Following the Trend is Contrarian?!

Somehow Being Bullish in a Bull Market is Contrarian

They say this late in the rally that "the easy money has already been made". Easy money?! Excuse me? What part of the last 5 years has been "easy"? Investing in today's markets is like standing in the eye of a hurricane. Everything around you is swirling, you have no idea which way to orient yourself because of all of the confusion, top calling and endless noise. While the bull market has been running for just over 5 years now and I cannot remember ever hearing that the market is safe to enter and that tons of upside is surely to come. No, for the last 5 years all I have heard is how weak the economy is and how stocks have risen too high too fast and how NOW is the time for the other shoe to drop. Yet here we are 5 years removed from the financial crisis and the market is 200% higher...no thanks to the analysts out there. I remember the way I felt in 2010 when I started investing my own money, I saw someone on CNBC talking about how the easy money had already been made and how stocks were likely topped out for this run. I was terrified! I thought, "what the hell am I thinking putting my hard earned money at risk at these 'lofty valuations'?" 

Fast forward 4 years and here we are 1,000 S&P points higher. So what does this mean for us? It simply tells me how difficult it is and is truly contrarian thinking to stay a bull in a bull market. Which seems almost crazy if you have the perspective of a trend trader. When the trend is higher, you look for buying opportunities...simple. You must not fall for the fear of a market crash, you can't listen to someone on tv talking about stretched valuations. You need to have your own compass for navigating the hurricane around you. 

If you know where you are headed, all the noise fades into the background. If you believe in what you are doing, no analyst on the news will shake your position. You know that if they are talking poorly about it then it likely has a lot further to go. If you are in a bull market (we are), all the noise of corrections and tops is not contrarian thinking, its poor recognition of the current environment. Its human nature to fight the simple path; somehow we think that if its going up it will surely have to come down. So instead of continuing to go up with it, you start looking for ways to go against it. You think you are being bold and contrarian, but what truly takes contrarian thinking is having the confidence and common sense to just stick with the damn thing. 

Rotation is Coming to Discretionary (XLY)

The sector that has my interest the most right now is the Consumer Discretionary group. The top 10 XLY stocks are CMSCA, DIS, AMZN, HD, MCD, F, FOXA, TWX, SBUX, and PCLN. Just glancing at these charts shows some very solid consolidations over multiple months and many are now resuming the prior uptrend with breakouts. 

This has been a sector left for dead by most investors and I hear things like money managers have recently gone overweight in Energy and Industrial stocks and are getting underweight Discretionary. Yet everywhere I look atop that top 10 list I am seeing very nice base setups just below all-time highs in most cases. That is not bearish activity to me, it looks like this sector is just warming up to take another run at the second half of the year. Take a look at the last year for XLY on the Daily view:

It appears that XLY is getting more and more comfortable with current price levels. We have not seen price reject that upper range like it did on previous visits. When price can continually probe the upper boundary of a long consolidation it should get your attention; a support base is building, its like a launch-pad for new highs. 

The other interesting item to note is the surge in trading volume in the past two weeks. What do we say about rotation? Money flows in and the stock moves higher. It sure looks to me like there are some big buyers here that think this market is about to resume a leadership role. The other thing you could say is that the last time a major spike in trading volume occurred, the big selling in early February, that marked the bottom for prices before a stellar rally. Now you could suggest that the capitulation selling in February could be similar here but reversed. The contention would be that we are seeing capitulation buying into the highs and are likely headed for a dip. That is certainly a possible, however the way most of the key sector stocks are behaving it looks to me like this is just getting started and this will likely lead to a push to new highs.  

Take a look at an XLY prospect and a current holding for our Portfolio, TWX. This week it made quite a move to the upside based on a bid from 21st Century Fox for $85/share. The offer was rejected by Time Warner, but the assumption is if Fox is willing to pay $85/share to buy it, the market should as well.  

This is the weekly view going back to 2007. Just look how this week's trading action played out! Fortunately we got a strong buy signal last week and were fully positioned for this move. Of course I didn't expect it, but we will take it all the same. 

I reduced my open risk on the position once the initial 18% move took place to bring the holding back to a .5R sizing. Since we cannot move our stops with a surge like this due to its speed and volatility, we have to calculate our open risk based on our current stop at 67.50. With the close of the week $20 higher than the open, it tripled our open risk in one day. That is a place where rebalancing is a prudent thing to do. Yes it could go higher from here and likely will, but I have no idea of where I am wrong now besides the previous support. Until TWX can build a new support base and bring the risk back in our favor, we will wait with reduced positions and just ride the waves, awaiting the next signal. Fantastic start to this trade huh?!

Rates Continue to Push Lower

To continue confounding the masses, interest rates have been in the one of the cleanest downtrends ever for the over 20 years. There is that contrarian thinking again, just by sticking with the prevailing trend you manage to stay ahead of the herd who are insisting on higher rates. Bonds continue to hold up well and keep wanting to push prices up and rates lower. This week TLT has been able to take out its prior swing high on the weekly chart and seems poised for even higher prices to come (i.e. lower rates). 

 While I am still not completely sold on the recovery relative to the SP500, price has shown that the 110.50 level is key support and that the 114 level was not high enough. Based on this continuation higher I have brought the Portfolio's TLT position into proportion with our new account size. I have left the previous holdings from before the new inflow alone, but will be using signal opportunities to bring them into balance with our new risk tolerance levels. So while TLT should be brought up to speed in the new Portfolio, its also still too unproven to need to increase risk at current levels. 

Remember we had a fairly large TLT holding prior to the reduction we took 3 weeks ago, so bringing it back into balance with new account risk parameters is still a nice boost for Bonds in our Portfolio. 

Entering Honeywell (HON)

Honeywell has been on my radar for some time due to its fantastic uptrend. After doubling in price from 2011 into early 2014, the stock has traded nicely sideways for 6 months and is looking to resume that uptrend on this week's breakout. They announced better than expected earnings Friday morning and was the catalyst to propel this stock to new all-time highs. 

I love this setup because it is just so clean. Here is a closer look at the breakout action:

There is no mistake that a significant breakout occurred this week. Price has easily taken out all previous highs and Relative Strength is showing a clear confirmation breakout, suggesting money flowing into the stock. The stop location is also extremely favorable here as we can use the confluence of support from the rising 20 WMA and the recent 6-week support area lows at $93. This makes for a risk of a little over $3 for the potential reward of a massive uptrend resumption. I'll take a clean setup like this every time. 

Symbols of Interest Going Forward

There were many contenders this week for entries into our Portfolio but only one really showed everything I am looking for. But we should keep a close eye on a few names that could be setting up for us soon:

Verizon (VZ) and Enbridge (ENB) are two fantastic looking setups and are VERY close to triggering strong signals. Goldman Sachs (GS) and Citi (C) look interesting if they can continue to push from here. Also Amazon (AMZN) and Google (GOOG) seem setup to move higher. 

--Sceptics say its time to duck and cover, all I know is my system keeps signalling fantastic risk/reward entries. As long as that is the case I will continue to take them as they come. While the fear is that the market is elevated, it is still above all levels of support and trading well above a rising 20 WMA and trend channel support. That is the criteria I have in place to signal it is time to be looking for bullish trades. When the market is bullish, I am bullish...If that is contrarian thinking then I think the definition of that term has been lost in translation by the Wall Street fear mongers.