We've Been Here Before

That was a tough week. But this is how markets behave and this is something we all have to deal with as market participants. They take the stairs on the way up, and the elevator on the way down. This week's price action says it all:

We have been here before haven't we? We have seen sharp profit taking a couple times in this recent bull surge that have tested the 20 WMA trend support. Each of the previous tests led to sharp recoveries immediately, will this time be different?

We always want to be looking for patterns in the market to see if the pullback/correction is part of the normal range of price movement, or if this is something outside the bounds of expected trading action. It is a fact that bull markets do a great job of shaking people out just in time for it to rally right back, leaving the overeager in the dust. If it doesn't immediately come back we will know that something may in fact be changing.

I have been waiting for the "inevitable" correction along with everyone else, will this bring that Wave 4 decline (here)? I don't know, but what I do know is that the market is telling us something and we need to listen.


--While the SP500 is testing its trend support area, a few of our holdings are showing relative weakness and need to be exited at this time. Know that this is PERFECTLY OKAY. This is exactly what I talk about when we need to listen to what the market is telling us by selling the weaker holdings and riding the strongest holdings. After a pullback we should only be left with the very best holdings in the market. That is a pretty good place to be in my opinion. Selling the losers and riding the winners, this is what makes you profitable over the long term.

HON

This is what we do. We find a low risk setup, we take our signal and we sell when the signal fails. If we are wrong, we are wrong quickly. We take our small loss and move on.

While HON is still within a longer term uptrend, the failed breakout and close below both the 20 WMA and prior support low is enough to make me think the consolidation needs more time. We will now watch from the sidelines.

PPG

PPG also sported the dreaded failed breakout and confirmed to the downside this week. This week's trading sliced through the prior support/breakout area, filled the gap from the first week of July and took out the 20 WMA. This one makes me a little bummed. I've held PPG for over a year and I have been willing to sit through some marginal breaks of support, but none have been quite this damaging. The big breakout failure is what really worries me here as that can lead to a very swift shift in sentiment.
All of the buyers on the breakout are now trapped and will be looking for an exit, creating potentially strong overhead supply.

There is still a solid long term uptrend support near $187 so I will want to see that hold on any test, and we will just have to see if this can setup for us again.

CMI

Cummins continues to be an excruciatingly difficult trade to manage from a volatility standpoint. It will spend 6 months grinding steadily higher and will then see all those gains disappear in one fell swoop. While this is still within the uptrend channel and did see some buy support, I feel I have given this every opportunity to prove something over the past 3 weeks and it hasn't even been able to muster a bounce. This week we saw a gap through the 20 WMA, a break of first support at $150 and within two days it had taken out the lower trend swing low at $139.36. That is enough for me and I will need to see some serious base formation before I consider this for a holding again.


But what if we are selling at the bottom? Well that's going to happen sometimes. We can only control so much and what we can control is the amount of risk we are willing to put forward to see if this stock is going to become our next big winner. If it doesn't then we will move aside and look for a better one. Remember the beauty of Relative Strength investing is that we get to change horses after each turn. This gives us the absolute best odds of picking the big winners in the end.

Well why don't we just hold because we own such strong companies? Don't get married to a stock holding ever! Yes these are all fantastic companies that have demonstrated they are market leaders for many years. But that is not what I do. I deploy a risk based market strategy; I am simply not willing to risk 100% of my money 100% of the time, as is the strategy with buy and hold. If something is not working and trading lower I will get rid of it and look for something else.

The mistake that investors typically make is that once they sell they think its over. What if we sell here and the stock turns around and goes back up? If that happens we will look for our signal confirmation of a resuming uptrend and buy them right back. This is why we have a watchlist, so we can continue to monitor the best and strongest companies. If we sell and it sets up again, we get right back in. No confusion, no remorse for having to buy back in a little higher. These things don't concern me and they shouldn't concern you. When risk becomes elevated you need to reduce your exposure to the most affected stocks and wait for them to prove that they are not in fact continuing lower.

We want stocks that are moving higher steadily and that offer us a very small risk for a potentially limitless reward. I'm not the guy who sits on a 20%+ loser and says "oh well, at least they pay a nice dividend". Hell no! On to the scrap heap they go and we look for a better one. To have success in the market you need a methodology that aligns you with the current trend and direction of the market. The best thing we can hope for is to follow along with the rallies and reduce exposure early in a declining cycle.

 Long term outperformance comes from protecting against big downside moves. It doesn't come from killing it to the upside during rallies. Anyone can make money during a bull market. The trick is to have a method to keep you in when things are moving higher and then alerts you to when things are ready to turn back lower.  

--With these portfolio adjustments we head into next week with holdings of:

20+ Year Treasury Bonds (TLT)
Starbucks (SBUX)
Gilead (GILD)
Time Warner (TWX)
Wells Fargo (WFC)
International Paper (IP)
Freeport McMoran (FCX)
Ford (F)
American Electric Power (AEP)
United Healthcare (UNH)