Well the SP500 closed lower finally, after 8 higher weekly closes in a row, the market posted a red weekly bar. Of course it only finished 1.8 points below last Friday's final trade. Not to say that nothing happened this week, because we certainly had a choppy ride to our first lower close in over two months. At one point the S&P was down almost 2% from last Friday's close, but a strong November payrolls number cleaned up much of the damage and left us once again testing the highs.
There still is rampant speculation that the Federal Reserve will begin reducing its stimulus efforts at the December Fed meeting which is this coming Wednesday (there is practically zero chance of this happening). The economic data has been very strong, signalling that the economy may be strong enough to stand on its own with less Fed intervention. This rash of strong economic news has led to itchy traders trimming some gains and anticipating a Fed reduction. It has also lead to the
wonderfully accurate (I'm attempting to be as sarcastic as possible) media analysts/pundits calling for this reduction in Fed easing. It is really starting to drive me nuts when listening to these media sources. All I hear is analyst after analyst spouting off these amazingly complex theories about where they "think" the market will go next and why it can't continue to move higher. From someone who follows price action and trend strength, there is simply WAY TOO MUCH THINKING GOING ON!
All you hear on these financial shows are, "I think", "I think", "well I thought", "I think"...Who gives a rats ass what these people who are constantly wrong THINK! I sure as hell don't care what they think. I suppose I just need to turn off my tv and radio, but there is just something that keeps me listening. I guess its the every so often Carl Ichan interview that makes me laugh, or hearing one of the few commentators I actually enjoy (or maybe I'm just too much of a junkie). But why can't these so called professional investors focus on a plan or a system for investing that doesn't require needing to know the exact day the Fed will taper or when the market will break its uptrend? Wouldn't someone who manages money for a living have some hard and fast rules to keep their investments on track in moments of high emotion? Or would they just do like most everyone else and panic along with the crowd?
The one main thing I take away from an afternoon of listening to CNBC is how relieved I am that I have a solid trading plan that doesn't involve hitting the "trade" button based on what every analyst thinks or what a pundit says I
should do with my money. Having a plan means having conviction in your own ideas and having the confidence to take signals regardless of what the masses think of my transactions.
SP500
Here's the weekly chart of the SP500. Each arrow above points to when price exceeded the upper Bollinger Band and then led to a subsequent correction/consolidation. Since the recent move above the band just a month ago we have seen the market trade more or less sideways. This is very typical action and in no way represents a major corrective top; the market runs hard, gets a little overheated and needs to cool off a bit. While we may see some more weakness or sideways trading over the near term, the longer term setup still looks intact.
The other thing I notice from this week and two weeks ago is the long lower "tail" on the weekly bar. That shows that while prices sold off intra-week, they were strongly bought and finished near the highs into the weekly close. That is strong action and these are what are called "bullish wicks". The "wick" comes from another major charting style known as Candlestick charts. We have looked at these before. But the takeaway is when you see a long tail, wick, shadow, etc on a weekly bar, it means while prices were initially taken lower, downside pressure could not sustain and buyers took back control. For our sake of discussion this is a good thing and something to look for.
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Since we had no changes to the Portfolio this week, let's revisit our Sector Groups and see where we need to adjust our stops going forward.
Financials (XLF)-- Cash
Here is the Daily chart of the XLF. While I have been stubborn with this position since exiting back in September, I still see the Relative performance against the SP500 as in a downtrend. Relative Strength has not confirmed the breakout in price. While I struggle to let this continue to go on without entering a position, I still think I need to see a little more. If price takes out the high near $21.60, I will enter as that will show a breakout, follow through, pullback, and again confirmation of new support. I would expect the Relative Strength to break the downtrend if that happened, but I would then take the position regardless based on the individual strength in price.
I actually like many of the individual names within the XLF more than the ETF itself. I currently hold two of the top 10 holdings and am entering a 3rd at Monday's open. Currently we hold WFC for the Portfolio, I hold BAC in personal accounts and will be adding MET on Monday. With many of the individual names breaking out and showing strength, it seems to only be a matter of time until the group follows.
Discretionary (XLY)--Invested
After the most recent advance and break to new highs, there seems to be nice level of support along with the 20 WMA right near $61.75. A breakdown of that area with a RS confirmation, would be enough to let me book the gains on a strong year.
Technology (XLK)--Invested
Tech has been smoking hot over the past nine weeks, and looks to be a trend that will continue. The Relative Strength chart says it all here. I'm actually going to post a larger version of the RS to zoom in:
This is the Weekly chart of the XLK Relative to the SP500 over the past 18 months. After lagging severely for nearly all of 2012 and then continuing into mid-2013, it appears that the ratio is about to turn back in favor of the XLK sector. The white trend lines depict a symmetrical triangle formation that is breaking out to the upside. The grey support line shows an area of interest coinciding with the prior swing low. If the XLK:SPY ratio were to fail here and break below that support, it would likely be a bad sign for the market and very bad for Technology. But right now it looks picturesque for bullish activity and a trend shift. Pair that with prices continuing to hit new multi-year highs and you have a sector looking to outperform for some time to come.
Our stop however still sits below the $31.38 low prior to the recent rally. I expect the stop to rise once prices consolidate and for a new low to trade off of. When a stock moves straight up it is often hard to raise your trailing stop as the most relevant support/demand area is still at the prior breakout level.
Industrials (XLI)--Invested
I much as I would like to raise our stop to the $48 area, there is just not enough of a retested support to call that a stop level. The XLI did acquire its upside target near $50 over the recent weeks, so that does make me want to be conservative. But we also need to give this strong performer room to pullback and still continue higher. If we raise our stop too soon it opens the possibility of getting a false signal. We end up getting shaken out near the lows of simply a corrective profit taking, not a full blown trend failure. We should sit tight for a while with this one.
Materials (XLB)--Invested
Materials have been acting weak for the past month now and the Relative Strength trend seems to be struggling with multiple resistance areas as it appears to want to roll over. While I like this uptrend, I am getting a little spooked by the recent weakness relative to the overall market. That being said, we are not selling here and would still need to see more than 5% of downside before our stop is even tested. I will be watching for the support band to hold and for Relative Strength to break to the upside out of the larger downtrend pattern.
Energy (XLE)--Invested
Energy is in a similar situation as Materials. They just can't seem to keep it going in terms of relative performance. The stock continues to grind slowly higher, just not at the same pace as the overall market. there has been enough interest at the $84-83.50 area to make me tighten the stop on this potential lagging group. A clean move through the support zone and 20 WMA will see our exit.
Staples (XLP)--Invested
The Staples have been holding their breakout and have just cooled off into the breakout retest area. We have also seen nice accumulation of shares on the initial breakout and now the retest bounce. I think this goes higher. Our stop continues to be the swing low near $39.50. We have no reason to tighten the stop yet as the trend indicators are intact.
Health Care (XLV)--Invested
Health Care continues to perform well and we now have an anchored support level from the prior breakout highs and 4 week consolidation over the last few months; this shaded area also holds the 20 WMA. A clean break below $51.35 would stop us out.
Utilities (XLU)--Cash
Utilities, while showing a potential breakout from a symmetrical triangle pattern, have really struggled to continue putting a rally together. They are showing a nice trend of higher lows, but we would need to see a higher high above the $39.50 peak before we would want to get interested. Relative to the market, the Utilities have sucked lately and don't represent an appealing space at the moment.
20+ Year Treasury Notes (TLT)---Cash
Treasuries continue to be weak and can be shorted on a breakdown of the prior low.
Gold (GLD)---Cash
Gold continues to be weak and can be shorted on any bounce attempt below $132.
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Overall the trend continues to be higher for stocks and the offensive sector groups are doing the heavy lifting. I really like what I'm seeing out of Discretionary, Technology, Industrials and Health Care. I also am encouraged by the price performance of the Financials. With all of the nonsense buzzing around the media you would still think we are in a bear market. Its refreshing to be able to take a step back from the noise and really see the clear picture of the market and what is
actually happening instead of what some analyst
thinks will happen next. We try to simply take prices one week at a time, with as an objective eye as possible. And we are not easily swayed by the ramblings of others.
We have had a great year here folks, it will really get interesting when things turn the other direction and you can see how easy it is to protect those gains you've made and how you don't have to watch your accounts evaporate when the market seriously corrects. We will take our signals and step aside. But until that time comes we continue to follow the trends higher.
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