Saturday, May 25, 2013

Weekend Update: The Fed, The Scared Shorts, and All-Time Highs

This was an interesting week for the markets. There seems to be much push and pull at the current trading levels and the near-mid term direction is cloudy (but when is it not?). The week opened flat with low volume trading being done likely because of the upcoming Memorial Day holiday and the pending Fed Minutes that were to be released Wednesday morning. After hearing the testimony on the economy by Ben Bernanke, stocks soared Wednesday morning to reach yet again another all-time high for the SP500. However that rally was quickly and heavily sold, reversing the entire mornings gains and taking the SP500 below the weekly opening price (which we haven't seen since May began). That trading action created an "outside day"  , eclipsing both the prior days highs and lows, and is typically a short term warning signal.

Sure enough the market was sold hard to open Thursday's session, but that weakness was quickly slowed and steadily bought throughout the day. The same scenario played out Friday as well, morning weakness and slow bounce off the lows. The volume of shares traded this week were higher on the sell side and lower on the buy side. This signals the first indication of some distribution coming into the market. However it was interesting to still see how much interest there is to buy any and every dip, that should not be ignored at this point either.

Its hard on the Shorts right now; those betting against this market are being extra nimble and careful not to be exposed any longer than they have to. What we are seeing is the Shorts are willing to take a stab at a pullback but they are then very quick to cover their positions and take the small gains. They fear the Fed, the under invested and lagging money managers, also the slowly improving retail investor and his/her cash finding its way into the market on any opportunity. And you know, they should be afraid of all those things, those are steady tailwinds behind this market. As long as the Shorts are unable to sustain any real selling there should be little fear on the long side of this market. Basically what they are spouting about is the likelihood of the Fed reducing its stimulus soon and the other is that markets have risen too far, too fast. These reasons to me are really just "feelings" the shorts are having to justify their claims, and not really backed up with significant evidence to trade off of.

A new blog I am following and consider a must read is Alpha Capture written by Jon Boorman. He nails
the idea that the bears and "top-callers" in the financial media have a decent setup to their trade (story) but there is simply no price trigger to trade that setup. Here is a link to this post, "Calling Out the Top Callers". Do read it, it is a fantastic post and blog!

Some things to remember:

--Hard counter-trend moves are typical in strongly trending markets, there is the slow grind higher and the sharp snap back reactions. These typically resume in the direction of the prevailing trend.
--The big money is always looking for strong positive news events as the opportunity to sell. If you were in there buying the Fed day rally then you played right into the "smart money's" hands. Beware the "sell the news" trade.
--We are entering into the summer doldrums with low volume trading and historically flat returns vs the other half of the year. Usually November-April are the strongest market months and May-October are the weakest.
--While we have seen more weakness this week than we have seen in a while, the economy and jobs markets are slowly continuing to improve.
--The Fed is not likely to reduce stimulus heading into the slowest time of year for the markets and the economy. There has been too much talk and speculation that the Fed will be "tapering" the QE program in the near future. Listen, follow what IS happening, not what someone says might happen. Right now the Fed is pumping, markets have rallied due to it and its not going to vanish any time soon.

On that note I want to take a look at the longer term views of the Market and just show where we have come and are likely to continue.

This is the monthly chart of the SP500 going back to the mid 80's:

After the monstrous climb in equity prices from 1980-1999, the market has basically traded in a sideways range for the last 10-15 years, consolidating those gains. It is just now breaking out from those prior highs; remember how these range consolidation patterns work? They typically work as continuation patterns, resolving in the direction of the current trend. The measured target from the range breakout projects about 900 points of upside are to follow a sustained break and hold of this prior high level. The outlook long-term from this pattern is very bullish for stocks.

On the other hand, a "potential" sticking point for the near term rally is shown on this weekly chart:

I shared this chart in my post that went out last Wednesday; this is the weekly bar chart for the SP500 showing the rally off of the 2009 lows. This just presents us with a possible resistance point in the near to intermediate term (which would work perfect for the summer slow down huh?). We will be watching this level closely over the next couple weeks to see how traders respond to the new upper boundary. Personally I would love to see some sideways trading action for several weeks if not months. I know we all like higher prices, but just dumping new money in after the 100 point rally we have seen over the past month is tough to do. While its the market's job to make it tough sledding for us investors, we simply need some new bases and support to trade off of. Taking a new position here means a reasonable stop won't come into play for at least 50-60 S&P points and that is a stretched risk/reward scenario.

Right now I recommend only holding what you feel comfortable holding through a possible correction down to the 1575-1600 level. If you are too overexposed to hold your current positions through a move like that then you likely need to reduce your overall exposure. For me holding roughly 60/40 stocks to cash seems about right. My current holdings are sized properly that I can easily withstand a 10% correction and not freak out and panic them away. If that scenario does in fact play out, then we would be reassessing the validity of our positions at those new levels.

From what I can see across the markets, it seems that the consumer is strong, housing is improving, jobs are growing gradually and the Fed is stimulating. Its still a very strong environment for stocks even after the seemingly endless rally we have had. That being said, I think there are certain areas that you should be positioning towards in the market and not just blindly buying because everything is going higher. Those areas include:
Consumer Discretionary
Health Care
Transports (I like the rails)

These are all plays on the improving consumer, aging demographics, job growth, loan growth and housing.
Those are the strongest trends in our improving economy and that is how you want to position yourself going forward. Always align with the strongest groups when investing and leave the laggards for the "heroes" to sort out. Don't be a hero, invest smart, safe and consistently aligned with the trend.

Wednesday, May 22, 2013

Reversal Day? Don't Panic

For anyone following the markets, today was a nasty one. The action on Fed days are always interesting but today was one of those that we would like to forget. This morning the action was strong on some dovish comments from Ben Bernanke and markets ripped to new all time highs. The afternoon however was not as favorable for the bulls. After the Fed Minutes were released at 11:00, markets reversed course hard and closed down almost 1%. Trading action like we saw today is what is considered to be a "key reversal day" where the market rises to a new high (higher than the previous days high) and then reverses and closes below the low of the previous day. The trading bar today on the chart is whats called a bearish outside day, a high above yesterdays high and low below yesterdays low; the entire action engulfs the prior days trading range. Typically this signals a turning point in an extended rally (which we are currently in).

Does this mean sell it all and hide under a rock? No it does not. But it also means that further caution is advised until we see how this possible turning point is handled by market participants in the next two days before the long Memorial Day weekend. Today I took some well earned profits on a few of my big winners, sold a couple of my lagging holdings and simply raised a little cash. I am still roughly 60% long and plan on using my newly freed cash reserves as new opportunities arise.

This market has been a tricky one since the introduction of QE. We just have not seen prolonged weakness on these typical technical indicators that usually signal trouble ahead. There are some signs that the market has run a bit hot here and today's initial surge kissed right up against the long-term weekly trend channel resistance. Does this mean we will see a sell off? Not exactly, but it does increase the odds that one may be nearing. However, I would not be surprised at all during tomorrow's trading session if the market just shrugs this one off again and continues to rip higher. Each time during this rally that I have taken some profits I have been made foolish by Mr. Market, frankly that's his job, to make the masses look like reactionary, impatient morons. But after the run we have had over the past 7 months, a breather would be a welcomed and renewing cleanse.

We still sit well above the breakout level of 1,597 on the SP500, so everything is still peachy as long as that level holds. It would be great to see a pullback that retests that key level as that would offer a fantastic risk/reward opportunity, but the market is rarely that forgiving. We will just have to continue to plug away and manage risk as best we can.

My recommendation after today's trading would be to look around your portfolio and trim off some gains on your larger holdings, sell out of your losing positions and get ready to put some new money to work once a new support base builds. I would not advise being less than 50-60% invested above the 1,597 breakout level. I still feel we are in a transitioning market environment with higher prices still to come, but I also feel that some more consolidation around these levels would help create better opportunities in the future.

Saturday, May 18, 2013

Weekend Update: Status Quo

Once again the market continued to make and finish the week at new highs. Nothing is standing in the way of this market and higher prices. Just when it looks like the rally is slowing or attempting to pull back, it just shrugs it off and rips to a higher high. Anybody who attempts to take profits on winning positions simply looks silly by the end of the next trading session (myself included).

This is an interesting market dynamic that we have here at the current moment; anytime a short term weakness presents itself, the next trading day just stomps it back into oblivion. The market will not always act this way, but until it changes we have to do our best to stay the course and ride this wave as far as it can go. Something I have been noticing is that since the beginning of this 6 month surge, any time traditional rules for risk management suggest a pullback, the market ignores it completely. This is something I have thought a lot about recently. What the market is doing is starting to set the stage for the later stages of the bull market. It is crushing any and all doubt and is forcing participants to accept the prospect of higher prices. Typical risk management and common sense have been cast aside, any and all buys are being rewarded, while sells are being punished.

My best guess as to what is being instilled in investors/traders habits is that the market is lulling them into thinking that the market will simply not go down, and if it does go down, any pullback will be very short lived with higher prices coming shortly after (Acceptance/Confidence). This will, in all likelihood, create another bubble type situation in equity prices in the future. Just as with the housing bubble and the dot com bubble, participants were absolutely convinced that those assets would simply never lose value and would just continue higher unabated.  What this does is create a situation where people will become greedy and too overconfident to follow and observe solid risk management principles (Euphoria). So far any sort of profit taking has shown to be a hasty and impatient choice as prices continue to rip straight up. This is likely to continue much longer than people think is reasonable; as the saying goes, "markets can remain irrational longer than you can remain solvent".

Basically what I'm getting at is equity prices are likely to continue higher long enough to get everyone complacent and over-exposed, only then will the cycle be completing and a longer term trend shift be underway. As far as I can tell, we are not near to a euphoric state as many still feel stocks are too extended. These are the same ones that are lagging the averages and under-invested, they NEED a pullback. As long as there are those who are noncommittal and on the sidelines, prices are likely to leave them in the dust.  There will be some pullbacks along the way, but until psychology changes, prices are likely to continue to push higher.

Here is the Weekly chart of the SP500 back to the '07 peak:

The long term view is very strong looking as long as the 1,576-1,538 support is held. Right now we have the 20 Week MA within that support band and well as the rapidly inclining trend support drawn from the 2011 lows.

Shorter term here are the levels of interest (Depending on your trading/investing time frame)
This is the 30 Minute chart looking back about 2 months

I am trading the SP500 based on this short term uptrend and so far it continues to act well. A break of 1,648 would cause me to exit my short term trade. At that time I would expect a retest of the prior breakout level on the longer term chart near 1,600. Until a breakdown occurs however, things still look up.

Several of our Top 10 stocks are acting very well and are following the broad markets to multi-year or all-time highs.


HD announces quarterly earnings before the market open this coming Tuesday. Price has once again tested the upper trend range and I took some profits this week on my current holdings. I tend to reduce my positions heading into an earnings announcement, especially when we are at the upper trading range and there are a lot of high expectations for this quarters results. The relative strength trend is now testing a very important level and it will be interesting to see how the stock handles the announcement on Tuesday. This stock is a hold above key trend support currently near $69.


Ford just keeps doing very bullish things. After forming what looked like a double bottom pattern from mid-2011 through mid-2012, it setup a very nice reversal pattern triggering a strong rally off the August 2012 low. Now it has gone through a 4 month consolidation and in the past 2 weeks has really started to accelerate to new multi-year highs. Keep riding this one until we see a change in relative strength and/or a breakdown of the current price uptrend.


Wells just continues to be strong and one of the leaders in the undervalued Financial sector. We are looking at a long term, weekly chart here and as you can see it is making new highs very consistently since the breakout of the $34.50 resistance level. It was also disclosed this week that as of the beginning of May, WFC is the largest holding of Warren Buffet's Berkshire Hathaway portfolio. Hey, if Warren Buffet likes it, who am I to argue?

I currently view the Financial sector as having lots of upside potential and the market will continue to rally as long as the Financials are performing well. The sector can be played many ways: it can be played very aggressively through JPM, BAC, MS, C or it can be played more conservatively through WFC or USB. A holding I recommend is to own WFC and one of the other risky plays in the space; what I like here would be pairing WFC with JPM or BAC in a portfolio, where you hold twice as much WFC and then half as much JPM. For example hold 50 shares of WFC and about 20 JPM, that way you can play the sector aggressively with a reduced JPM position and then take a more stable approach with a larger position in WFC. Both will provide roughly a 3% dividend and plenty of upside when the market rallies.


Clean Energy sure has caught a bid after its short term breakdown over the past 2 months. This is a weekly chart showing a nice reversal setup that has broken out and then confirmed with 2 consecutive weekly closes above the breakout level on massive buying volume. Even after this nearly vertical rise in the past month, the target for the reversal is still 15% above current prices. I added to my position two weeks ago on the breakout and will look to add more shares on any kind of weakness we see to retest the breakout level.


3D has gone parabolic over the past 2 weeks and tested its all time highs this past week. We have seen some weakness since the test and I took partial profits on my holdings here. But overall this still looks like a monster stock in a growing and intriguing industry for the future. What I am hoping happens here is a sort of Cup/Handle formation that would give this massive up move a short consolidation before continuing the strong uptrend. Again, I think this stock is just in the early innings of what could be a revolutionary change in technology and an absolutely massive stock price. At the same time though, after getting over a 40% gain over the past month, I did take some profits last week with the hope of being able to buy those shares back when we have a better risk/reward point to continue off of.


Enbridge has continued its steady climb and higher highs. Something of note here however is the test of the long term relative strength trend support. Here we are looking at the Weekly chart and as you can see this is a 6 year relative strength uptrend. The ability to hold this support will be very important for my position size going forward. If the Relative Strength fails, I will hold no more than a minimum position. I do still plan on holding this stock in some capacity as long as its above key support at $41


HAIN broke out from its developing reversal pattern and has now retested the breakout area. After a brief dip below the breakout level of 62.50, price has rallied and now closed at the highest weekly close since since late last year. HAIN reported another record quarter 2 weeks ago and the stock has steadily declined since the announcement, but seems poised now to retest its prior all-time highs at $72. Stops on this breakout should be placed below the shakeout low around 61.50.

This is currently my largest holding after I added to my position after the earnings slide and breakout retest. Both long-term and short-term I think HAIN is a big winner.

Saturday, May 11, 2013

Weekend Update: Rotation and Follow Through

Hi Everyone! I hope you all had a good week. It was a good week for the markets as we saw continued gains across the board. What we saw this week in terms of price action was a market that wants to push higher. After last Friday's big breakout of 1,600 on the SP500, we saw confirmation follow through for that breakout; the S&P closed 1.3% higher at 1,633 for the week. Once again an all-time weekly closing price.
Here's a look at the 30 minute bar chart:

Now that we have seen the broad markets rally, we need to see who exactly it is that's leading the way higher. Its time again to take a look at the key sectors and see which ones are relatively strongest.

XLF- Financials 

The Financials have been relatively strong for 2 years now. Once again making new multi-year highs. The rally will not be in jeopardy until the financials roll over. Levels to watch on the downside are 18.45 and most importantly 17.00. As long as those levels are holding, the markets will continue higher.

XLY- Consumer Discretionary 

Discretionary continues to be strong and a leader in the market. This is reflective of a strong consumer and a steadily improving economy. Continues to make new highs.

XLK- Technology

Finally! The Tech breakout I have been waiting for, oh so patiently is now here. There has been a strong rotation into the Technology space with big winners such as MSFT, INTC, GOOG, and AAPL recently. Now we will need to watch how price handles this over head resistance at prior highs...Relative strength seems to think a breakout is coming. A move above $32 would be big for the markets. Equally a rollover here and breakdown of $29 would be bad.

XLI- Industrials

Similarly to Tech, Industrials have caught a bid this week and continues to make higher highs. Love the performance breakout.

XLB- Basic Materials

Materials have also broken above key price and relative performance levels. It seems like higher prices are ahead. Names I like in Basic Materials are MOS and PPG

XLE- Energy

Energy is still relatively weak despite price finishing at its highest levels in nearly 2 years. Continue to wait and see a bit more before jumping in too strongly into Energy. Recently Energy has been a leader, however the strength trend is still lower overall.

XLP- Consumer Staples

This is one of the most important charts I look at everyday. When Staples are outperforming the market, caution is needed. As those times very typically coincide with declines for the general averages.
So here is what I like about this chart:
-The relative breakout we saw and were watching closely last week, failed to follow through and it has rolled over.
-Secondly, when the Relative Strength rolled over, there was huge selling volume (distribution day) as seen by that big spike on the volume chart. A rotation of that magnitude should catch your attention.
Basically what this is saying is that some BIG money came out of Staples at the end of last week. We can see it by the largest volume day of the past 2 years and the inability for the Staples to hold their relative strength over the S&P. The notable thing about this is that after the big distribution day in the Staples, we have seen several of the under performing groups catch a bid (XLK, XLI, XLB)...I wonder where the money that came out of the Staples went into? : )

Important point to note: once the Staples make their way to the lower end of the relative chart, it will be time to start thinking about playing some defense...Maybe even go long the XLP for a quick and dirty way to play it. But we will deal with that when we get there.

XLV- Healthcare

Healthcare is technically a defensive group, but the way this has been performing... You should be exposed to this space in some way. I like ABT, UNH, PFE

XLU- Utilities

After a very nice run, Utilities can now be flushed. This chart is looking all kinds of in trouble. Relative strength has broken even the most conservative of trend support, price has failed its uptrend support and made a lower low in the uptrend on Thursday, and volume has been big to the downside over this past week. Rotation, rotation, rotation.

There is a saying that the market will usually offer you a gracious exit...if you take it. For anyone long utilities at the close on Friday, be thankful that 50 DMA was sitting there to slow the free-fall. Take the small bounce as an opportunity, and reduce positions.

GLD- Gold

Gold has been in a downtrend for almost a year now. After the recent breakdown of key support at $148, price has formed what looks like a bear flag pattern. There are a lot of gold bugs out there currently who get nearly hysterical if you question their doomsday scenarios. But the point is that gold has been an under performing asset since last year. I do understand the thesis the gold believers tout, but I also invest with what is "actually" happening, not with what I "think" will or should happen. Stories are nice and all, but if the one thing getting in your thesis' way is price, then you will be on the wrong end of a losing trade...

Bottom line, Gold is weak and I am currently short this space with a stop set above $144. For longer term doubters of the yellow metal, $148 is a big level and solid stop.

TLT- 20+ Year Treasuries 

Well so much for the comeback in Treasuries. Strength has faded and volume has increased to the downside. I was stopped out of my TLT position last Friday and so far we have seen increased follow through on that move. To prove that Treasuries are really going to roll over this time, we would need to see the prior low near 114 to be taken out. But so far so good.

Wrapping up this week's post, I like what I'm seeing in the market's internals right here. I think almost all of these signals are bullish for stocks at least in the short term. The big thing I will be watching going forward will be how well the new relative breakouts we are seeing in Tech, Industrials, and Materials will hold up in the near future. Due to the rapid exits from the more defensive names I think those rotations will continue to find their way into the riskier groups like Tech and Materials. It would have been worrisome to see rotation out of the defensive's and into cash, but what we have seen is the willingness of market players to look to the under-valued high fliers who may just have been taking a breather.

As of the close Friday I am currently just under 70% invested. I took some profits on some out of balance winning positions I had over the past couple weeks and am now in a very comfortable situation should we see any short term weakness. I am positioned to take advantage of any weakness we may see above the 1,600 level. I will be looking for opportunities with my remaining cash to put it to work if nice risk/reward setups come my way.

Saturday, May 4, 2013

Weekend Update: Acceptance


The SP500 finally broke out significantly above the all-time high resistance on Friday after a better than expected jobs number for April. Also this week both the Fed and the ECB ( European Central Bank) added to or hinted at more liberal easy money policies going forward. The combo of extra stimulus with an improving economy was just what the bulls needed to finish the week at historic levels.

This is a shorter time frame looking at the past month and the breakout today. Just a very strong open to the day and the gains held very firmly.

There are a couple things about this move that makes it unique. First it creates a weekly closing price higher than we have ever seen. There are many longer term investors that consider weekly closes a much more significant accomplishment than simply a daily close. Second, it clears the S&P above a psychological level of 1,600 which was a target many traders and investors were focusing on. Now that it is broken it should create a momentum trade higher from here.

Along with the positive momentum caused by breaking above the 1,600 level comes a sort of collective sigh of relief from traders and investors alike. This level had stopped epic bull markets dead in their tracks twice before; the "Dot Com" bubble in 2000 came to an end at S&P 1,552 and the Housing euphoria which topped out at 1,576. Now we have eclipsed that prior resistance and continued to push higher.

Except this time the mood of the market is not nearly in the same place as it was in 1999 and 2007. If you recall from both of those markets participation was broad. You had people at parties giving stock tips like they were the next Warren Buffet, or telling you that housing in America NEVER goes down. The largest demographic in our history, the baby-boomers, were all fully invested in their pensions and retirement accounts, were taking out bad debt and buying new things hand over fist.

But what is the mood right now? Are we Euphoric? In my personal opinion we are no where close to euphoric. Look at what the news focuses on and discusses: China is in a slow down, Europe has been in recession for a couple years now and is on the verge of collapse, QE is single-handedly propping up markets, etc. I mean Consumer Staples and Utilities have been market leaders all year, typically very defensive groups. Gold has undergone a parabolic move since November 2008 until August of 2011. It has only been until recently that gold finally showed some weakness which signaled less fear around the market.

You see, markets trend in cycles, they have for as long as humans have been speculating. There was the "Tulip Mania" that the Dutch got themselves tangled in, and many other peaks and crashes throughout history, including our most recent stock market events in 1999 and 2007. To get an idea of how silly these waves can be, think back several years ago, remember Beanie Babies and Tickle Me Elmo? Those are also examples of asset bubbles and crashes, these don't only occur in financial markets. Retail investors just simply don't trust this market because they expect history to repeat itself and crash on them again. It is possible that the QE inflated markets will or are creating their own bubble in equity and bond prices, but the typical emotions associated with a major peak are simply not present. These sorts of runs always end badly and this one will too, but being too early to the party can be just as damaging to your investing accounts as being too late.

Where we are in the market psychological cycle is largely up to interpretation, but where I feel we are today is just over the mid way point of this bull run. I think Friday's breakout signaled a transition from a mentality of Doubt and Caution to one of Acceptance.

Here is what I mean by the market psychological cycle: courtesy of RMB Unit Trusts

Market participants go through the same basic emotions when speculating the value of any asset. The uptrend begins tentatively as those who recently lost most of their savings in the prior down swing tend to look at any positive development very suspiciously. But as the trend continues to gain traction, participants start to dip their toes back in but are going to have one foot out the door for when the next shock lower arrives. After conditions continue to improve and prices keep rising, there comes a breaking point where the cautious approach is proven lacking and a confidence and acceptance phase comes to the forefront. As confidence builds and momentum increases, players continue to get more liberal with their investment choices and start reaching for riskier and riskier assets. Then comes the final phase of the move where everyone owns stocks and feel that they can do no wrong. That is the point where things change. If everyone owns the asset in question then there is no one left to convince to get in and push prices higher, those people are already in and fully invested. 

Once things turn for the worse, the cycle downward is very similar to the way up. In the early stages of the correction investors feel that its nothing to be concerned about. They will just ride this little wave out and higher prices will continue. But then what happens is that the downtrend persists and investors start to get weary and fearful. Once things turn bad there is not much time left in the swing lower as people are panicking to dump whatever they own for whatever they can get for it. That panic and loathing phase very typically signals a major bottom and the cycle starts over.   

I am of the opinion that we have, as of Friday, crossed out of the Doubt and Caution phase and will now be entering the Acceptance and Confidence phase. In accordance with my view here and the market's breakout I have increased my holdings to now just under 70% invested in stocks and 30% cash. I consider a fully invested position for my accounts to be 80% stocks 20% cash; I continue to use the 20% cash for short term trades. 

My game plan going forward is to remain heavily invested above the 1,600 level on the SP500. If the market fails this breakout and trades back below 1,600 I will then go back into a cautionary position and reduce my holdings back below 50%. When the signals change we have to change with them and this week we got a new signal to work with. I have adjusted my allocations in my accounts to a more aggressive position and sold off my lagging assets and added to my winning ones. As a general rule I like to have my biggest positions be in my longest winners and strongest setups, and my smallest positions in my newer holdings or weaker positions. 

This week I made the following adjustments to my accounts:

Reduced: AGNC

New Buys: GLW, GLL(short gold), SSO (2x Long SP500), EEM (Emerging Markets)

My other current positions:

I will be looking for pullbacks to add to these positions further.