Saturday, August 31, 2013

Weekend Update: Trouble Afoot?

As we have officially ended the summer doldrums, as far as Wall Street is concerned, the markets are teetering on the edge of a significant correction. The coming week should tell us all we will need to know as to the short term direction the market is headed. The "big money" managers will be returning from vacations ending this Labor Day Monday, and will be ready to retake the reins of this market. As they return, uncertainty is running amok; a potential US strike on Syria, Federal Reserve taper concerns, the August Non-Farm Payrolls due out this coming Friday, US Debt Ceiling debates, and also uncertainty on who the next Fed Chairman/woman will be. All of this adds up to a likely volatile and whippy market environment for the next few weeks, oh and I forgot to mention that historically, over the past 120 years, September shows the weakest returns of any other calendar month for the DJIA (Dow Jones Industrial Average).

What we are listing here are all the things that could pop up to derail the equity markets' rally. However there is a common maxim on Wall Street that its not the known concerns that are the issue (theoretically the market has factored in these events and their likelihood), rather its the unknown unknowns that are the real problem.  But for now we seem to be dancing that line of buyable dip or significant corrective action. Since we have now ended another month we will take a look at multiple time-frames, from long to short, to try to discern what all this nervous talk actually means for our investments.

We will start with the shorter, Daily view and move through the Weekly and Monthly views as well.

SPX Daily 1-Year   (Bearish)
We looked at this chart last weekend and discussed the uptrend. After seeing the higher high in late July, we are yet to know if that will mark the top or if its simply another high that will soon be eclipsed by the next new high. The way we will know with a high likelihood of success that we will continue to see future higher highs will be to make sure we don't violate the prior low at 1,559. We will need to see a higher low to continue to believe that the uptrend is still valid and moving forward.

 Last week we retested the prior support zone we were watching so closely and that proved to follow suit and hold as new resistance. The market will need to take that level out to the upside if this short term view is going to turn around. We seem to have found some support at the new uptrend support line from the November low and the June low. However we also see a down sloping 20 DMA that too will act as resistance on the way back up. The first thing we want to see accomplished here will be for the support line and last weeks' low to hold. Then we will need to see the resistance near 1,670 taken back. If this low fails to hold, the last line of defense will be the June lows.


SPX Weekly 3-years   (Neutral)
The Weekly view shows a similar picture for the near term. Price this week closed below the rising 20 WMA for the first time since January; the 20 WMA is a major indicator that I use to determine market health. Typically when price is above the 20 WMA odds for higher prices are better, when price is below the odds for lower prices are more likely. We will need to see that average retaken soon to have more confidence that the top is not in. We will be watching the same things on the Weekly view that we are watching on the Daily view above. I will be watching for the uptrend line and the 20 WMA to hold as support for the rally to continue. Or I will be watching for a continuation of the pullback and possibly a significant correction back to the weekly channel lows near 1,450.

SPX Monthly 15-years   (Bullish)
Here is where I feel the perspective still shows bullish implications; this is the Monthly bar chart. With all the "doom and gloom" talk going on in the world, the market is STILL holding above its prior all-time highs and is STILL in breakout territory. As we have discussed in the past, we want to be bullish and invested ABOVE this level. The level happens to be right at the 1,559 area and corresponds to the June lows. You can see why there is so much importance placed on the June low at 1,559. It is not only the prior confirmed higher low in the intermediate-term uptrend, but it is also the long term resistance level for the SP500. Just as in the Daily view where the short-term support area at 1,670 was support and turned into resistance, this 1,559 resistance level should now turn into support since its been broken.

The bottom line is that while there are signals that the market may correct significantly from these levels, it is still to be seen that the longer term support we are watching will fail to hold. As of right now the market is at a critical juncture on multiple time frames, it is still holding above key support levels for now, but is showing some signs that it may be looking to correct or consolidate for a longer period of time. There are a lot of things to fear right now in the market but until price confirms that fear on the longer term time frame, we are still in a position of strength with the current uptrend.

On that note, we only lost one of our holdings this week, but it was a big one. The Financial sector group (XLF) failed to hold its key support levels last week and is a major crack in the markets armor. Maybe it will be a false breakdown and it will rally right back, but as of now the risk/reward is no longer favorable.

Current Holdings:

XLY, XLK, XLI, XLE, XLV
HAIN, DDD, CMI, AAPL, F, PBW, WFC, PPG

Cash Positions

XLF, XLB, XLP, XLU
ENB, HD

We had two notable winners this week with DDD and HAIN showing excellent relative strength. Several of our holdings are still breaking out against the market on a relative basis and seem to be holding up better than the overall market also.

DDD
DDD finally broke out above the key resistance level of $51 this week and although it broke out once and failed, it was able to bounce right back and close at a new weekly all-time high. Looking good with DDD.

HAIN
HAIN was able to hold right at all time highs this week after last week's big breakout. The very tight consolidation this week, while the market corrected, was a sign of strength and likely higher prices to come.


Our other holdings that have shown good relative strength recently are:

PPG
While PPG is testing its 20 WMA, it is still a ways from its long term trend support. During this market's correction PPG has broken out on a relative basis as shown below. I'm willing to give this room down to the prior lows at $144 because of the recent and prior strength.

CMI
Cummins hasn't done a whole lot since we bought it. It has had a couple nice attempts to move higher, but just hasn't been able to put together a hot streak yet. That being said, it has HELD its breakout and the RS trend has been steady since its breakout also. The fact that this has held up well with the market rolling over it also a very good sign for it going forward should the market rebound.


AAPL
It's pretty much the same here with AAPL as with CMI. It broke out strongly a couple weeks ago and has simply consolidated its move while the SP500 has corrected. The RS trend is strong here and showing nice rotation into the stock.

XLE
Energy is looking good. We saw a nice relative breakout this past couple weeks and price has held well above the key $79 level. Energy will be a group that flourishes during global unrest, is this chart telling us that a potential excursion to the Middle East will linger longer than expected? Remember the scandals with Haliburton and Dick Cheney? The Iraq war began in 2003, what did Haliburton's stock do beginning in 2003? From the beginning 2003 through 2005, the stock gained from $10 to over $40




Tuesday, August 27, 2013

Exiting XLF (Financials)

This is a troubling one folks. Financials are a major market leader and the fact that we are getting a sell signal today speaks volumes about overall market health. There hasn't been a legit sell signal in the XLF since last year. This is notable and we will need to watch risk closely in the next few days.


Its been a great run for the XLF this year and a correction seems to be reasonable here. We are seeing RS confirm its sell signal from a week ago and today price gapped below the prior low from last week and through long term trend support. I expect this to find major support near the $17 level, although I doubt it goes that far.We can also watch the short term downtrend that is developing from the top of the August peak. That should provide some hint that the correction is over if it is taken out to the upside. We will have to step aside and see what happens.

Sector Fundamental Analysis (Part 1 of 2)

Something I like to do twice a year is have a fundamentals showdown between the 10 top holdings in each sector group to see which stocks are relatively cheap compared to their peers. Although I use price as my primary investment criteria, I feel it is valuable to have an understanding of relative valuations, as it unearths potential opportunities that one would otherwise be ignorant to. Most of the time I don't particularly care what a company is doing financially so long as the trend is up and Wall Street's impression of the company is positive. But when you can use the fundamental valuation to reveal even more potential upside, it can be incredibly useful.

How I like to use relative valuation is when I have two strongly performing stocks (price suggests gains ahead) and I am trying to choose between one over the other. If price is essentially saying the same thing but one company is reasonably cheaper financially, I use the valuation to act as a tie breaker. That way I am not only buying the strongest performing stocks, but also the relatively cheapest.

Each Sector group that we follow within the Blog Portfolio is made up of mostly 10 companies (there are many more than 10 holdings in each sector, but the top 10 holdings are what move the needle). These stocks are suppose to represent the 10 strongest and best positioned companies in each industry; right off the bat we are drawing from a very strong pool. We then compare them individually against each other in terms of relative valuation. I calculate a "valuation metric" that I adapted using James P. O'Shaughnessy's book "What Works on Wall Street" as my statistical backing and valuation model. We compare the 6 classic valuation ratios that O'Shaughnessy uses in his analysis and I added PEG to consider growth into the metric:

Price/Earnings, Price/Book, Price/Sales, Price/Cash Flow, EBITDA/EV, PEG, and Shareholder Yield.

All of this information can be figured from a company's yearly financial statements and most business websites offer many price ratios for quick reference. If you would like to get the individual fundamental breakdowns for each stock and sector shoot me a comment with an email and I will just send you my work.

The "valuation metric" I calculate is very simple. Each stock gets a 1-10 rank per ratio category depending on how it compares to its peers. A 10 is given for the cheapest valuation in the category and a 1 is given for the most expensive valuation in the category. We do this for each price ratio and create a composite score for each stock. That then gives a our ranking from relative cheapest to most expensive in the group. Here are the results for each sector. I have also added the current 1-year Relative Strength (RS) within the sector.

XLF- Financials


Fundamental RS 1-YR
BAC 43 BAC
C 40 C
JPM 38 GS
MET 34 AIG
AIG 33 MET
GS 25 JPM
WFC 24 XLF
USB 22 WFC
AXP 20 AXP

USB
XLY- Discretionary

Fundamental RS 1-YR
CMCSA 58 F
FOXA 57 SBUX
TWX 54 TWX
F 50 FOXA
HD 38 HD
DIS 38 NKE
MCD 34 XLY
NKE 27 CMCSA
SBUX 17 DIS
AMZN 13 AMZN
MCD
XLK- Technology

Fundamental RS 1-YR
INTC 55 GOOG
AAPL 49 CSCO
IBM 43 MSFT
T 43 VZ
ORCL 43 QCOM
CSCO 39 XLK
VZ 39 ORCL
QCOM 33 IBM
MSFT 29 T
GOOG 15 INTC
AAPL
XLI- Industrials

Fundamental RS 1-YR
CAT 58 BA
GE 50 HON
UNP 49 UNP
CMI 47 UTX
BA 47 CMI
UTX 35 MMM
MMM 31 XLI
EMR 29 EMR
HON 23 UPS
UPS 17 GE
CAT
XLB- Materials

Fundamental RS 1-YR
FCX 58 PPG
LYB 58 LYB
DOW 53 IP
IP 49 ECL
NUE 34 DOW
MON 31 APD
APD 31 NUE
DD 30 XLB
PPG 28 DD
ECL 24 MON
FCX
XLE- Energy

Fundamental RS 1-YR
CVX 55 EOG
COP 54 HAL
APA 49 APC
XOM 46 COP
OXY 38 XLE
APC 38 SLB
HAL 34 CVX
SLB 30 ENB
EOG 23 OXY
ENB 19 XOM
APA
XLP- Staples

Fundamental RS 1-YR
CVS 63 CVS
WMT 60 HAIN*
PM 46 COST
MO 43 PG
PEP 38 XLP
COST 35 CL
PG 31 PEP
HAIN 25 WMT
KO 22 MO
CL 22 KO
PM

XLV- Healthcare

Fundamental RS 1-YR
UNH 55 GILD
PFE 49 AMGN
ESRX 47 UNH
MDT 44 BMY
ABT 40 JNJ
MRK 40 MDT
JNJ 36 XLV
AMGN 32 PFE
BMY 22 MRK
GILD 20 ABT*
ESRX
XLU- Utilities

Fundamental RS 1-YR
AEP 54 SEP
PCG 54 NEE
EXC 51 D
PPL 47 PPL
ED 41 XLU
DUK 35 DUK
SO 31 AEP
SRE 29 PCG
NEE 22 ED
D 21 SO
EXC


Okay, so there is the hard data. In our Part 2 post I will discuss interesting notes about each group and some general thoughts on reading between the lines to extract maximum potential. 

*Note: HAIN and ABT are not actually members of the XLP and XLV respectively. HAIN is a long time favorite of mine and it is a consumer products company, I just feel its a little more interesting to follow than the smallest of the top ten holdings in the XLP, Mondelez. They produce similar products except HAIN is an organic foods producer which I feel is underrepresented in the sector, but I also like its prospects more than most in the group. ABT in a recent company spin off, separated itself into two companies, Abbott Labs and AbbVie the pharma side of the business; AbbVie has replaced ABT officially in the XLV. I prefer the original company for my research as that was the stock in the XLV for years prior. These are just funny quirks that I have thrown into my analysis, so omit them if you see fit to. 







Saturday, August 24, 2013

Weekend Update: "Taper" Talk Continues

We had no changes to our portfolio holdings this week as markets traded slightly higher following last week's weakness. The question that we will want answered this coming week will be whether the low set at 1,639 on Wednesday will hold and create the next higher low in the uptrend or will it fail and put the entire rally in jeopardy. While taper talk will likely dominate the news feeds, the Fed is attempting to give the markets some calming words as it continues to reiterate its plans to maintain its current QE course until data indicates a strong enough economy to sustain without their intervention. A new development in the "taper" soap opera this week was after the Fed Minutes were released Wednesday, the pundits and analysts are now resigned to the idea that the Fed will implement a "taper light" and only reduce QE by a small amount. It seems to me that the media doesn't want to get caught in another "fiscal cliff" fiasco and is now attempting to back peddle from its imminent taper campaign. I still believe that the taper fears are completely fabricated by the media and have no real basis to what Ben Bernanke wants to leave as his legacy. Big Ben has been a staunch advocate for aggressive stimulus measures for his entire chairmanship, why would he stop now, 4 months before he steps down? It seems quite unlikely to me.

Legendary investor George Soros has stated, "markets are constantly in a state uncertainly and flux and money is made by discounting the obvious and betting on the unexpected." At the beginning of 2013 the media's warnings were based on the fiscal cliff and all the uncertainty surrounding the event. That was the obvious fear, we would go over the fiscal cliff and markets and investment accounts would be ravaged. Their advice was to sell and protect yourself. What in fact happened? Nothing, a decision to maintain the current course of action was made and markets ripped, leaving all the fearful sheep in the dust and chasing a runaway market. Here we are again, the new obvious fear is the September Taper and Debt Ceiling debate. The media's message is to sell and protect yourself as a significant correction is imminent. Well I would rather take my cues from the market and it is still saying the long term trend is in place. As long as we have higher highs and higher lows on the longer term charts, I will maintain my current course and stick with my winners.

That being said the market is sending many mixed signals as to its next move. A few troubling developments have been the changing of the individual market leading stocks. Names like IBM, HD, WMT, XOM, these are some of the biggest players in some key sectors and have recently been showing signs of topping out. We like to take our cues from individual stocks that lead the market and when they behave in a certain way it suggests a hint to overall market health. At the same time however, bonds are breaking down badly, and defensive sectors are lagging severely. I tend to put more emphasis onto how the sector groups behave vs. a few individual names, and still the sectors that are outperforming the market are the offensive groups. Financials, Industrials, Discretionary are the top dogs along with Healthcare, and now Technology, Materials and Energy are showing positive signs.

Lets take a look at some interesting and relevant charts to act as our bell-weathers moving forward.

SPX 1-year Daily Chart
This is the last year for the SP500. What I'm showing are the significant swing high and swing lows within the uptrend. We have seen a steady rhythm of higher highs and higher lows and is the definition of an uptrend. What we need to be watching for near term is the 1,639 low to hold; the rising 20 WMA also sits at the 1,640 area. But the truly deciding low will be the current confirmed swing low at 1,560. One last item of note here is the pending retest of the support zone we were watching a couple weeks ago (yellow shaded area). We know that prior support becomes new resistance after breaking, so this will be a very interesting test for the market. If the resistance holds, that low at 1,639 is likely to fail and would also likely trigger stops on several positions that we hold.

Russell 2000 Index
Speaking of interesting decision points, the small cap index, the Russell 2000 will be testing a short term downtrend resistance after bouncing off of key trend support and the prior May highs. How this wedge pattern shakes out will also be very important for the health of the overall market. Small caps, by their nature are more economically sensitive and are a tell for investors' appetite for risk. When small caps lead (as they have all year) the market moves higher, when they lag markets falter. What is nice about this index is that its a leading indicator for market strength and should let us know ahead of time what the larger cap index's are likely to do next.


XLK
Last week we were watching how the Technology sector would handle its overhead resistance and Relative Strength decision point. Well it hasn't moved above the prior highs just yet but the relative outperformance breakout we have seen is indicative of sector rotation and strength. While Tech has lagged most of the year, it would be excellent for the market should it now assume a leadership role heading into year end. Right on cue, AAPL has shown up and could lead this sector and the market to new highs.


TLT- Long Bond
We haven't revisited Treasuries in some time, but in case you haven't heard, they are getting crushed. This is all part of the "taper" talk which has caused interest rates to rise. Remember how bonds work, when interest rates (yields) rise, prices go down. What we have seen here is a total breakdown of the Treasury market and the triggering of a 2 year topping pattern. This is a weekly bar chart, so you can really see the time and magnitude of the move. Historically when bonds go down, stocks go up. However lately that has not been the case as stocks and bonds have moved similarly as interest rates continue to cause concern on the broader economy. This move I feel is due for a little bounce, by my measure it is extended here and will need to have a relief bounce before continuing lower. The relief in the bond sell off will be triggered by falling rates and should help offer some relief for stocks as well.

HAIN
HAIN announced earnings this past Thursday and had yet again another blow out quarter. The stock spiked some 15% on the news, but has since settled up about 12% for the week. Sweet move for the stock and our portfolio! The Cup/Handle pattern is definitely confirmed with this breakout and should see upside drift as we move forward. The initial target for the move is $87.50. Again that doesn't dictate our position, but it is something we will be watching for. The new stop for our holding with this confirmed new high will be below the breakout bar at $72.50ish. But there really is a large band of support from $72.50-$70.


HD
Home Depot also reported an exceptional quarter and raised its full year guidance, yet the stock reversed the earnings pop right from the open on Tuesday and closed well below our prior trend support. This is a troubling development for the stock as the excellent news was met with selling. That is usually a signal that price has peaked and is ready for at least a rest before continuing. We exited our HD position over a week ago and that seems to have been a good signal. For the near term future, I will be watching to see if the current trading range between $82-$72 can hold and allow HD to work off its massive run without going into full correction mode. $72 should act as STRONG support, so we will hope to see some price stability at those levels.


ENB
Here is a look at one of our lagging watch list stocks. This may offer a glimpse of what HD is about to experience. ENB has been in a long term uptrend and started to breakdown a couple months ago, only to stage a strong 10% recovery to get back into the trend channel. However it was unable to hold and has since been slammed for 3 weeks straight. It MUST hold the June lows at $39.50 to stay on our watch list.


CMI
While the market was undergoing corrective action the last couple weeks, CMI has been breaking out and retesting its breakout level (prior resistance becomes new support). On Tuesday and Wednesday of last week price came back to kiss the breakout level only to find strong buy support and Thursday it was able to rally hard. Text book breakout stuff here...Stick with this one. If we see a move above the $129 breakout high, we will be able to move our stop up to break even at the $123 swing low.



Friday, August 16, 2013

Exiting Home Depot (HD)

Well we got our exit signal on our Home Depot position today. It is still very close to the key support areas, so this still may recover as they announce earnings for the quarter this coming week (Tuesday, before market open).

The Relative Strength trend has been weakening recently and this week price confirmed the breakdown failing the 20 WMA and then closing just below key uptrend support. We may have been able to give this a little room, but after the run we have had in the position year to date, I would rather acknowledge the signal and just reenter the position should it turn around from here. You always can get back into a position once you sell, its not like the stock disappears and you are not allowed to buy it back. So we will continue to watch with an interested eye as to how it handles the news event this week and whether it can retake its key support levels.

What troubles me the most here is the fact that while being quite oversold and testing such a key level that price could not stage some kind of bounce today. It attempted to rally but then saw consistent sell pressure throughout the rest of the session and confirmed yesterday's weakness. We will certainly keep this on the radar as the long term uptrend is still not unconfirmed, but the weakness we saw this week triggered our sell signals...Always follow your signals!

Exiting XLP (Consumer Staples)

We are closing our position in XLP today. Since entering the position we have seen prolonged relative weakness and with this week's trading, price has broken down below its 20 WMA, the prior breakout level and Relative Strength has failed key long term support.

Something interesting about this exit is that the market has seen some weakness recently and usually when the market is weak investors flock to the safety names like the Consumer Staples. We have not seen that this time however and they seem to be getting sold the hardest. That either means investors are willing to stick with more risky names and the market will continue higher, or that stocks accross the board are seeing liquidation and an even deeper correction may be on the horizon. When Staples sell off it means one of two things:

1. Investors are leaving lower risk, safety stocks, in exchange for more risk appetite and bigger gainers (Bullish for the Market)

2. Investors are dumping everything and even the so called "safety" stocks are too risky for the current environment and feel cash/bonds are a better bet to weather the storm. (Bearish for Market)

**also though it is possible that what we are seeing in the Staples, as well as Utilities and Bonds, is the effect of higher interest rates on those typically high income generating investments. If rates rise, people can gain more money on their general savings accounts and may be inclined to take less risk in the market.

As of now we do not fully know what scenario we are dealing with in regards to investors risk appetite. Being that the market is just 2% below all-time highs and the market leading sectors are still the offensive groups, I am inclined to give the benefit of the doubt to the Bulls and the uptrend here. We will monitor this closely going forward and as always, I will keep you posted to any new developments.

Here is the weekly chart of the XLP. You can see why we are exiting. We have a flattening and broken 20 WMA along with a failing RS trend support that has been in place for more than 2 years now.

Wekend Update: Summer Cleanup

**Posted Friday. I will be out of town this weekend, but needed to get this post out as I feel it is fairly urgent due to today's (Thursday) action. All charts are weekly charts, with this week's bar only showing trading through Thursday.

Today we saw a down turn that invalidates our short term breakout trade. While the markets have churned in a consolidation pattern for a few weeks, today's trading action violated the lower end of the consolidation range. This not only broke short term support levels, but it also created a false breakout on the SP500. The implications of the breakdown however are still minor as price is well above key long term support levels. I will be interested to see how Friday's action confirms or rejects today's support failure. The stories justifying today's trading woes throughout the financial media are due to the Federal Reserve's "likely" tapering its QE program at the next meeting in mid September. The market and many of its participants are behaving as though the September reduction is a done deal, while I feel it is still quite premature. The Fed Chairman, Ben Bernanke, has stated ad nauseum  that the QE program will continue until the national unemployment rate is reduced to 6.5%; currently it sits at 7.4%. I assume we are all reasonable people here and we understand that 7.4 and 6.5 are different numbers and are not equal to one another. Okay, so we agree 7.4 does not equal 6.5? Good!

Apparently all of Wall Street and the financial media believe that these two numbers are the same thing and Fed tapering will ensue at the next meeting within the next 30 days. I'm not an economist, but I'm pretty sure it will take more than one employment report ( one month) to lower the unemployment rate a full percentage point. All this talk and concern about this imminent tapering is complete B.S. and is only intended on scaring the shit out of every retail investor that happens to listen to the news. Luckily for us all, our fearless leader (Yours Truly), can see through such a blatantly slanderous ploy, and am here to help you navigate what will no doubt be a volatile next 30 days of trading. For another, excellent explanation as to why tapering will not occur in September, I recommended you read the latest post from trader Joe Fahmy. Joe hits the nail on the head as far as I am concerned and I couldn't have stated it better myself, so do check it out!

Now, I am roughly 98% sure that the Fed will maintain its current policy at the September meeting. That does not mean however that I feel the market is safe for the near term. Thursday's breakdown will likely create some stressed out Bull's who bought the breakout and don't want to sell. Just know that the market will test your reserve at nearly every turn and those participants will be tested, rest assured. I believe that both sides will be tested soon which should create some interesting movement in the market. The next 4 weeks will likely bring increased volatility and plenty of talk that the financial world is coming to an end. My plan will be to hold onto longer term positions (Blog Portfolio included) while the individual names still maintain a relative advantage to the market. We want to keep an eye on the broad indexes, but this next 30 days will really be about the individual stocks that seem to hold up the best. These we will want to buy heading into the September Fed meeting as the market should overcompensate and rally strongly on news that the QE program will remain intact for now. Plans can always change, but I believe the hysteria over the September Fed taper and the early fall Debt Ceiling debate, will create a very nice buying opportunity into the peak holiday earnings season. I would recommend using this opportunity to raise some short term cash from the weaker holdings in your accounts, those under-performing and breaking below key support levels. This cash will be your dry powder for a move out of the Fed meeting and portfolio protection over the near term. I think it would be wise to raise around 25% cash (obviously you will have more cash if your holdings weaken significantly). This you can take out of some nice gains you have gotten recently or from stocks that just have you confused or stressed in any way.

 This time of increased volatility is a time to do some portfolio cleanup; get rid of the riff raff that has you stumped or at a loss, and only hold onto your strongest, most confident positions. This will allow you to create some dry powder and also be sure to be investing in only the market leading names. A portfolio clean out is something that should be done a couple times a year; at times of market transition it is always prudent to make sure you are only holding what you have the most conviction in and discarding anything else that is causing your account harm.

Today we are going to take a look at our Portfolio from top to bottom to make sure we are only holding the leaders and/or strongly positioned stocks...Lets try to clean out any holdings that are lagging.

Current Holdings  

XLF, XLY, XLK, XLI, XLE, XLV, XLP
HAIN, F, HD, WFC, DDD, PBW, PPG, CMI, AAPL

Cash

XLB, XLU
ENB


XLF
The XLF is still holding up and is above all major support levels. As long as the uptrends persist we will stay long. Friday's action should have no problem holding the rising 20 WMA. That moving average along with the RS support trend will act as our stop.

XLY
Pretty much the same as the XLF. Discretionary looks fine here. We will stick with the outperformance and uptrend.

XLK
Tech is close to doing something...what it does next though, I'm not sure. With AAPL showing such relative strength recently I would not be surprised to see this continue to breakout. But due to the rest of the sector's weakness, it would also not surprise me to see this rollover here. Key trend support and RS resistance rejection would likely be enough for an exit.

XLI
XLI looks to be breaking out on a relative basis and is still making higher highs. Industrials look good here.

XLE
Energy is still slogging along the upper breakout area. Its holding its breakout and above the rising 20 WMA. We will stick with it until it rolls over below the breakout level and uptrend support near $78. Or if we see RS trend really turn down that would also be an exit signal.

XLP
XLP has broken down and is now on the chopping block for Friday's trading day. Price is failing the 20 WMA, along with the RS weakness we have seen recently, these two signals will see our exit at tomorrow's close provided they do not recover.

XLV
Healthcare is still strong and in an uptrend. No reason to doubt it here. ~$47 is key support.


HAIN
HAIN is showing a very nice Rounded Bottom pattern or Cup/Handle. This pattern is in play and price has held the breakout level for over a month. With earnings due out this coming week, we will see if the story justifies the price. A failure of this pattern and our position would be a break of the $62.50 price support and handle low.

F
Ford is fine here. Looking like a very strong rally that could use a breather before heading higher. Stick with this above trend support near $15

HD
HD is another one that is testing our mettle. Relative Strength is rolling over here and confirming a new relative low by failing the support (Red line). Price is now testing long term uptrend support but has broken the 20 WMA with today's sell off. If we see no bounce back attempt tomorrow, we will likely exit the position at tomorrow's close. Because of the strength of the trend I may be inclined to give this a little look before selling. Tomorrow will determine a lot.

WFC
Wells is still in a strong uptrend and has held up well despite the recent consolidation. Relative Strength is still above a breakout area and I would expect a pullback to that support coincide with price testing the rising 20 WMA.

DDD
DDD is stuck in sideways indecision. The shaded support area will be of major importance; depending on which way price moves out of the support range will determine our position going forward. Now that price has consolidated, the rising 20 WMA has had a chance to catch up to price. The 20 WMA and range support will be our invalidation point.

PBW
Clean Energy has seen 4 weeks of corrective action. Based on the direction of the 20 WMA (rising quickly), the trend is strong. I would expect that to serve as support after the recent 10% decline. We have seen strong buy support since the breakout in early May, and I expect that to continue shortly. Because of the strong technical position this is in, I am inclined to let this run as long as its above the support at $4.90.

PPG
PPG is still managing to make higher highs and is solidly above all trend support. Stick with the uptrend.

CMI
One of our newest holdings, CMI has seen strong price action and relative performance since our entry and this looks to be in good shape. Something to note is the larger range that we are now testing. I like how we are seeing the relative breakout along with the smaller range breakout occurring right at all-time highs. That signals strength; the fact that CMI has managed to achieve all this at a time when the market is showing signs of rolling over reinforces the strength.

AAPL
Our other newest holding is AAPL. Boy, we couldn't have timed that better! Thank you Carl Icahn. In case you missed it this week, legendary activist investor Carl Icahn announced this week that he has taken a large position in the stock and is in discussion with AAPL's CEO Tim Cook to aggressively increase their share buy-back program. Carl announced via Twitter that he feels AAPL is greatly undervalued and the stock has gained nearly 10% since his comments. When an investor of this magnitude publicly announces a position like this, you can see the result that follows. Be glad we are in this and lets enjoy the ride.


All in all not much damage done to the longer term charts with today's sell off. Today is just the first shot over the bow for the Bears. They are going to have to muster much more gusto to take this market down without a fight. The bottom line for this week is don't fear every pullback in the market. Accept the fact that markets go in both directions and that its the dominant trend that should be obeyed over the day to day noise. Ignore the media, focus on the trend. So far, the trend is bullish stocks and in line with the Federal Reserve. Don't stray from this momentum until it is proven to be broken. One day does not a correction make; we will need to see much more deterioration to shake out our winning positions.

Saturday, August 10, 2013

Big Money, Gone Fish'n

This was a rather uneventful week for the markets as a whole and officially starts the deepest stage of the summer doldrums. Many traders and money managers have gone on vacation, so trading volumes are lighter than normal and the market becomes prone to choppy trading. The important thing to note is that, while closing lower for the week, the SP500 was able to hold the 20 DMA and closed still roughly 1% above our key 1,674 short-term stop. Not to mention that it created yet another higher low tick on the weekly chart.

Here is a look at the Daily view of the SP500 and you can see how price held above the key support band. While it is possible that this is THE top of the market, we will not try to anticipate that and will wait for price confirmation below the 1,674 low to begin to scale back short-term positions. Long-term our key level to watch is the swing low from the May pullback at 1,560. That is still a long ways off so for now we will keep our attention initially on the shorter term levels.

The top calling has grown in size and volume over the past week; apparently sitting less than 2% below all-time historic highs is all the ammo Bears need to justify their opinions. I read a quote this week from renowned market technician Peter Brandt where he said, " I have NO (that means NONE) interest in playing the markets from end zone to end zone. I want to play the markets between the 30 yard lines. I want you traders to consider this — if you were to never put on a trade that opposed the 14- or 21-day moving average of a market (or whatever length of time you want to establish), would you be money ahead or behind? Think about it!!!!". 

 What Mr. Brandt is saying is that he has no interest in calling tops (and neither should we). Also that when you are an investor in the market, managing your own money and possibly others', you should focus your attention on the longer-term trend and stay with your positions until that trend invalidates. Playing the markets between the 30 yard lines means just that. We will seek to catch the majority of an upward move and avoid the majority of a downside move. We will not attempt to pick the absolute top or bottom in the market, we will wait for the prevailing trend to shift, and we will join along with the highest probability trend.

 I particularly like the last part of his statement where if you were to use a simple moving average and only take trades in the same direction of the moving average and general trend. It is nice to hear when a very experienced and successful investor reinforces the same principles that I am currently trying to employ in my own investing strategy. By following the 20 WMA I have found that trading in the same direction of that average GREATLY improves the likely-hood of a successful trade. However by following such a lagging average doesn't allow you to get out right at the top or right in on the bottom tick. But it does allow us to capture the white meat of a rally and avoid the destructive losses caused from severe market corrections; it will generally keep you on the correct side of the market. There will be some false signals, but more often than not it will catch positive expectancy opportunities and will NEVER miss the biggest moves. The key for us is to be able to stick to our plan and not let our emotions get the better of us while we watch the markets churn.

--We added two new positions to our Portfolio this week, AAPL and CMI. As of this week's close we now nearly fully invested. Being this heavy in our positioning at these levels may be concerning to some, but the fact that THIS MANY stocks and sectors are fitting our trade signal parameters shows just how strong this market is and I believe we still trade higher from here. If the markets roll over we will give some money back and we will get set for the next move. I try to take the emotion out of trading as much as I can and become a slave to my signals. I have seen the success of following the plan and have experienced the pain of not following it. When I make emotional trading choices, my returns suffer. When I follow my signals strictly, my returns improve greatly.

Lets take a look at our two newest holdings and then a couple charts of interest for us going forward.

AAPL
As I expected, AAPL has gone into a consolidation mode since braking to a new swing high. Price on the daily view has flagged orderly on declining volume, so I am not concerned at all about our entry or current position in the stock. I would like to see price firm up a bit as it nears the up-sloping 20 DMA and not repeat what happened the last time prices pulled back from these levels. The flagging action is similar to the prior peak in early May, but that weakness saw downside follow through and created another prolonged pullback. If this time is actually different (which I think it is), I would expect to see some support come in here near the $450 area. Obviously we will be watching this closely as we head into the end of the summer.

CMI
CMI saw a follow through day today and closed higher even in a down tape. That is exactly what I like to see after a breakout; strong relative strength like this signals that a shift is taking place. We also saw the gain today come on increased volume. Increased buy volume after a day of positive action is considered an "accumulation day". An accumulation day is seen as strong institutional support for higher prices. If the big guys are buying, it shows conviction in the move and adds to the probability of success. Its nice to see this confirming signal right after a breakout from a large trading range.  


Currently we are holding 9 of our 10 watchlist stocks and 7 of our 9 sector ETF's. That just leaves ENB, XLB and XLU as the  non invested positions on our list. Unfortunately I only have enough cash in my account to make one further purchase (this shows how invested we are at this point), so I want to make sure I choose the best fit for the remaining positions. ENB and XLB are set up the best of the three, but neither is showing quite enough at this point to signal a winner (both are very close though).

XLB 
XLB is currently on breakout watch for next week to see if it can sustain its attempt at a new high. Today's trading action came on heavy volume and closed above the long term resistance. Also we saw a definitive breakout on the RS chart, signalling a potential shift in fund flows into the Materials space. If I could pick both ENB and XLB, I would have purchased XLB at today's close. Fortunately I can be a little more picky
here because I do also have another very interesting setup forming in ENB...

ENB
Granted this setup still has a ways to go and XLB is looking like it will breakout from here, but I like ENB from a longer term perspective. If you remember correctly from previous posts, ENB has been in this (yellow) uptrend channel since the 2009 lows and has shown remarkable relative strength. Until just recently, this stock was continually making new all-time highs and has now pulled back to the lower end of the channel support. Price actually failed the new polarity support at $42 and sliced through the lower support of the uptrend. That breakdown lasted exactly ONE day and it was back within the support area. That is positive action and now after moving higher, price has begun to form an early reversal setup right at lower channel support (major support, especially with the confluence of the polarity level at 42 also). I am not jumping in here because prices are below the 20 WMA (and 20 DMA as shown above) and also RS trend has not looked too favorable recently as ENB has under performed. This setup could get very interesting in a couple weeks and I will keep you posted on any changes or developments.

One potential problem for our Portfolio is the relative performance of the XLP (Consumer Staples).
 As you can see from the Relative Strength chart that after following a steady upward trajectory vs. SP500 for a couple years, lately the trend has weakened and is now breaking below the support line. Price has remained firm though and has managed to hold in a very tight range for the last month and a half. If the RS continues to deteriorate we may exit this holding regardless of whether its going up or not. If we have other positions that are turning it on and outperforming the market, that is where we want our money to be put to work. If we end up selling the XLP that would also free up an extra amount of cash to purchase both of our potential winners in XLB and ENB. This one we will be watching closely.

p.s. It would be bullish for the market to see some weakness come into the Staples here. That would signal investor risk appetite by avoiding the so called "safety" stocks in the Staples sector. Also if XLB holds its break to the upside with Relative Strength, it would be a major positive for the market continuing higher from current levels. If you are a Bull at these levels (which you should be if you are reading my stuff) then you really would like to see Materials outperform Staples here as that would likely give the market a swift kick to the upside.

Thursday, August 8, 2013

Entering Cummins Engines (CMI)

We will be entering CMI at the close today as it has convincingly broken above long term range resistance and prior highs. We have been very close to a signal the past two weeks and today's action will trigger our entry.

Looking at the chart, the setup is very clean. I like to see very defined levels in my trades as that makes it very clear when to enter and when to exit. The Daily view shows a textbook bull flag, with today confirming the breakout.


You can see the flag here formed from the earnings report rally at the end of July. That initial rally (flag pole) was on massive trading volume and the subsequent consolidation (flag) came on steady, declining volume. This is exactly what we like to see with this type of pattern. It shows very strong interest in the stock, followed by a light and orderly profit taking by short term traders. It is also positive to see the pattern form and breakout at a well defined resistance level.

The Weekly view shows us where our risk will be monitored and also confirms our key entry signals:

The view here shows us a key pivoting location just below last week's strong weekly bar. This is also where the rising 20 WMA is located, so that will be the level we use to determine our trade validity. The Relative Strength chart shows a nice coiling triangle pattern that has broken to the upside, also signaling money rotating into the space.

Tuesday, August 6, 2013

Entering Long AAPL

AAPL closed above the key resistance level of $465 yesterday and made its first higher high since the downtrend began last September. This has run nearly 20% off its lows at the end of June, so some consolidation here wouldn't be a surprise. What we are seeing is a confluence of entry signals in the RS trend vs. the SP500, price above a rising 20 WMA, positive momentum, and NOW a higher high. A breakout above the $465 level also puts the Double Bottom pattern in play.

We will use the $420 level, just below the post earnings gap, as our stop on this position. The stop gives us roughly a 10% cushion should the stock pullback a bit here. A breakdown of that low @ $420 would also violate the 20 WMA and trigger our exit. Remember we will not always be right, but when we are wrong, we will know quickly and act accordingly. Always keep risk in mind when you enter a position regardless of how positively you feel about the asset in question. Always know where your trade is wrong and NEVER hold onto a losing position beyond your predetermined stop.

Here is a look at AAPL on the Weekly view:


On the Weekly view we have a Double Bottom pattern with a measured target @ $545. Price has taken out and followed through from a rising 20 WMA. The RS trend has broken out from a YTD downtrend.

Daily View
Here is a look at the daily time frame. You can see here the breakout of the congestion zone and higher highs. Also the gap caused by the better than expected earnings report (yellow box) and then the prior swing low that we will be using as our stop on the position near $420


Friday, August 2, 2013

Weekend Update: Goldilocks Jobs and S&P 1,700

Another week in the books and another new high in the major averages. The July Job's Report came out Friday morning and was not too high and not too low, it was just right for the economy to show improvement and keep the Fed's pedal to the metal. With stronger than expected data points this week, the market took off from its 3 week consolidation and broke through the 1,700 level. The level by itself is not that meaningful, but people like psychologically pleasing round numbers. What is interesting about the breaking of the 1,700 price on the SP500 is that it is the key target for many short term traders within the bloggosphere (not me however). It has drawn a lot of attention from round number type people and therefore has some significance. There are two things I noticed this week with the 1,700 test in mind:

1. Being that this is the level that most are watching and targeting, it is interesting to me how few believe that the market will just power through it and continue higher. The broad consensus is that this will be THE top for the market and a pullback is imminent. The action however is leaving Shorts feeling squeezed, and under-invested Bulls praying for a top. Typically when this dynamic exists the market will do what it does best, make the herd look foolish and inflict maximum pain. Seeing that the Fed has posted its new Buy Schedule for August and econ. data continues to show gradual improvement, we should have clear skies above. The thing about all-time highs is that there is no overhead supply in the market (resistance). There are no levels where Bulls have bought in and are now trapped; everyone has a profit and are not in any hurry to sell as things seem to be looking good. This creates a situation where Fed funds continue to buy any and every dip, currently invested players hold their positions, and the under-invested and short positions continue to be dragged along for the ride... Prices continue to grind higher.   

2. The other mildly interesting sentiment check I witnessed was Thursday listening to the local FM radio. I was tuned into a fairly progressive, small rock n roll station here in Portland and I happened to catch their obligatory, mid-day 5 minute news segment. One of the DJ's was reporting on the SP500 eclipsing the 1,700 milestone. Initially I was a bit worried, when KINK FM starts talking stocks my radar goes up a bit (usually when normally unassuming folk start to gain an interest in the market it has likely gotten overheated, historically speaking). She was saying that strong earnings where a cause and blah blah. Clearly she is someone who doesn't follow the financial markets with any interest and neither does her cohort. He made some sarcastic "ya-hoo!" about her news and then they both had a little chuckle. After they finished their scoffing fit, the reporting DJ made an off-the-cuff remark that even at these new highs and with an improving economy, the market was still not to be trusted and could plummet at any moment. That was when I got to breathe my sigh of relief. Normal people still hate the market, good. The more casual non-believers we have, the more those potential participants have under-invested dollars that will (at some point) find their way into stocks. This is by no means hard evidence, but it gets back to the idea that this market is far from euphoric and still has much to prove before "the every-man" finally gets on board.  

Here is a look at the Daily Chart for the SP500 at these new breakout highs:


Another new high and a new higher low we can trade against. Short term positions can be added here with stops placed below the July 26th low. A break of this level will also likely coincide with a failure of the uptrend support. I added some short-term positions Friday into the close and will hold those trades with 1,676 as my initial stop. There is a large confluence of support at the 1,676 level as that was also where the prior rally highs topped out in mid may and then where price has found support through this recent consolidation. A quick breakdown of that low will signal a false breakout on the S&P and will alter our stance on current, short-term positions.

Longer-term things look very strong here as we take a look at the Weekly Chart:


The market is quickly retesting the uptrend channel resistance after pulling back on the last test in May. This is bullish activity and shows just how strong the advance has been. As long as price can hold above the rising 20 WMA and above the prior swing low at 1,560, this market is still on its way higher. It is possible that once prices retest the upper trendline that some weakness comes along, but we will wait until we actually see that. Right now there are so many stocks breaking out to new highs and forming bullish patterns that we have to stick with this trend as long as we can.

The Blog Portfolio added two new positions this week: DDD and new prospect PPG.

Currently we hold 14 open positions:
XLF, XLY, XLK, XLI, XLE, XLP, XLV
HAIN, HD, F, DDD, PBW, WFC, PPG

Cash:
XLB, XLU
AAPL, ENB, CMI

Let's take a look at our newest additions and then a look at some of our more interesting laggards:

DDD
Well we got our entry signal in DDD this week on the big pre-earnings breakout. Unfortunately the breakout did not hold as the earnings report saw a "sell the news" response. However, initially the stock was down some 9%, it rallied back to close down only 2% on the day. Wednesday, Thursday and Friday saw some post earnings churn as price held very stable just below channel resistance. The stock has held a tight range between $45 and $49 so we will be looking for a move below the $45 support level as our stop. This sort of multi month consolidation at all-time highs resistance is bullish behavior and I expect a resolution higher from here.


PPG
PPG was our new prospect addition this week as we lost MOS as a viable candidate. I have followed and owned this stock for some time in my personal accounts and the MOS breakdown this week provided me an opportunity to add this perennial winner to our watch list. Also this week we got the signal to buy into this monster gainer with a breakout on our weekly RS indicator and a close at new all-time highs. Being that this is such a persistent trend, we will want to ride it as long as we can. Our stop will be placed just below the prior swing low at $144.50 which also coincides with the intermediate uptrend support. A strong level there!


AAPL
AAPL is getting very close to signalling an entry for our portfolio. We have seen strong follow through since its positive earnings release and it is now testing the prior highs from early May. I imagine you are wondering why we are not already in this stock due to our noticing the potential Double Bottom pattern and several of the bullish indicators we follow signalling an entry. What I try to do is enter into positive momentum situations with a very high probability of success. Since its magnificent decline, AAPL has never made a higher swing high on any rally attempt; it persistently has made lower lows following the lower highs. This is the definition of a down trend.

What I have been commenting on and watching lately are the signals that begin to build a case for entering a position. The ultimate determining factor, after signals indicate bullish activity, price must confirm that bullish bias. My signals include a Relative Strength outperformance or breakout vs. SP500, a rising 20 WMA with price above it, and finally an uptrending stock confirmed by higher highs.  

AAPL is within $3 of making a higher high. We have seen a RS breakout vs the SP500, price has also retaken a newly positive sloping 20 WMA. All it needs to do now is breakout and close above $466, that will be our entry signal and confirmation of a new uptrend.


CMI
Cummins is amazingly close to an entry for us after this week's trading. They reported a positive quarterly result this week and the stock has closed above range resistance. This week also saw the 20 WMA roll into positive trend and RS broke above a short-term downtrend line. Arguably we could have entered here into the close this week also. The one thing holding me back is the longer-term downtrend resistance on the RS chart. It is possible that this becomes some sort of bull trap as it just barely poked through the upper range. Any positive action this coming week will likely trigger that breakout and add a follow through confirmation of this week's strength. That is what we will be watching for. With price still in the upper range of a massive sideways channel, it will take some time for the full duration of this breakout to fulfill...We can have some patience here.


XLB (Materials)
Materials are set up for a big move very soon. This coiling pattern has been forming for over 2 years and we are now approaching the apex; something will have to give shortly. The RS downtrend is also nearing a possible breakout. Price is above a rising 20 WMA, so if we can see RS take out the downtrend while price can close above the $42 level, we will have our entry signal. Just an FYI, a breakout in XLB would be seen as a big positive for an increased rally by the major averages. Materials have lagged for years, if they could take the reins and lead, we could be in store for some solid returns.


As it should be apparent now, we are in a very favorable market to be long stocks. What few stocks on our list we don't own, nearly all of them are as close to buy signals as we can get. It may seem crazy to be adding new holdings at these levels, but I follow price and my signals. When I get my entry, I take it. It may be wrong sometimes, but I know quickly when it is and keep my losses small. Once you have a system in place that is successful, you learn to trust the signal instead of all the noise surrounding the markets and the economy. Really the only reason to be a seller of stocks here is that they have gone up a lot. But that holds no sort of empirical evidence, it is an emotional reaction to fear and greed. The market is a master of triggering your most vulnerable emotional responses at exactly the wrong times. It is for that reason that we have rules in place to override our emotional swings and keep us on the correct side of the market.