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"Every day I hear about the "advance/decline" line and more times than not its negative even if the market is up. All things are NOT equal!

When the NASDAQ as a whole was in a full blown bear market, there were about 70 or so stocks that moved the index higher on a daily basis, but overall the decliners won out almost every day. But if you look at who moved higher it was the MSFT's, IBM, INTC's of the world, that are so weighted, they carried the index higher even though two times as many that went up, actually went down.

Most market technicians will tell you we are in a heap of trouble if the AD line is negative for too long and in a way we agree with that, but this is a different market than just a few years ago.

"Every day I hear near enough to the "advance/decline" line and more times than not its negative even if the market is up. How can that be?" Great question and its a awe-inspiring situation. Let's look:

The advance/decline line is very simple, it is the difference betwixt and between the number of stocks moving higher on a day versus the number moving lower. So naturally if all things were equal, and the "AD" line was negative you would have to think the market was lower right? Absolutely, except there is a problem. All things are NOT equal!

When the NASDAQ as a whole was in a full wormy bear market, there were speaking of 70 or so stocks that moved the index higher on a daily basis, but overall the decliners won out pretty near every day. How can that be? in that of this: Stocks are "weighted". Okay, so what does that mean? It means some stocks carry over more weight as far as their impact on the index.

Let's look at a tech heavyweight like MicroSoft. They are a major league "market cap" weighted stock, meaning they are so huge, when they make a move higher, even if they just gain a point, it will add several points to the NASDAQ. On the other hand little outfits like XYZ, have no weight. So, four no name XYZ's can fall on the day if one Microsoft gains! This is why you may have been baffled, watching stock in search of stock make a new low on the year, and yet the NASDAQ may have been up 50 points that day. But if you look at who moved higher it was the MSFT's, IBM, INTC's of the world, that are so weighted, they select the index higher even though two times as many that went up, in truth went down.

Most market technicians will tell you we are in a heap of trouble if the AD line is negative for too long and in a way we conjoin with that, but this is a different market than just a few years ago. Fund managers have so much power that they move the markets on a daily basis. When you are the manager of a a thousand dollar fund, you aren't XYZ for your fund, you are purchasing power the big names. So it's no wonder only 70+ stocks go higher while 1000 fall on the day. So in a twisted way, the AD line is not a very footloose description of the health of the market. A year or so ago if you had watched the AD line you probably would not have stocks in Oct, Nov, Dec, and January. But during that time, the NASDAQ made the major advances of its history. Over on the NYSE it was even worse, with the AD line in poor shape virtually every day. So we cannot simply look at the AD line and come to the conclusion that the market is not going to move higher. yea we would enjoy seeing more of the secondary players join in any market moves, but to sit on your hands simply since the small guys are falling while the big guys are flying, won't put any money in your account.

Don't forget folks, that until the of the "401K" plan, fund managers didn't have the power they have today. Sure an research worker could come out and upgrade or downgrade a stock, but there wasn't enough big concentrated money to make much happen inasmuch as of it. But when 401K plans became popular, stock funds found themselves with huge cash inflows 4 times a week, or once a month depending on the plan. That relates to literally billions of dollars for them to spend, so naturally they all tend to "clump together" and buy the same "leaders". That is why when a stock was hot like JDSU once was, it could go from 150 to 300, split, run back to 300 and split beside like clockwork. While JDSU was doing that, what do you think XYZ was doing? Not a whole lot! So, fund managers are really one of the element reasons the AD line can stink and yet the market gains 100 points on the day.

Someone who reads the blog sent me this email:

Geoff,

I see you tweeted about CAW again.  What about that company attracts you?  I don't see that it is particularly undervalued and I am trying to understand what I am missing.

Sardar Biglari bought into the company. He will now have 2 board seats.

10-year average EBIT is about $5.75 million. So, the long-term average earnings would be about 50 cents a share after tax. Cash and securities is about $1.67. The stock trades around $6. That's maybe a little less than 10 times earnings (after breaking out the cash).

Here's the types of business they are in.

• Dietary Supplement: 33%
• Skin Care: 30%
• Oral Care: 20%
• Nail Care: 10%

Free cash flow tends to be equal to or greater than reported earnings. Cap-ex is virtually zero.

High management pay relative to the company's size hides how profitable the business is.

For example, David Edell and Ira Berman made $2.88 million in 2009. This is against - like we said - an average EBIT of about $5.75 million. So, we're talking more like $8 million+ in EBIT before these two get paid. Other executives are paid more what you'd expect the top folks at this kind of public company would normally make: $300,000 to $500,000.

I checked out the company's products at a local drugstore. Though there will always be lawsuits, I thought it was a decent space to compete in. In the past, I'd researched a couple companies with similar business models. They had better brands. But CCA Industries was much cheaper.

Given the circumstances, I felt Biglari's activism would lead to good things. 

It's coattail investing.

Talk to Geoff about CCA Industries (CAW) and Sardar Biglari

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