Market at New Highs, Discretionary is Rocking

Discretionary is on Fire

When we talk about new highs for the stock market, we expect those highs to be accompanied by offensive, "risk-on" leaders pushing the indexes up. Consumer Discretionary is probably the most economically sensitive group, and this week we continued to see strength in that area.

A new addition to the Portfolio this week is Nike (NKE) who was leading the Discretionary sector higher all week.

Entering Nike (NKE)

This is exactly what I like to see from a leading stock; its breaking out to new highs, above a large and clean looking consolidation base. Also the breakout in price is being confirmed by Relative Strength suggesting this is once again assuming a leadership role.

This is the 4th stock from the XLY that we hold in our Portfolio and while that does make me a bit nervous, I feel that we are still properly spread out within the sector. Our current Discretionary sector stocks are Time Warner (Media), Starbucks (Restaurants), Ford (Autos), and now Nike (Apparel).

The issue with holding so many stocks from a particular sector is that you begin to get concentration risk by having too many similarly trading stocks in one area. We could see some issues here if the XLY decides to roll over, but I think the technicals line up in each of these stocks nicely and feel that the risk/reward being offered by each name is quite positive.

If NKE should not play out as we plan, stops need to be placed just below the recent consolidation and 20 WMA at $76.75.

This group is on fire right here and just starting to chug in my opinion. Almost every name in the group is breaking out to new highs. Home Depot (HD) has exploded over the past couple weeks, Comcast (CMCSA) is breaking out nicely this week-there was a close decision between NKE and CMCSA, but NKE presented better diversification and risk parameters. Time Warner and Starbucks are consolidating their initial rallies nicely, Ford looks on the verge of a big breakout, Disney has been a total beast for a while now. Everywhere you look at this group you are finding winners. I think its just getting started.

Energy Has Pulled Back, Now What?

A couple months ago I discussed the rally in energy and how it was getting ahead of itself. Names like EOG and COP were rocketing straight up and the trend was becoming unstable. Since then we have seen prices come in quite a bit off the highs and are now sitting on some pretty important support levels. Lets look at a few key names in the group.

EOG Resources (EOG)

EOG is one of my personal favorites and I am currently a holder in private accounts. Since touching its range highs 3 months ago, price has moved right back into the uptrend support. Price has broken below both the 10 WMA and 20 WMA, but is still holding the prior breakout level of $102. 

I feel this stock once again needs to be placed on the close watch list and for dip buyers, you could even put on a position here using the uptrend support and $102 as your stop. Based on the most recent correction back in late 2013 it would appear that this could even slide sideways for a few more weeks and still be just fine. We want to be aware of this stock above $102. 

Schlumberger (SLB) is in a very similar position, as are COP and HAL. These names lead the Oil Services group and how they handle this pullback will go a long way to determining whether Energy needs more of a correction or if the dip has ended and ready to continue higher. 

 Here is a look at Conoco (COP) and you can see a similar formation. 

The concern here is that the initial wave of selling has just paused and another move lower is coming. Take a look at the last decline at the end of 2013. Its very possible that we will see a similar type of shakeout move before any sustained upside can continue. 

This is why we need to watch how these Energy names handle the key support. A break above would suggest support has held and higher prices are coming. A break below the consolidation area and another sharp leg lower could be ahead. 

Speaking of Offensive Groups, What are Financials Up To?

Back in July I posted a way to use Monthly charts to find relative value in the market. The two groups I thought presented the best "value" were Discretionary (see above) and Financials. I continue to feel this is shaping up nicely and many names in the group are looking interesting. 

You already know about Wells Fargo (WFC) and Berkshire Hathaway (BRKB) because we hold them in our portfolio, but there are a couple other names that need our attention. Here they are ranked by relevance and setup:

JP Morgan (JPM)

JPM is further along than most of the major banks in terms of its recovery. It recently made a breakout to new highs and has since been consolidating. We need to see RS turn higher and start outperforming, but the structure of the base breakout seems solid above $52.

Goldman Sachs (GS)

Goldman looks great right here and is setup for lots of upside should it fight through the overhead supply. If/When this formation breaks out higher it has 50% potential and a date with its prior all-time highs. A clean break above $182 will set this into motion.

Bank of America (BAC)

As you can see BAC is similar looking to GS but quite a bit behind. The $18 level has been a major sticking point for rallies, but another test of that area could result in a breakout this time. This still needs work, but it should be on your radar. 

Exiting Freeport-McMoran (FCX)

We are taking an exit signal in FCX this week. Since breaking out to what looked like higher highs and a change of trend, price has been on a non-stop skid for 8 weeks. This week price sliced through the 20 WMA and came into our stop area near $35. 

I had previously placed my stop at $35 and while this closed at $35.02 I felt that the overall failed breakout and lack of any strength was plenty evidence to step aside. This is a very oversold stock at this point and will likely bounce a bit from here. But the simple fact that while the SP500 has been continually making new highs for the last few weeks, FCX hasn't even sniffed a bounce. 

What I try to do is find stocks with a higher than normal probability to outperform the market. When the market makes new highs and a stock continues to slice through support levels, you want to avoid that stock and find something else that is working. Sometimes we sell the bottom, but we look for the strongest opportunities with low risk, when that is no longer the case we exit and look elsewhere. 

Your equity is your investment ammo and you want it targeted at the most promising setups. Again, while FCX may bounce back a bit, its going to take an awful lot just getting back to even. I can regain the loss much quicker in a strong winner than I can in a languishing, oversold stock. Book the loss and move on.