Weekend Update: Watch List Stocks updated

In case you haven't noticed the market has gotten a bit choppy and wild to start 2014 and especially in the past couple weeks. Q4 earnings haven't exactly knocked the cover off the ball and Emerging Market worries are starting to creep up quickly. But despite these concerns, US Markets continue to hold key intermediate term support levels; especially our first "line in the sand" at 1,767 continues to find buyers. My purely anecdotal observation is that market followers have gotten rather negative toward stocks over the past couple weeks. We have seen profit taking since the beginning of the year, but that is expected after such a strong previous year. Investors hold winning positions into the new year so they can push back their tax payments until 2015. This fairly normal reaction has been explained by the media in terms of a Turkey/Emerging Markets currency crisis and reduction of Fed stimulus. While these concerns should not be ignored (especially future Fed tightening), we are still not even through the FIRST key support level! This is a very important lesson to understand: resistance is resistance until broken, support is support until broken. So far support is still acting as support yet the media is widely convinced that we should expect a 10-15% imminent correction. This correction may come to pass, but we have to break support first. So keep an eye on 1,767 going forward.

As per our year end review discussions, I have adjusted our Top 10 watchlist stocks for 2014 as I felt fewer total holdings would be better (dropping the 9 Sector ETF's) and we did not have each sector represented equally in our prior list. We held two energy stocks and two Consumer Discretionary stocks, while not having a Health Care or Utility stock. For our list going forward these will be the stocks I will be following based on fundamental strength, technical setup and key investing themes for the future. AAPL, ENB, and HD have been exited as of Friday's close based on failing technical signals and portfolio re-balance.

Financials-                       Wells Fargo Bank (WFC)
Consumer Discretionary-  Ford (F)
Technology-                     3D Systems (DDD)
Industrials-                       Cummins Engines (CMI)
Energy-                            Clean Energy (PBW)
Materials -                       PPG Industries (PPG)
Health Care-                    United Health Care (UNH)
Consumer Staples-           Hain Celestial (HAIN)
Utilities-                           American Electric Power (AEP)
Bonds-                            Treasury Bonds (TLT)


We have also made some small adjustments to how we position size our holdings based on signals of strength. Lets take a look at each holding and see where the Blog Portfolio is invested as of the close of trading Friday, January 31st.

Wells Fargo Bank (WFC) 2/3 holding

WFC has shown strong trend strength over the past couple years and we have two actionable signals suggesting more positive price action. Price is above the rising 20 WMA and Relative Strength is still in its longer term uptrend. There are currently no price patterns in play here so we have 2 out of 3 actionable signals and therefore hold 2/3 of a position. To take us out of our positions here we would need to see the RS trend fail and for price to break the 20 WMA while taking out the low just under the average at $43.20.


Ford (F) 0/3 holding

We exited F some time ago as it was failing our trend strength signals. Since that time it has continued to trade lower after a failed bounce back attempt that retested the underside of the now declining 20 WMA. Ford has built a case for more weakness in the near future. I still like the long term setup here and the cheap valuation, but we will just have to wait for more positive price action before getting back involved.

3D Systems (DDD) 2/3 holding

DDD was a monster performer in 2013, 2014 however has been decidedly different. We took gains out of the stock as it continued to make new highs and just this week I added back some of the prior holdings we had previously. While this could certainly continue lower, a retest of the 20 WMA after a $20 decline is enough for me to take a little nibble. I am holding a 2/3 position for DDD based on the long term RS uptrend and price above the rising 20 WMA. We don't have an active price pattern in play, so we will have to wait for further formations to add once again to our holdings.

*Note: For a stock that is this volatile, a full position of DDD is not the same size as WFC or AEP for example. Due to is wild swings I tend to keep my maximum position size somewhere in the 50-75%  range vs. a slower moving stock. For example, if our regular "full position size" is $10,000, DDD would max out around 5,000-7,000 depending on your particular risk parameters. I tend to lean somewhere around 60% of the regular maximum size, for a reference point.

Cummins Engines (CMI) 1/3 holding

Cummins was looking like it really wanted to push higher but has since failed its new high breakout. It is now trading below the 20 WMA and Relative Strength is looking weak as well, breaking below the 18-month support line. We still however have a positive suggesting price pattern in play. The Cup/Handle setup here still suggests price is in a bullish long term posture and we would need to see the uptrend line broken and lows near $105 taken out before this pattern is killed off. As of now the pattern has a price target near the upper $160's. We maintain a 1/3 position to capitalize on this price formation.

Clean Energy (PBW) 2/3 holding

Of the two Energy investments on our watchlist I chose to keep the Clean Energy Fund (PBW) and gave Enbridge (ENB) the boot. This is only based on fact that I think renewable energy is the future; the clean energy sector seems to be finding a possible generational bottom in prices. I like ENB also though, it is trading just off its all time highs and seems likely to resume its uptrend in the future. If anything were to happen to the health of PBW, ENB will be the replacement in the future.

The chart here looks fine, we still had a series of higher highs and higher lows when we took our exit signal a couple months ago. That has now shown to have been a shakeout move and the stock has attempted to move higher. We have the start of what looks to be an even larger reversal Head/Shoulder pattern in the works, although the right shoulder is much shallower than I would like, a break above $7 sets this pattern into motion. We do still have 2 signals in play currently as price has managed to retake and hold the 20 WMA as well as a longer term up trending Relative Strength trend line. Due to the overall uptrend we need to use the swing low at $5.89 as our trailing stop. We have seen twice in the last year where a correction will pullback just enough to close below the 20 WMA only to turn and go right back higher. To help avoid another shakeout we will be watching those lows for confirmation that a more conservative posture is needed.


PPG Industries (PPG) 2/3 holding

PPG has continued to produce a solid and steady uptrend. After a two week "cool down" some buyers have resurfaced right at key support. We hold a 2/3 position as price is above the rising 20 WMA and longer term RS trend is intact. We will look to reduce our holdings if the $180 support cannot hold and/or the Relative Strength uptrend fails.

United Health Care (UNH) 0/3 holding

I chose UNH as our new Health Care stock for 2014 due to its long term price strength and its extremely favorable fundamental valuation. UNH is the "cheapest" of the Health Care sector top holdings, yet it continues to make new all time highs in a steady uptrend. At this exact moment however we have no actionable signals based on our plan. What is also notable is that price is trading just off the upper range of the 5-year uptrend. The plan will be of course to continue to watch for our signals to trigger and hopefully price will retrace back in line with uptrend support. That would present a very nice place to look for entries in the name.

One more item to note is the RS trend. While technically in an uptrend vs the SP500, it was unable to make a new relative high on the latest price advance. The Relative chart formed a "Double Top" looking signal as price topped out and has struggled since. This will be an interesting level to watch going forward. Although a move back to the lower trend support would be welcomed as well. Currently its below the highs and above the lows UNH is kind of in no man's land here and we will watch and wait for more confirmation.

Hain Celestial (HAIN) 1/3 holding

HAIN just keeps chugging along, but as I have stated previously, the stock likes to "pop and consolidate". We recently got an overbought reading after the big surge 2 weeks ago and reduced our 20 WMA position as a retracement was likely. When prices become over extended above the 20 WMA I see those as profit taking opportunities and reduce my holdings. When price corrects back in line with the average I will put that portion back on. Currently we have only one valid signal and that's the ever steady RS uptrend. We have no active price patterns as the Cup target we traded for the second half of the year was acquired on that big surge rally as well.

Hain gets a 1/3 holding right now, but on a pullback to the 20 WMA I will add back that portion. And this is more trading than some will prefer to do, there is no law that says you have to take profits on these quick moves; the trend is higher, the stock behaves orderly and continues to set new highs in prices continuously. I will highlight these "profit opportunities" but if you are more comfortable holding and following the overall trend, that is not a problem with me.

American Electric Power (AEP) 3/3 holding

Our new Utility holding will start with a boom. AEP, as of this week's close, triggered all 3 of our strength signals. Price has broken to new multi-week highs with an up turned 20 WMA, Relative Strength vs the SP500 has broken out of its 8-month downtrend, and a reversal price pattern has triggered.

AEP has confirmed a reversal Head/Shoulder bottom and has convincingly broken above the neckline resistance on strong volume. The price target for this pattern is at roughly $53.80, over 10% from current levels. We would at that time look to take gains on that 1/3 position dedicated to pattern formations and maintain our other 2/3 holding. The stop on new positions here is below the $45.50 right shoulder lows. A move below that level would suggest this was a false signal and we would wait for another.

The fact that Utilities are so strong here suggests weakness for the overall market is likely. The Utility ETF, XLU was a poor performer last year relative to the market but has seen solid fund flows to start 2014. When investors move to Utilities they are seeking yield in an uncertain environment, currently we are seeing this taking place; AEP pays an annual dividend of over 4%. That is a nice consolation prize for our holding even if nothing comes from this setup. AEP is cheap relative to its peers, pays a solid annual dividend and has been a strong and steady performer.

Treasury Bonds (TLT) 2/3 holding

The other group that investors flock to when trouble starts to creep into the market is Treasury Bonds. We currently have a 2/3 position in the TLT as it is suggesting intermediate term strength. We have price above the rising 20 WMA and RS trend has broken to the upside after lagging the market for almost 18-months. If we can see a break above the 109-110 resistance area, it will trigger the Double Bottom formation seen above and we will add an additional 1/3 position for that trade opportunity. This will be a crucial level for Bonds and Stocks, yet I take my signals as they come and we have 2 currently in motion. A breakout above the prior highs will likely have broad market implications and will be something to watch closely.

TLT will be used in our portfolio as a hedge for our open holdings when the market suggests trouble ahead. I feel this is a more appropriate method to gain protective exposure rather than Shorting. I originally intended this blog to be simple for folks to follow and trade along with, adding short exposure goes outside the bounds of simple investment strategy. I will do my best to keep things as simple and clear as possible, so TLT will act as our "anti-stock" trading vehicle going forward.



---Our 10 watch list stocks are fundamentally and technically strong, and most fall in the upper range of overall sector fundamental score. All have promising long term uptrends and/or trading momentum.

 Clean Energy, CMI and HAIN fall into my themed based trading portion. I believe renewable resources will continue to grow making PBW a solid likely performer. CMI is a transportation play on the natural gas boom, and HAIN represents the healthy eating movement. I feel these are areas of strong growth in the future.

UNH and AEP are our new editions to make sure we are representing each sector of the market equally. Both have leading sector fundamental scores and are in strong and steady long-term uptrends.

DDD and PPG are sector leaders in terms of  product innovation and have shown strong long term returns. These are not what would be considered "cheap" by any metric, but sometimes you have to go with Relative Strength in a portion of your portfolio.

F and WFC are strong "American economic recovery" plays and represent consumer demand. WFC should be strong based on loan growth and US housing. F has been a leader in new car sales and has moved toward more energy efficient vehicles. Both should be in high demand should the job market recovery continue in its upward trajectory.

TLT (Treasury Bonds) will be our market protection portion of the portfolio. As Bonds signal buys we will use those signals to hedge our market exposure as conditions are likely suggesting elevated risk levels.

That leaves us with 10 holdings and represents a really nice mix of value, dividends, growth and relative strength. All in all, I would be hard pressed to come up with another mix of stocks that cover all of these metrics better. 

--Fortunately we have been given a nice grace from Mr. Market by pulling back this week making portfolio adjustments easier. These adjustments will be made for next week's trading as this is how price and trend suggest we position our Portfolio going forward. This will be subject to possible adjustments each week if the market moves swiftly lower through key support levels. For now however we continue to hold the line and our holdings look solid going forward.