There is not much to report that is new this week. The market continues to see strength sold and the sector rotation is moving further defensive. What concerned me the most about last week were two things:
1. Solid earnings moves are being seen as profit taking opportunities, not opportunities to add to positions.
AND
2. All indexes failed to hold early week gains after retesting broken support levels. That means pressure is growing to the downside as any rally attempt is being met with sellers.
Once again the Relative Strength is in the large cap stocks that are paying dividends instead of the growth oriented, momentum plays. The SP500 and the DJIA continue to fare better than the Nasdaq and Russell 2000. I want to show the daily views of these indexes to see the prevailing shorter term price action first:
SP500
While the SP500 was able to move above the prior swing high it still remains range bound. The uptrend here is still intact, but this action is a mess.
Russell 2000
After a 6-day reversal to retest its breakdown, RUT got hit hard once resistance held. The trend is lower and this worries me.
Nasdaq
Just like the Russell, we are seeing the Nasdaq continue to roll over after any decent rally. This could get really nasty if it breaks 4,000...Thats the big level going forward.
Zooming out and looking at the Weekly charts we continue to see similar Relative Strength in safer not riskier:
SP500
On the weekly view you can see the sideways range environment the SP500 has been trading in for the last 6 months. While better than the other two, until it can break and HOLD above 1,880, this will continue to be a high risk environment.
Russell
It appears to me that the RUT is about done with its oversold bounce and is ready to resume lower. This along with the Nasdaq require further defensive positioning.
Nasdaq
Again, above 4,000 its still ok. Below it though and we could have a problem. It doesn't look too good to me.
While the price action remains in transition we did see some further defensive rotation in our Portfolio this week. With the failure of PBW to recover its lost ground after a one-week grace period I am cutting the remaining holding. I also added an additional amount to the TLT position; the Portfolio is nearing its maximum positioning for a bond holding, I would be willing to allocate another 10% from here should the situation arise that we were in a new bear market. For now however the additional exposure is due to the technical nature of the TLT and impending warning signs from stocks. Defense is the best way to play it during times of market transition. There is no reason to give back your hard earned gains by getting aggressive at this time, wait for a "wind at your back moment" when the odds are more in your favor.
TLT (4/3) added another 1/3 position
Treasuries have now been able to clear all resistance and are now firmly in breakout territory with follow-through. Being that TLT is also a quite low volatility holding, having a larger than normal position size is ok, especially in a troubled stock environment. Just as fast moving positions need to be sized correctly, low moving positions can be dealt with in the opposite manner; its best to hold smaller holdings in high volatility names and larger ones in low volatility names. It is our only hedge position (a position that balances against elevated risk in another asset), so as long we still keep the exposure to less than 1/3 of our total portfolio the size it is not excessive. Currently TLT makes up roughly 20% of our current market exposure.
PBW (0/3) reduced 1/3 holding
We had given Clean Energy an extra week on its sell signal as the break was marginal, however this week's action was less than impressive after giving back most of weeks gains into the close. The RS trend was not able to recover and price failed to retake the $7 resistance level. We will step aside here and wait for both of these trends to resolve themselves before we get back involved. This has been a name that likes to whip you around, so just be ready for another setup should this prove to be yet another shake-out trade.
AEP (3/3)
I want to show two charts for AEP. First here is the weekly view showing prices in a strong uptrend and making a new all time high. Our initial base target is only 30 cents from current prices and I would normally be inclined to reduce some size into that target. However looking at the longer-term monthly view, something is happening that I feel suggests that we stay the course and let the full position run further:
As you can see, going back over 15 years this has been THE level for AEP as every test has lead to a strong downside reaction. With this strong breakout this month I will be running this holding until a failure of the breakout occurs. As long as price can stay above this level we want to be aggressively positioned, this is a strong move.
Other than that there wasn't much movement for our other holdings and we remain in a similar position that we did last week:
Both PPG and UNH continue to trade near our stop levels but are still holding, we will also.
CMI and WFC still have cushion below current prices and have continued to show solid Relative performance.
Chart of the Week
Does this say risk on or risk off?!
Here is the weekly RS trend for AAPL vs AMZN going back 5 years; this is essentially a comparison of safe value vs. risky growth. We are currently seeing a breakout of a consolidation zone that has been building for the entire year of 2013. The last time a move similar occurred AAPL rallied 75% in a 6-month period from Dec 2011-April 2012. This
also occurred when both AMZN and the SP500 continued to struggle following a correction. AAPL is breaking out on a Relative and absolute basis and looks like a new trend higher is beginning. Will the price rise dramatically from here? That is unknown. But what is known is that the risk/reward and history suggest strength in AAPL for the near future.
In fact since the end of 2011 AAPL has had a -.13 correlation to the SP500 which means it outperforms when the market and growth names struggle. Does this breakout suggest a strong environment for stocks going forward? I would say NOT, but AAPL looks good here.
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