Entering Disney (DIS)

Due to the holiday weekend I'm not able to post a full weekend review, but there is a new entry signal triggered in shares of Disney.

We will be entering a position as the stock appears ready to resume the long-term uptrend higher. Due to the recent consolidation we are able to enter and have a strong position size due to the relatively close stop placement.

The recent price consolidation has the look of a Cup/Handle or Bull Flag formation. After the sharp decline through Sept-Oct, shares have snapped back and are now at new highs. Prior to this week's breakout price consolidated again forming the Flag or Handle and is suggesting higher prices in the future. 

We can place our stop below the higher low formed by the Flag/Handle. That area also coincides with the rising 20 WMA. If price were to fail that swing point we would want to step aside as more consolidation would be likely. 

Taking a look at the Relative Strength vs the SP500, you can see a steady trend higher and this recent correction in price also found support right at the Relative uptrend going back to the '09 lows.

Our risk is well defined on this trade and a stock a all-time highs gets the benefit of the doubt. This is an easy entry here.

Plenty to be Thankful For

In the spirit of Thanksgiving, I would like to pass along an article I came across this week:

http://www.vox.com/2014/11/24/7272929/charts-thankful

Being that this was a shortened and distracting week for investors, I simply want to piggy-back on last week's theme of noticing what we have and where we have come. Instead of focusing on all the negatives around us, let's take a few minutes this weekend and really see some things to be thankful for. 

Have a happy Thanksgiving and I will see you all next week.

America is at All-Time Highs

The market once again closed at a new all-time high this week. If its not apparent by now that new highs are not a bearish indicator then nothing I can show will convince you. I have been writing about new stock market highs since early 2013 and the market has continued to produce them routinely for over a year. Most ordinary investor folk believe that when the market is at highs it is time to sell; they believe "stocks have gone up too much". The statistics however simply do not support selling into new all-time highs, or even new 52-week highs for that matter. New highs lead to more new highs; by their definition when a stock or market makes a new high that is a positive sign, a sign that things are working and should not be a signal to sell.

Since early 2013, when the market made its first new high in over 6 years, the SP500 has continued to rally another 400 points or 25% from the original breakout. If you take your advice from ordinary investors or the financial media you likely have missed that move in fear of some unfounded scare tactic.

The point is that America is at all-time highs. Most people will not acknowledge that as truthful either. There is a quote that says, "the world continues to improve, yet people believe that things are always getting worse". This flaw in thinking is usually caused by some political or emotional bias based on some preconceived ideas of conspiracy or malfeasance directed at the government. Any number of popular theories can lead to these ideas:

-The Fed is artificially inflating our currency and economy to sure future disaster
-Democrats or Republicans are ruining the country for any number of reasons
-Some sort of war will erupt and destroy life as we know it
-All data supplied by the government is corrupt and intended to deceive our confidence
-An individual has an opinion and regardless of facts, their opinion is all that matters

These flawed ideas are typically created by some form of recency bias, be it the 2000 and 2009 stock market crashes, recent political elections, some "very believable movie plot", opinions of their parents/friends, etc.

If you constantly live waiting for the next disaster or think that everything you read or see is an intentional deceit, you will simply not live a very fulfilling life. But if you step away from opinion and bias and just observe facts you will see what is actually going on right in front of you. Here are just a few facts showing that things are really not so bad:

-Life expectancy in the US is 79.8 years, an all-time high
-Infant mortality rates in the US are 5.2 deaths per 1,000 live births. By comparison in 1980-85 the number was double that.
-Percentage of the US population with a college education is 43.1%, an all-time high

People will assign blame to any number of exterior causes to explain their "bad luck" or struggles in life. But the simple facts are we are living longer, our country is more educated than it has ever been, the survival rate of our offspring is at its highest in human history and our best economic indicator (stock market) is at all-time highs.

You can argue with that all you want, but those are the facts. The other "doom and gloom" theories are just that, theories. They have little backing in the data and simply don't matter to day-to-day life. What good has hating the president or Federal Reserve gotten you financially over the last 6 years? If you acted against the status quo, you likely have not benefitted in any way by one of the largest market rallies of our history and don't have anything to show for it except sour grapes and how "you will be proven right at some point". Good luck with that. I will continue to observe the facts and adjust my lifestyle and choices accordingly.

SP500

Its really been impressive, the most recent bounce back from the October low. The relentless bid continues as any sign of weakness is bought. I have to imagine that a pullback is in the near future, but there isn't much reason in trying to anticipate it. The market has to be given the benefit of the doubt and as long as the SP500 can stay above about 1,900 there isn't much to worry about.

My sector data continues to gain strength as the stocks trading above the 20 WMA moved from 60 last week to 62 this week. This suggests that the trend is still likely headed higher and positive support for the market is in place.

We have two new entries for our Portfolio this week. They should both be familiar to you if you have been following this blog for any amount of time. This week we are entering PPG and SBUX.

+Entering PPG (PPG)

PPG is one of my favorite stocks, so when it acts right I like to be an owner of the shares. Since taking our exit on August 1st, the stock has traded erratically. First moving to a low near $170, to trading at an all-time high at $215 just 5 weeks later. Fortunately for us PPG did take a little pause and built a nice swing point to put a stop against right at the $197 level. This little swing low allows us to own this stock as it keeps our stop only about 8% below our entry price.

You can see this swing point better on the Daily chart:

The pivot created on November 4th emphasizes a solid support zone going back to the previous support last summer. This will give us plenty of clarity on the stocks future direction by how it handles a test of this previously important support level. Above that swing the stock is in full breakout mode and below it the trend becomes more muddled and risky.

My two favorite confirmation indicators look tight on the weekly chart, giving more confidence to a strong entry at these levels.

+Entering Starbucks (SBUX)

Since our previous failed trade, the stock has been forming another higher low. This week price was able to break above the most recent swing high and seems ready to resume to the upside. For initial stop placement I am leaning toward the major low that was formed in October. Stops should be placed at $73.35, but can soon be moved to the $77 area.

Lets not forget why we like this one:

I hope we are going to see a similar resolution of this wedge pattern as we saw in late 2012. The last time the stock acted this way it went on to rally 100% over a 1-year period. I believe we could see that happen again.

Our indicators look solid here as well:

With this week's new entries, that brings us to 13 holdings:

UNH    +22%
NKE     +18.7%
BMY    +14%
HAIN   +12.3%
BRKB  +11.6%
GILD    +5.6%
TLT      +4.8%
GS        +2.4%
IP          +1.3%
PPG       0%
SBUX    0%
PCG      -.06%
UPS       -1%

Continue to let those winners run and keep any losses as small as possible.


Chart of the Week

So you want to make a bet against the price of oil rising? But you are uncomfortable shorting in the market, so making an outright bet against oil prices seems unlikely...Then how can we take advantage of weaker oil prices without directly shorting oil?

Look no further than Carnival Corp (yes the cruise ship company)!

Carnival Corp (CCL)

As you are likely aware the cruise industry hasn't exactly been hitting it out of the park for the last 10 years or so. Something to do with being toxic waste dumps, stranded sinking death traps, or petri-dishes teaming with ebola/noro/"insert sickness of your choice". Pool that all together and you get some negative news flow and hesitant consumers, which tend to equal lower profits.

Yet if you look at the stock something interesting has been happening. Despite the negative news, CCL has continued to make higher lows since the '09 market crash. Also what is very interesting to me is if you flip the monthly chart of CCL over, it begins to look very similar to the chart of oil:

OIL

With oil breaking down from its multi-year support range, the price to do business for the cruise industry is decreased substantially. A company like Carnival is set to profit big from lower oil prices as their costs decrease AND their customer base has extra discretionary spending due to the savings at the pump.

If one wishes to participate in falling oil prices and wants an easy way to play it, CCL seems like a good fit. They have costs on their side for the foreseeable future and have a consumer with a steady tailwind to their backs. That pairing equals profits.

CCL:OIL

Don't believe me that CCL likes falling oil prices? Just one look at this chart showing CCL vs OIL should say it all. Relative to OIL, Carnival is making a monster multi-year breakout and should set up an excellent risk/reward trade for the intermediate term.

Any longer term position should be based on a stop at the most recent swing low on the Monthly chart. $36 is where the stock should hold on any pullback. If that level were to fail, this analysis is no longer valid and defensive measures should be strongly considered.

Quick and Dirty

Its a short and sweet review this weekend as the market continues to hover at its highs. With an environment like this you need to step back and just let your winners breathe. Remember that markets go in both directions so some normal consolidation should be likely soon; don't be shocked to see pullbacks in the near future. We have no changes to our Portfolio so here is a quick look.

Just charts, no commentary
(weekly view)

NKE

TLT

UNH

BRKB

BMY

GS

HAIN

UPS

PCG

IP

GILD

Our charts all move from lower left to upper right. That tells me we are investing the correct way. We are investing with the trend and with the path of least resistance. While there were no changes to our holdings this week, I would like to point out two names I'm watching closely next week to see if any follow through can come from their mild breakouts this week:


Cisco (CSCO)

Verizon (VZ)

Weekend Portfolio Update

The market continues its moonshot and once again closed at all-time record highs. This is why we wait for the market to take us out and don't try to anticipate future movements. While most of the financial media world, myself included, were very cautious on the market during October, the market has a mind of its own and will do as it pleases. This is why we wait for individual stocks to invalidate our trade rationale and why we don't just sell everything to make the pain stop. If you approach the market correctly you shouldn't be experiencing much pain regardless of the action. Your risk is predetermined by your trading rules and you simply stick to the trend until the trend begins to fail. Everyone that felt negative and then acted on those feelings has been left in the dust.

While our portfolio was not left unscathed during the recent decline, we did come out the other side with only the strongest stocks in the market as our remaining holdings. We have since participated in the rally and have found new names that are setting up and breaking out as the next batch of leading stocks.

We have two new entries for our blog Portfolio this week: United Postal Service (UPS) and International Paper (IP). With the two new entries we now hold 11 positions:

Nike (NKE)                                  Consumer Discretionary
20-year Treasury Bonds (TLT)    Rates
United Healthcare (UNH)            Healthcare
Berkshire Hathaway (BRKB)      Financial
Bristol Myers Squibb (BMY)      Healthcare
Goldman Sachs (GS)                   Financial
Hain Celestial (HAIN)                Consumer Goods
United Postal Service (UPS)       Industrial/Transportation
PG&E Corp (PCG)                      Utilities
Gilead (GILD)                             BioTech
International Paper (IP)               Basic Materials

Its no coincidence that we own what we do. If you like stories and fundamental "reasons" for your stock positions, I can describe each of the major talking points for our portfolio. First off, interest rates are low, that supports higher Bond prices and rewards companies that pay substantial dividends, specifically Utility stocks do well in a low rate environment. Financial stocks are also poised to do well as interest rates begin to rise, which many participants believe is in the near future. Next I could say that due to drastically declining oil and commodity prices Consumer, Transportation, and Materials companies are setup to do well as their input costs are being lowered seemingly daily. That savings adds up over time, especially for the consumer who basically sees the equivalent of a tax break due to lower prices at the pump. And lastly Healthcare and Biotech companies are thriving due likely to the increasing number of Baby-Boomers needing health care services.

Those all make up a nice story. So there you go, if you need a narrative to feel secure in your holdings I just formed a nice one for you. Funny thing about narratives however is that they are formed only after prices suggests something is going on. If you waited for the story to get excited about the stock you would often miss half of the move. This is why I prefer to let price lead my investment decisions, as more often than not I have already made substantial gains by the time the media has caught onto the story.

On that note, we should no longer be paying attention to YahooFinance and CBNC for market news. The place for all happenings about your stocks is StockTwits.com. Check it out! Play around on there, respond to ongoing conversations (try not to be a jerk  : ), and look up a few of your stocks and see what's going on. Its real-time data and about 10 solid minutes ahead of major media.


--Lets take a look at each of our holdings and see where we stand with the market at all-time highs, starting with our two newest holdings:

+Entering United Postal Service (UPS)

UPS has been a stock in a box for over a year. This week we are seeing a defined breakout above the prior highs. Relative strength has broken out from its downtrend vs the SP500 and is signalling outperformance. Lastly the MACD is showing that the year long consolidation was simply a pause in the longer term uptrend by reversing higher at the Zero line. (remember why we like this?)

Pretty straight forward here.

UPS monthly bars

Looking at the Monthly chart of UPS you can see the large sideways range the stock has been in since its IPO in late 1999. At the beginning of last year the stock made new all time highs, and after traveling a bit higher, it since has been trading sideways "resting" after the large rally higher. Only this week did we see a solid breakout move above the range highs. This signals that the uptrend is resuming higher.

Using both the Weekly and Monthly charts I want my stops to be placed right at $96. A break of that level would not only be a failed breakout but it would also take out the range lows, suggesting that more digestion is needed. Then looking at the monthly chart, a failure of $96 would also break the rising 20 MMA which tends to be good trailing trend support. If price consolidates over the short term we could then move stops up pretty quickly to the $100 level.


+Entering International Paper (IP)

Ugh, as goes the life of a trader... You buy the breakout, it rolls over, you end up selling at the low, and then have to watch the stock resume to the upside. Its frustrating when it plays out this way; this what's known as a whipsaw. As legendary trader Ed Seykota once said, "if you want to avoid whipsaws, quit trading."

The market loves to frustrate you, but the best thing to do if you get caught in a situation like this is to simply continue to take your signal and treat this new trade like the previous one never happened. Its not easy to do, but this is imperative for your investing success.

As you can see IP has it all right here: Strong breakout above a key resistance level, confirming rotation by the RS breakout and a MACD that suggests the trend is still higher and ready to resume to the upside.

IP monthly bars

The Monthly chart looks even better. After a torrid run in 2012, the stock needed to cool off and spent the last year + consolidating those gains. The risng 20 MMA was able to catch up to price and offer excellent trailing support. Not only did the 20 MMA act as support, but the confluence of that and the uptrend line from the 2009 lows was just kissed before sending this stock recently higher.

Initially it will take a break of $46 to stop us out, but looking at the monthly view we will be able to move that stop higher once price proves it can hold above this lengthy consolidation breakout level.


Nike (NKE)

NKE continues to push to new highs. The breakout is confirmed and there is nothing to do here except get out of the way and just let this one run. For now stops should be placed at $81.50, but soon we will be able to move them up to the $87 closing lows.

Treasury Bonds (TLT)

Since spiking 4 weeks ago, TLT has been steadily trading lower. We have strong trend support at $116 and will be watching closely on any test of that area. For now though, the trend is higher and we will continue to hold Bonds.

United Healthcare (UNH)

Despite this week's slight struggles UNH has been on an absolute tear the past month. This stock continues to make new highs and higher swing lows. There is nothing to do but let it continue. Stops should be below trend support near $84.

Berkshire Hathaway (BRKB)

Berkshire made new all-time highs this week and continues to act very well. They announced earnings at Friday's close, so we may see some short term volatility. When a stock continues to make new highs we just want to let it work, so work we shall. Stops should be below the swing low and 20 WMA, just about $132.

Bristol Myers Squibb (BMY)

Speaking of rocketships, BMY has been in launch mode for the past 3 weeks. Since price has been straight up we still need a wide stop to make sure we capture all this has to offer. Stops should be placed at the swing low near $50.

Goldman Sachs (GS)

Goldman finished higher on the week and seems to be resuming higher after the recent pullback. Nothing to not like here, stops should be at the swing low near $177.

Hain Celestial (HAIN)

HAIN continues to impress and is trading at all-time highs. Again we let winners run, and this one is winning. Keep your stops out of the way and below the swing low at $96.

PG&E Corp (PCG)

Considering PCG's big move over the last couple weeks some constructive consolidation seems likely. The breakout here is of the long-term variety so we are giving this a lot of room with stops down at $44.

Gilead (GILD)

GILD is reversing a bit and is part of the hot biotech space. Some prolonged digestion of the recent uptrend would be positive. Our stops need to be below the recent support zone, the $100 area looks like a good place to be for now.


Well that about does it for our Portfolio. Often the best thing to do is simply sit on your hands and let your winning trades continue to work for you. You don't always have to be trading, You don't always have to be doing something. The key to hitting big winners in the market is simply to let it happen. So often traders want to pick this top and take those early profits in fear of giving them back. If you want to win you need to be willing to do what so many are not. You simply need to act in the way that often goes against your emotions and what "feels" right. What feels right is rarely the best course, but investing doesn't have to be difficult. Have a plan, stick to it and continue to execute your plan regardless of market conditions and headline noise. Price will tell you everything you need to know. A pundit on CNBC will not grow your returns, but a systematic method for identifying high probability situations will.

Rules Aren't Fun are They?

If you follow a rules based trading plan you likely have had your rules tested repeatedly in this market over the past couple years. This has been a market that makes a fool out of anyone who uses any form of risk management; if you have sold stock over the past few years, the market has laughed in your face and ripped higher. What this creates is a generation of investors (those of us bull market riders post Financial Crisis meltdown) who have been punished for selling any stock and not just mindlessly buying any and every dip. The mentality this creates is one of "why sell when the market just comes back higher every time". Investors begin to forget the risk of loss and only focus on the fear of missing the next rally higher. As the saying goes, the pattern works until it doesn't. Humans have an amazing ability to forget the past and constantly repeat the same mistakes over and over. We saw this behavior in 1999, 2007 and its building again currently; it has been happening throughout human history.

The market teaches all the wrong lessons at all the right times. The market is designed to set up emotional herding behavior and then blast them to oblivion when they least expect it. Following your rules will be frustrating at times, you will miss some moves, you will sell and have to buy back in higher, you will doubt your process and you will question your intentions. THIS IS NORMAL and is a necessary part of market cycles. Your strategy will not work all of the time but when it does finally come through it will save your biscuits, big time.

Around the time when you are about to throw in the towel on risk management is precisely when you will need it most. We are currently going through a period where the undisciplined and ignorant are reaping the rewards of their carelessness. But believe me when I say, that time will end and it will end badly, it always does.

I find it very difficult to be bearish as the market hits new all-time highs, there is no statistical precedent that suggests new highs are bearish, in fact its the opposite; new market highs lead to more highs. That being said I am personally seeing so many troubling signs that I am having a hard time getting more aggressively involved. I am trying to take an objective market view and frankly what I'm finding is a situation where the market is requiring me to stretch my risk management principles if I want to participate further.

Currently I am 50% invested and 50% cash. Despite the new market highs this week I was only able to find one compelling risk/reward opportunity. Here is what I'm seeing:

Stocks are Extended beyond Favorable Risk/Reward

Many normally favorable buy signals are requiring stops that are too far from the entry points to make them worth our capital. There are some excellent companies breaking to new highs but where the stops need to be placed, for trend invalidation, is beyond the rules I have in place. I don't like to enter a new position if the stop location is more than 10% from the entry. This is the rule the market is trying to convince me to bend, it wants me to chase. 

There are a few stocks that under normal conditions would have presented strong buy signals this week.

UNP

Union Pacific is showing its dominance but the stop location is more than $20 below the entry. This will need time to cool off before offering my kind of entry opportunity. 

AEP

AEP has held its long-term breakout level and is resuming to fresh highs. Unfortunately it too is running a bit hot and will need a more favorable setup to allow us to enter.   

DIS

Disney is closer to being an acceptable entry, but for my specific stop placement criteria it would take a break of the $79 low to invalidate the trend. Based on the entry price of 91.38 that leaves $12.38 as the distance between the entry and the stop. A 13.5% stop is simply outside my rules for solid risk/reward. 

These 3 examples are just a few of the potential signals the market is offering. Many names have not triggered entries, but the ones that have are all in runaway mode and currently will need more consolidation to set up more favorable trades.  

The only name that presented a strong enough case for entry and we will be taking is PCG. But it too is just extended enough to stretch my rules. 

Entering PCG

This week PCG broke through its long-term resistance level, finished at new monthly closing highs and signaled a strong trend resumption. 

Our stop location at the $44.30 swing low is just outside our 10% rule at 11%, but I felt the setup allowed just a tiny bit of leeway. That being said, this was the only favorable entry signal I could find among our watchlist. 

Monthly Chart Review Confirms Expanding Volatility

It is taught that markets experience volatility expansion near turning points in the prevailing trend. Volatility expansion is fantastic near the end of a downtrend as it signifies a possible change in trend direction that favors the bulls. However in a steadily uptrending environment that has been accompanied by very low volatility, a change in that volatility range is to be viewed with caution. Currently we are not seeing investors approach the market with caution. In fact bullishness among investors continues to remain elevated.  

The leading sector in the market right now is Biotech, and the leading stock in the group is Amgen (AMGN). AMGN is displaying symptoms of trend instability and volatility expansion. 

 Its slightly hard to see from this view but this month's bar is the largest trading range from highs to lows that AMGN has ever seen in any single month. After a 400% rally over the last 2 years, and then seeing the most monthly volatility in its history, AMGN has the look of "blow-off" type situation. 

Notice the other 3 times when monthly volatility was unusually high. The events occurred in late 1999, 2005, and 2008. Each of the monthly bars preceded multi-YEAR corrections in price. To suggest that this is a serious moment for shares of AMGN is a bit understated. Investors LOVE the biotech space here and based on the technical outlook of the stock, I believe risk is extremely high.  

We pointed out a similar situation back in June when Schlumberger (SLB) was exploding to new highs. The stock had rallied 100% off the lows in just over two years. 

Right before SLB underwent a 30% correction, volatility expanded significantly on its final surge. The chart we posted in June looked very similar to how many stocks, especially AMGN currently look. This doesn't automatically mean we will see significant corrections like occurred in SLB, but risk is now becoming alarmingly elevated. Caution is advised.  

SP500 Posts a Monthly "Hanging Man" Candle Formation

The Hanging Man formation is one we haven't seen much of in this market until this point. It has a similar structure as a Hammer, except that Hammers occur at the bottom of downtrends. They signify a change in sentiment as sellers become exhausted. A Hanging Man however occurs in an uptrend and suggests that buyers may be losing control of the uptrend. It can be an early indication that sellers are making headway and that a trend change may be developing. 

This formation can be seen across many of the SP500 component stocks and does signal some caution that we have not seen until recently in the uptrend. 

As of now this bearish theory has not been confirmed, but it does suggest that we remain highly vigilant for developing weakness.

Russell Small Caps Hold 20 MMA

A couple weeks ago we were concerned that the small caps were signalling a potentially ominous sign. I was concerned by the weakening trend indicators and most importantly the break of the 20 MMA. Since this is a monthly signal however we need the full monthly closing price to confirm the signal. As you can see above the Russell was able to regain its 20 MMA and postponed the signal breakdown. 

Currently the long-term RS and MACD still suggest caution, but until we get that confirmation from a break of the 20 MMA we have to still defer to the uptrend in price.

Following your preset rules is not always easy. At times it will feel as though the market has figured out your strategy and is now set to smash it to bits along with your account. But do understand that all strategies go through periods of underperformance, but those poor periods are then followed by extremely positive ones as long as your rules remain intact and observed.

Our set of rules have done a fine job at participating in the majority of this monster bull market, yet now we are seeing signs of a market change. When conditions begin to change you will notice the adjustment in how your strategy now interacts with the market. For the better part of the last 3 years our plan has wanted us invested heavily and that has been the correct positioning. It is only in the last month or two that conditions have begun to feel and appear different. It is also true that over the past two months our Portfolio has been moving decidedly more neutral. At a 50/50 stock to cash ratio my positioning is not particularly bearish, but also not fully bullish. It remains to be seen whether we do infact correct from here, but conditions are deteriorating noticeably from my view point.