, high-yielding Dow stocks has been strong. In many cases, those who went for the highest yields this year have fallen further behind because many high-yield stocks have dropped sharply in price.


Many dividend seekers don’t use technical analysis as part of their decision-making process, but they should. If investors had looked at major trend lines and levels of support, as discussed in "How to Get Started in Chart Reading," they might have stayed out of these three high-yield disasters.

Click here to enlarge


Chart AnalysisFrontier Communications Corp. (FTR) is a $4.9 billion telecommunications company that currently yields 14.6%. At the end of 2010, FTR closed at $9.66. With a dividend of $1.00, it was yielding 10.3% -- a figure that on the surface looked attractive. However, the stock is down 45.5% for the year.

  • The weekly chart shows a very long-term negative pattern, as the rebound in 2008 just tested the former support (now resistance), line a, before turning lower
  • The long-term downtrend, line b, is clearly intact, and the two-year continuation pattern (lines 1 and 2) was just an interruption in the downtrend
  • The relative performance, or RS analysis, broke key support in 2007, line c, and has formed lower lows (line d) ever since
  • The stronger relative performance of the on-balance volume (OBV) likely reflects the high-yield buying frenzy this year
  • First resistance now stands at $5.60 to $5.80 with further resistance at $6.40

Invesco Mortgage Capital Inc. (IVR) is a $1.7 billion mortgage investment company that currently yields 17.9%. It is down over 35% so far in 2011 and the weekly chart shows a short-term flag formation (dashed lines). This is likely a continuation pattern, which suggests a further decline.

  • The Fibonacci targets from the flag formation are at $11.80 with further targets in the $9.60 to $10 area (see “Using Fibonacci to Trade Flag Patterns”)
  • The weekly chart shows that IVR completed its top formation in June when it closed below major support at line e
  • The RS line has been making lower lows since 2009 (line f), indicating it was underperforming the S&P 500. It dropped sharply this fall
  • The weekly OBV dropped sharply in March and shows a well-established downtrend, line g
  • Short-term resistance now stands at $16.20 with key support at $14.20

Nokia Corporation (NOK) is a well-known, $18.5 billion communications company that currently yields 9.7%. The stock has also had a miserable ride, down 49.9% for the year.

  • NOK has really never recovered from the break of key support during the summer of 2008
  • The RS analysis topped out in April 2008 and then broke long-term support, line b, in November 2008
  • Since 2008, the RS analysis has been in a well-established downtrend, line c, and shows no signs yet of bottoming
  • The OBV broke support, line d, ahead of prices, line 1, and has been forming lower highs over the past few years
  • NOK formed a bear flag formation in 2009 and 2010, which set the stage for a further decline
  • There is initial resistance at $5.40 to $6.00

What It Means: Even basic fundamental investors simply must employ some elements of technical analysis in their investing decisions.


Those who don’t use technical analysis often face the difficult decision of whether or not to sell because while they bought the stock for yields of over 10%, the stock price has since dropped much more than the yield has paid them.


How to Profit: Clearly, I have no recommendations to buy any of these three stocks, but those who own any of them should be certain to pick a level in advance where they will cut their losses.

1Comment
Dec 14, 2011 11:51PM
avatar
Dividend rates are at record lows when we look at the long term stock market history. Stock prices are way too high for the dividends offered. Everybody thinks they are going to make it up on price appreciation. It is a casino. Buy high, sell higher to a greater fool is the plan of virtually everyone. But if everyone is betting the same, who is the greater fool to buy at higher price?? Stocks are a speculative bubble. This is like Tulip mania, South Sea bubble. Google for "STOCK MARKET KONDRATIEFF WAVE" to understand why.


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