Something For Everyone

I read an interesting article on confirmation bias this past week. The basic idea is that we tend to seek information that already agrees with our preconceived views on a subject. We find it comforting to read things that cater to our beliefs and emotions, yet we find it difficult and almost confrontational to seek opinions that differ from our views. This is a prevalent problem with individual investors too. We tend to form our opinions of how the market should behave based on the economic indicators, technical setups, political views, etc. As is often the case with biases, they warp our perspective of the actual environment because we attach meaning to each reaction that relates to our own current market view.

What I found so interesting while reading this article (although I had known about this concept prior to the reading), was how I had been slowly forming a more negative view of the market and found myself drifting toward a broad market bias. This is something that I try hard to avoid as I feel it offers no discernible advantage in my investing results, and may even be a hindrance due to the interference of my emotions.

Most people lose money in the markets (individual traders/investors), but some do find great success. So what separates the winners from the losers? If most people lose money in the markets, then we need to avoid behavior that appears to be that of the masses and start behaving more like the minority. If the majority of individual investors are emotional, reactionary, and fearful (the standard human tendencies in stressful environments), then we need to do the opposite of that and react systematically. We need to do our planning and thinking away from the heat of the battle so that in the moment of maximum activity we will act according to our non-emotional system and not allow our fear and greed to lead us to poor decisions.

With this confirmation bias stuff out in the open I think it is best if we simply focus on what avoids the most distraction and review our Top 10 holdings. I have spent quite a bit of time over the past month or more warning about difficulty in stocks going forward. While I still think it is a very mixed picture (at best), we need to continue to take the signals that are triggered by our system regardless of what the broader market averages are doing at the moment. Provided that the long-term trends are higher (they are), I want to be a buyer of strength in our core individual stock positions.

While we did have one buy signal in our Portfolio this week, it is important to review each position as there may be some interesting activity in a near future.

WFC (3/3) added on new buy signal

With the new consolidation breakout and RS trend resumption (not shown), WFC gives us another opportunity to increase our position size and slide our trailing stops a little higher. New positions can be added here with stops just below $48. Considering how weak the rest of the XLF component stocks look, WFC continues to be the bank to own going forward. So long as its trending smoothly, we will stick with this long term winner.


AEP (3/3)

Since hitting its base target a month ago AEP has flagged orderly back near trailing support levels. My current stop is at $50 as that would take into consideration a failed breakout attempt above all time highs as well as break the positive sloping 20 WMA and RS trend support. Above that level however we take a very small risk (less than $1.50 risk per share currently) for potentially unlimited upside after setting new highs just a couple weeks ago. Continue to follow the upswing in AEP, not to mention collecting that solid 4% dividend payout along the way.

 CMI (3/3)

Cummins just keeps motoring higher toward our $164 base target in a seemingly endless chain of higher lows and higher highs. This is a big winner for us and there is nothing to do but continue riding it. Stops near $140 make sense.

TLT (2/3)

TLT is at an interesting junction here. After a solid rally off of new downtrend lows, price is entering an area where the sledding could get a bit difficult. While we did see prices come within $1 of our target objective, the dominant down sloping trend line is causing a sticking point. I still think a stop location at $109 is the proper area for trend invalidation and it seems that we may see some choppy trading around current levels in the near future.

While I don't like the long term downtrend, according to my timeframe the trend is certainly in an upswing. An aggressive trader could consider taking off some risk at this point but since TLT is such a defensive and historically low volatility holding I don't mind riding our current position as long as the inflection level near $109 is intact.  

PPG (2/3)

PPG is on the verge of breaking out to new all time highs. A move above the downsloping resistance and a break above $200 would trigger an end to the nearly 3+ month consolidation. I would look to be a buyer of that move and trail stops to the $188 level.

UNH (2/3)

UNH looks great here after a classic retest of the prior breakout level. We did see a momentary shakeout move but price quickly recovered and is now resuming higher on strong trading activity. Above $75 we want to be holders of UNH.


HAIN (0/3)

HAIN continues to probe its downtrend resistance and we really have nothing to do but wait for a resolution of the current tightening of the price action. A breakout to higher highs above $94 would get us back invested here and we would trail our stop area to the $84 swing low support.

F (0/3)

Ford is just hanging out with the now slowly rising 20 WMA cupping the price action nicely. I like to see price consolidating just above a newly upswinging 20 WMA; that combo can create a solid base support to launch a new uptrend from. I want to be sure with this one though and a weekly close above the prior swing high at $16.50 is needed to confirm the positive analysis suggested above.

DDD (0/3)

As with most of the "hot money" momo names DDD continues to bounce nicely from severely depressed levels and long term support. We still need more confirmation that the downtrend is over before we take new aggressive positions here, but so far this is doing everything it needs to to right the ship. This week we saw both the downtrend line in price and Relative Strength broken to the upside. Now if a solid support base can form and we can get the longer term average to flatten and start moving higher again, this could be a stock to own pretty soon.

I said last week taking a small, longer term entry around current levels is not a terrible idea and I have done so over the past few weeks in other accounts, but for true trend based systems this one is not quite there yet.

PBW (0/3)

Clean Energy finally saw a strong bounce back this week but still remains below all measures of downtrend resistance. Until we see a real effort beyond one week's worth of trading to change the trend back to positive, this is a no touch currently. It would take a move back above $7 to get me interested at this point. Long term I love this space, but the short term picture suggests elevated risk and I choose to invest with the wind at my back, not blowing in my face.


--The current environment gives everyone a little something depending on their market bias. We have stocks suggesting further strength ahead and we have others that continue to be entering new downtrending phases. There is something for the Bulls and the Bears depending on where you look, yet I find it much more profitable to simply focus on what we know and not on what we guess will happen. You don't need to predict the next move in the markets to be successful investors, in fact it may be highly counter productive to attempt to position yourself based on your preconceived views. Its better to let the market show you where the strength is and simultaneously where to stay away from as that will always keep you aligned with the positive price action.

Chart of the Week

Russell 2000 Index (RUT)

Again, something for everyone here. For the Bulls we have finally seen price break above the downsloping resistance of the dominant trend channel of the past few months. For the Bears, they can say that while price is poking through the channel line, the RS trend is simply retesting the underside of the long-term Relative trend support. They could also say that even if we see a bounce from here it is likely to be short lived and would be setting up a larger topping pattern with a bigger right shoulder formation. Any positive trading up to the 1,180 level could still be considered a lower high on the long-term charts and would be vulnerable to selling pressure.

Fortunately we don't need to dwell on this battle. We simply need to focus on how our leading stocks perform and whether or not they provide the positive risk/reward setups we seek to be profitable and successful investors.