The Slam and Grab
Let's take a look at one of our newest holdings, IP for an example of how understanding the "rules within the rules" can be important.
On the surface IP broke out of a 1-year sideways digestion of the previous rally, seemingly resuming the previous uptrend. Price had moved quite strongly leading up to this breakout leaving many "value" investors in the dust. As a general rule most people like to buy into weakness, not strength, but IP was not providing that comfortable opportunity to buy weakness. It was running away from them and their comfort zone.
On the surface IP broke out of a 1-year sideways digestion of the previous rally, seemingly resuming the previous uptrend. Price had moved quite strongly leading up to this breakout leaving many "value" investors in the dust. As a general rule most people like to buy into weakness, not strength, but IP was not providing that comfortable opportunity to buy weakness. It was running away from them and their comfort zone.
Where this gets interesting is when you look at what has happened outside of the price trends over the past month. Since breaking out of this range, IP has received 3 analyst downgrades. The first two were merely shrugged off but the most recent one acted like the straw that broke the camel's back and shares took a tumble. Again, on the surface this had the look of a failed breakout attempt and a scary looking "island top" pattern. If price wouldn't come down naturally someone decided to MAKE it come down.
But a funny thing happened, once price reacted lower and saw a follow through down day (this is bearish confirmation of the negative price action = double scary) someone who likely missed out and wanted to get in bought a ton of the stock and sent it rocketing over the next two days. I call this the slam and grab technique. It happens all the time where a firm will downgrade a stock and after the initial price shock, big buyers will step in and accumulate the shares at the discount price. Often this is considered as a ploy to allow a big player to establish a position when otherwise would have been much more expensive to do so. This is the opposite of "pump and dump", which is a widely illegal form of stock manipulation. Basically someone owns a very large position in a stock and convinces a lot of other people to buy into the company, and once they are in and have pushed prices significantly higher, the original buyer unloads his shares at a sharp gain leaving the others holding the bag. The slam and grab is a way to force a hot moving stock lower so big investors can buy in cheaper before the stock makes another strong run.
If you were ignorant to this type of manipulation you may have been confounded by the short term failed breakout signal and could have panic sold. But if you understand how these ulterior motives work you would have seen it for what it was, a strategic shakeout move, and would have maintained the proper positioning to stay with the holding. This is once again another reason why we like to take a slightly longer term view of our stocks and are willing to let our trades play out to the predetermined stops. But it's an interesting development none the less.
Entering Verizon Communications (VZ)
VZ has been on my radar and held in other portfolios I manage for several weeks now, but this week we saw some significant trend development that has triggered an entry for our Portfolio.
Price has completed a double bottom formation by taking out the prior peak from November and it looks like the prior uptrend is resuming in full force.
As you can see from the longer term chart that after the torrid rally in 2012, the stock spent most of 2013 consolidating that extended move. Looking at this view you can also see the rounding bottom/cup pattern that triggered and we are now seeing the bullish follow through of that pattern trigger. There is so much to like here on multiple timeframes that it is one of my favorite setups moving forward. Based on the length of the rounded bottom, this could have multi-year upside potential. Also don't forget Verizon pays nearly a 5% dividend.
For risk management purposes we want to be in this trade above 48.50. That is the prior swing low point and would suggest quite a breakdown from the current positive price action.
For those concerned about the health of the overall market here, note that VZ only carries a .15 correlation to the SP500 since the middle of last year and has proven recently to perform strongly when the market struggles.
Entering Enbridge (ENB)
For those who have followed the blog since the beginning know that I love ENB, and how can you not? Just look at that long term uptrend! In my view ENB is carving out a solid 5-wave uptrend, this recent high marking the trigger of the final wave 5 surge. The last third of a move usually is the place where the most money is made in the shortest time, but really this setup has multi-year potential.
Recently though Enbridge has setup very strongly off of a solid support base. The recent trading action has the look of a continuation cup formation and projects an initial target of about $57. We have a very solid risk reward with this trade as well; we can use the swing low just below this breakout as our stop, call it 46.30 for now. This would require a failure of the recent breakout and a break of the rising 20 WMA and a lower low in the intermediate trend, that would be enough for us to step aside.
I love ENB above those lows and think this could continue to be a big winner.
Using Pullbacks/Corrections to Your Advantage
Everybody warns about a looming pullback. There is never a shortage of advice on how to protect your portfolio from pullbacks or corrections. But do you need to "protect" your portfolio from the wiggles in the market?
If you place affective stops and have a robust exit strategy, that is your protection right there. There is this feeling that pullbacks are to be feared and avoided at all cost, fortunes are lost trying to catch every move in the market. Not only do you drive yourself crazy trying to pick every top, but you are missing a huge hint from the market by being caught up in the noisy madness.
The hint the market offers you during a pullback is it shows you exactly what is vulnerable in your portfolio and where the real strength is. A pullback will take out your weakest holdings and only the best will remain for the next bounce attempt. This is another reason why I prefer to buy strength instead of weakness. If you are just lunging at every dip in the market and adding to the positions hit the hardest, you are growing your investment in a weakening stock. Successful portfolio management lets the pullback stop-out the laggards and once the dip subsides, the strongest stocks will begin to trigger trend resumption moves....That is where you should be buying.
The primary reason pullbacks are feared is because initially there is no difference from a standard small dip and an economically depressing market crash. Most pullbacks don't turn into crashes but being able to figure that out after the first 5% decline is impossible. However if you wait for the pullback to subside your probability of success increases dramatically.
A good rule of thumb is to monitor your portfolio and observe how your strongest and oldest holdings tend to make their way to the top of the "total market value" column in your account. This happens as your weaker and lagging holdings move toward the bottom. Then as the stops trigger, you cut off the weakest near the bottom and your remaining positions should continue moving higher in your account. What this creates is a situation where your best/strongest holdings are also your largest positions as they have continued to grow in value over time and you likely have had many opportunities to add to those winning positions, as we discussed above. And your lagging positions are your smallest holdings and then inevitably get cut.
This is a staple of Relative Strength investing and an easy way to make sure your portfolio is compounding positive returns instead of negative returns. You don't have to fear a correction, just allow the market to tell you what is good and what isn't, and continue to focus on what is good. This methodology will keep you on the correct side of the market in any environment.
My data suggests we could see a pullback very soon from current levels. The reason I bring this up now is so you can prepare your stop levels and watch how using this strategy can play out in real time. We don't want to sell early in anticipation of a pullback, but we also want to make sure we are listening to what the market is telling us. By triggering some stops it tells us that those stocks are no longer in favor and we should be focusing our funds in the remaining holdings that survived the correction. Run your winners and cut your losers.
If you place affective stops and have a robust exit strategy, that is your protection right there. There is this feeling that pullbacks are to be feared and avoided at all cost, fortunes are lost trying to catch every move in the market. Not only do you drive yourself crazy trying to pick every top, but you are missing a huge hint from the market by being caught up in the noisy madness.
The hint the market offers you during a pullback is it shows you exactly what is vulnerable in your portfolio and where the real strength is. A pullback will take out your weakest holdings and only the best will remain for the next bounce attempt. This is another reason why I prefer to buy strength instead of weakness. If you are just lunging at every dip in the market and adding to the positions hit the hardest, you are growing your investment in a weakening stock. Successful portfolio management lets the pullback stop-out the laggards and once the dip subsides, the strongest stocks will begin to trigger trend resumption moves....That is where you should be buying.
The primary reason pullbacks are feared is because initially there is no difference from a standard small dip and an economically depressing market crash. Most pullbacks don't turn into crashes but being able to figure that out after the first 5% decline is impossible. However if you wait for the pullback to subside your probability of success increases dramatically.
A good rule of thumb is to monitor your portfolio and observe how your strongest and oldest holdings tend to make their way to the top of the "total market value" column in your account. This happens as your weaker and lagging holdings move toward the bottom. Then as the stops trigger, you cut off the weakest near the bottom and your remaining positions should continue moving higher in your account. What this creates is a situation where your best/strongest holdings are also your largest positions as they have continued to grow in value over time and you likely have had many opportunities to add to those winning positions, as we discussed above. And your lagging positions are your smallest holdings and then inevitably get cut.
This is a staple of Relative Strength investing and an easy way to make sure your portfolio is compounding positive returns instead of negative returns. You don't have to fear a correction, just allow the market to tell you what is good and what isn't, and continue to focus on what is good. This methodology will keep you on the correct side of the market in any environment.
My data suggests we could see a pullback very soon from current levels. The reason I bring this up now is so you can prepare your stop levels and watch how using this strategy can play out in real time. We don't want to sell early in anticipation of a pullback, but we also want to make sure we are listening to what the market is telling us. By triggering some stops it tells us that those stocks are no longer in favor and we should be focusing our funds in the remaining holdings that survived the correction. Run your winners and cut your losers.
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