Stepping Up Our Game

I believe a key factor to success is to push yourself and challenge your ability to learn something new. For the past 5 years I have taught myself the markets, how to study price action, risk management, emotional discipline. During this time I have grown significantly as an investor and I strongly believe that my hard work has been paying off. There is always more to learn though and to challenge myself further. That being the case, a new challenge for me and you has been thrown down.

The Blog Portfolio will be receiving a new inflow of funds and therefore it is time to step up our game. For the past 18-months I have shared my adventures in the stock market. While I use this space to journal much of my investment thoughts, I have also hoped to help teach others who may be interested in managing their own money. We have followed a 10 stock watchlist and have allocated our funds toward that specific universe of stocks. However with this recent improvement of account equity we are going to need to expand our universe of available stocks to choose from, as a 10 stock maximum concentration puts too high of an exposure to any one particular stock. 10 was a small amount of individual names to learn and follow, but over the past 18-months I am sure you have learned to expand your watchlists as the new opportunities are much more plentiful. We will now be shifting to a 90 stock universe, the SP500 Sector Top Ten stocks. Each of the 9 S&P major sector groups are represented by the XLF (Financials), XLY (Discretionary), XLK (Technology), XLI (Industrials), XLB (Materials), XLE (Energy), XLP (Staples), XLU (Utilities). Each of these individual Sectors have a Top 10 Holdings made of the best 10 large-cap stocks in each group. Some of the names may change each year but the core typically stays the same. Names like Union Pacific Railroad (UNP), Wells Fargo Bank (WFC), Procter and Gamble (PG), and Gilead Sciences (GILD), are some of the key stocks we will be looking at going forward.

For your reference and Watchlist, here are the 90 stocks we will be tracking as we continue:

XLF                                                                           XLY
Wells Fargo (WFC)                                                    Comcast (CMSCA)
Bank of America (BAC)                                              20th Century Fox (FOXA)
JP Morgan Chase (JPM)                                             Time Warner (TWX)
Goldman Saks (GS)                                                     Ford (F)
Citi Bank (C)                                                               Home Depot (HD)
Morgan Stanley (MS)                                                  Walt Disney (DIS)
US Bank (USB)                                                          McDonalds (MCD)
Berkshire Hathaway (BRKB)                                      Nike (NKE)
American Express (AMX)                                           Starbucks (SBUX)
Met Life (MET)                                                          Amazon (AMZN)


XLK                                                                          XLI
Intel (INTC)                                                               Caterpillar (CAT)
Apple (AAPL)                                                            General Electric (GE)
IBM (IBM)                                                                 Union Pacific Railroad (UNP)
AT&T (T)                                                                   Cummins Engines (CMI)*
Oracle (ORCL)                                                           Boeing (BA)
3D Systems (DDD)*                                                   United Technologies (UTX)
Verizon (VZ)                                                               3M (MMM)
Qualcomm (QCOM)                                                   Emerson Electric (EMR)
Microsoft (MSFT)                                                       Honeywell (HON)
Google (GOOG)                                                         UPS (UPS)

 XLB                                                                           XLE
Freeport McMoran (FCX)                                          Chevron (CVX)
LyondellBasell Industries (LYB)                                   Conocophillips (COP)
Dow Chemical (DOW)                                                Apache (APA)
International Paper (IP)                                                Exxon Mobile (XOM)
Nucor (NUE)*                                                            Occidental Petroleum (OXY)
Monsanto (MON)                                                       Anadarko (APC)
Air Products & Chemicals (APD)                                Halliburton (HAL)
DuPont (DD)                                                               Schlumberger (SLB)  
PPG (PPG)                                                                 EOG Resources (EOG)
EcoLabs (ECL)                                                           Enbridge (ENB)*

XLP                                                                            XLV
CVS Caremark (CVS)                                                United Healthcare (UNH)
WalMart (WMT)                                                         Pfizer (PFE)
Phillip Morris (PM)                                                      Express Scripts (ESRX)
Altria (MO)                                                                 Medtronic (MDT)
Pepsi Co (PEP)                                                           Abbott Labs (ABT)*
Costco (COST)                                                          Merck (MRK)
Procter and Gamble (PG)                                            Johnson and Johnson (JNJ)
Hain Celestial Group (HAIN)*                                      Amgen (AMGN)
Coca Cola (KO)                                                         Bristol-Meyers Squibb (BMY)
Colgate-Palmolive (CL)                                               Gilead Sciences (GILD)

XLU
American Electric Power (AEP)
PG & E Corp (PCG)
Exelon (EXC)
PPL Corp (PPL)
Con Edison (ED)
Duke Energy (DUK)
Southern Company (SO)
Sempra Energy (SRE)
Next Era Energy (NEE)
Dominion (D)

* stock not included in the actual Sector ETF. They are individual selections made at my discretion.

So thats a lot more to follow than 10, but its time to take this to the next level. This is the watchlist I regularly use and if you are going to be a relative performance investor, you will need a more broad mix of the actual assets moving the markets. The way I manage my other accounts is I take signals generated by my trade plan (as we do with our Top 10) from this more broad mix of stocks. I focus on these stocks as they are the best and biggest of the best and biggest. The SP500 is made up of 500 total stocks, so our list still omits most of the stocks in that index and only focuses on the top 20% of companies.

The open management of trades will be similar to what you are already used to, with a few slight changes. For example, instead of splitting buy signals up into 3 increments, I simply use the 20 WMA breakout signal coinciding with the Relative Strength trend shift to enter a position. The position size and trade management is determined using the "R" metric I discussed here.

If this feels overwhelming to you then you can choose to pick a few of these to add to your current list of 10 and ease yourself in. But I base all of my weekly research off of these 90 stocks and will be sharing information relevant to them all. Again, to grow as an investor you will need to push your comfort zone a bit and get a more full view of the market place. That is what I will be working to help you with. You have made it through the beginner stage and now its time to move to a more intermediate level. For me this will be a big opportunity to manage money the way I believe is necessary to have strong success in the markets. We will be buying winning stocks in uptrends just as before and will be focusing on risk management as our #1 priority.

Warren Buffett has two rules for managing other people's money:
Rule #1. Don't lose your investor's money
Rule #2. See rule #1


With that being said, lets look at this week's Portfolio additions and subtractions.

-Reducing TLT position by half on RS trend failure

Treasury Bonds have been in a Relative Uptrend vs. the SP500 since the beginning of 2014 but now have created a lower low in the trend and broken the uptrend. Price was just able to hold above the 20 WMA and is sitting on our stop level. We will take half of our TLT exposure off and will await further direction.

Another continued move lower from here will likely see our remaining position sold, while a breakout above the $114 swing high would suggest more upside to come. We will see where this goes next. The last time TLT broke its uptrend and issued a sell signal, stocks rallied for from May through December of 2013. So while its not looking the best for the bonds space, stocks could be ready to run again.

-Reducing AEP for RS trend failure

We also received a failed RS trend in our Utility leader AEP this week. The price action is still intact here above the all-time high resistance level, uptrend support and 20 WMA. But Strength is beginning to weaken and it makes sense that Utilities would struggle at the same time as bonds as they are interest rate sensitive. With the strong jobs data reported Thursday morning, rates bounced as they would if the economy were turning a corner. I think a reduction of 1/3 of positions makes sense here. We want to be in this stock while its in breakout mode, but if its going to lag the market in any way, as the RS may suggest, it is prudent that we take some risk averse positioning.


+Entering Gilead Sciences (GILD)

As is consistent with this week's theme of selling defensive and buying offensive groups, GILD makes its way into our Portfolio. Gilead is a leading biotech company who has displayed strong growth and increasing investor support. After recently consolidating its substantial uptrend, prices seem to be resuming in the prior direction with this week's strong breakout. The price action has the look of a rounded Cup/Handle formation and this continuation pattern targets prices near $110. That would be our first target on entry and we will place our initial stop just below the recent swing low from last month. A break of that low and a failure of the rising 20 WMA would be enough to signal a failed breakout attempt. We will call it $77 for now. Above $77 though this looks like a continued winner.

+Entering Freeport McMoran (FCX) 

FCX has been in a steady downtrending market for several years now, that was until this week's move above the prior swing high that has invalidated the downtrend. This is a great setup as the upside could be fantastic compared to the initial risk of entry. The stock has declined over 50% from its highs back in 2011 and therefore we could see a potential 100% move to the upside if it wishes to revisit those prior levels. The support base is strong and initial stops will be placed below the breakout swing low and rising 20 WMA at $33.50.

That is a pretty wide stop so don't be surprised if the position size is smaller than usual at first. The beauty of a setup like this though is that as our stops trail the price higher we will have plenty of room to increase our position size should the trend continue to move in our favor. If it fails quickly we will take a small loss and move on. If this turns into a major bottom, the upside could be huge.


--Changes to be implemented from this point forward:

1. Stock universe to expand to 90 stocks, from 10 previously
2. Positions will be entered based on 20 WMA/RS breakout signal
3. Position size and trade management will be based on "R" metric
4. To reduce whipsaw situations from largely impacting our portfolio we will limit new portfolio additions to a maximum of two new positions per week.
5. Due to the potentially increased number of open positions at one time, the initial R will be set at .5R. Meaning we will be willing to initially risk .5% of our total equity value on each new position.