Portfolio Review

Merry Christmas to everyone! Being that this was a holiday shortened week lets just do a quick Portfolio recap. We had two changes with this week's trading, we are exiting GILD and entering TWX.  We also have some more trailing stop levels to raise.

Weekly bars

-Exiting Gilead Sciences (GILD)

GILD gapped through support to open the week Monday morning. Competitor Abbvie had their Hepatitis C drug approved by the FDA and signed a contract with Express Scripts to be their supplier to the public. This news hit Gilead and the biotech space hard and has signaled our exit.

We were still able to walk out of this with a solid gain; we entered the stock back in July around $85, so we still captured a 10% gain. Sure it could have been more but there is no way to know when a trend will end. We ride them until they invalidate, GILD broke our $100 support level and thats all we need to know.

The stock has a confirmed Head/Shoulder Top in motion with initial targets down to around $80. However being that this seemed to form a sort of "blow-off" type extension during spring and summer, the downside could be much more than the initial $80. Regardless of what this may or may not do going forward, it is time to transfer the risk to someone else.

+Entering Time Warner (TWX)

Since our previous exit, shares of TWX have rallied back near the highs. We now take our new entry back near those prior highs. This happens sometimes when following a trend; sometimes you sell the lows and buy the highs, thats just the nature of the business. However we continue to take new signals because we never know which one will be the next big move.

We have been watching TWX as the chart seems to be carving out a nice rounded base. This week's break above the swing high gives us our trigger. There is a solid support area between $77-80, so we will use the swing low at $77 as our initial stop.

Remember why we like this one so much:

TWX Monthly bars

I keep a close eye on stocks that begin to trade as TWX has been. Since the epic meltdown from 2000 the stock has been moving sideways in a decade long range. However since late 2013 the stock has been able to make new range highs and seems to be ready to trend higher from here. As always we manage risk first, but the potential upside reward greatly outweighs any downside risks at this point.

PCG

PCG continues its moon-shot and after holding the breakout level on the most recent consolidation, we can move our stops up to $48. I think it is reasonable to expect a consolidation/pullback soon, but as long as it can hold its breakout area I want to be in the stock.

 On top of the surprisingly immediate 10% pop we have seen, PCG also pays a 3.5% dividend in quarterly installments. This is a good one to own going forward.

IP

IP has been consolidating its recent surge very nicely. When you see trading action this tight after such a strong move higher, its a bullish development. A flag type consolidation is suppose to resume to the upside. Now that we have the 20 WMA above the recent breakout level it's safe to slide stops up to $49.90

Since we "expect" the consolidation to resolve higher, any breakdown will be seen as a negative development. But above $49.90 this appears to be set for higher highs.

SBUX

Current Stop @ 73.50
Potential next trail @ $79

DIS

Current Stop @ 88.50
Potential trail @ 91.25

NKE

Current Stop @ 87
Potential trail @ 90.70

BAC

Current Stop: 16.20

HAIN

Current Stop @ 104
Potential trail @ 109.50

PPG

Current Stop @ 204

GS

Current Stop @ 177
Potential trail @ 188

UPS

Current Stop @ 100
Potential trail @ 105.25

HON

Current Stop @ 94.80

UNH

Current Stop @ 88.25
Potential trail @ 95.25

BRKB

Current Stop @ 140.50

TLT

Current Stop @ 118
Potential trail @ 121

BMY

Current Stop @ 51.60
Potential trail @ 57.50


Performance since inception: July 1, 2014

Portfolio: +8.1%  currently with 79% capital invested
SP500: +5.8%  with 100% capital invested

Santa Claus is Coming to Town

It is well known on Wall St. that the end of the calendar year is the strongest in terms of market returns. This end of the year strength a.k.a "the Santa Claus Rally" is consistent and powerful. In fact it is so consistent that there are usually major implications if it doesn't happen; As the saying goes:

"If Santa should fail to call, the Bear will come to Broad and Wall."

If stocks fail to rally at year end, there are much larger forces putting pressure on the market. How the market behaves during this time is a good general health gauge for risk assets. US stocks should do well at year end for a number of reasons, but most importantly because we are a consumer based economy and the majority of retail sales are made during the holiday shopping season. If stocks perform poorly at the end of the year it is likely because those sales are weak and consumers have less disposable income to help stimulate the economy.

Fortunately for us it appears that Santa Claus is on schedule this year as we saw a huge surge in stock prices for the last full trading week of the year. We now would hope that the strength continues into year end as is the typical pattern. The SP500 has rallied 95 points in the last 3 days and had back to back +2% rallies on Wednesday and Thursday. The Federal Reserve maintained the status quo this week by announcing a continued patience before raising interest rates. The market was waiting for an excuse to rally and with oil finally slowing its relentless skid, market participants had all they needed to spark the buying surge.

SP500 Daily bars- 6 months

Depending on your investment timeframe, the past couple weeks have either been very stressful (if you trade a shorter timeframe) or simply consolidative action (if you trade a longer timeframe). By stepping back a bit from the daily noise of the market, the weekly charts reduce your emotional reactions and keep the larger trend in better perspective.

SP500 Weekly bars- 2 years

What has surprised me the most, probably because I invest both shorter term and longer term, is how volatile the shorter term has felt while my weekly stops were never even close to being tested. From a comfort perspective, the longer term view is remarkably peaceful compared to the shorter term, for whatever that's worth. 

As we head into the two remaining holiday shortened weeks of the year we have one new entry signal and a couple of trailing stops that need to be moved higher. Lets take a look. 

+Entering Honeywell (HON)

This is a position we entered in late July and were quickly stopped out as the breakout signal failed. Shortly after our exit HON took a sharp dive that looked like a full trend breakdown. However since that time the stock has shot back higher and this week closed at all-time highs.

I really like how the Relative Strength is breaking out to the upside showing a strong rotation of money into the stock. For risk management purposes I want to the use the support range lows at about $94.80 as my initial stop area. HON last week pulled back to retest that breakout level, the fact that it held and then resumed to new highs signals strong buying interest.  

I find when trades fail but then quickly re-trigger tend to be quite reliable and successful. This is likely due to the stubborn attitudes of humans and being proven wrong. We don't like to admit being wrong. We really don't like admitting being wrong again in such a short period of time. It is damaging to our fragile egos and therefore most would just prefer to look elsewhere for an "easier to swallow" opportunity. But if you are impartial enough to get right back in there, you are often handsomely rewarded. 

"From false moves come fast moves" as they say, and a stock coming off a hard shakeout can create a very good opportunity as sentiment has not been able to properly catch-up to the rapid price shift.


PPG

PPG has demonstrated remarkable strength since our entry 4 weeks ago. With the 20 WMA now caught up to the weekly pivot low, we can move our stops to that level at $204. 

HAIN

What a winner HAIN has been! We have given this a lot of room since entering our position but now the market is telling us we can move it on up. There is now a strong confluence of support at $104 and a break of that level would suggest more caution is needed. 

Something of note is that HAIN stock will be splitting 2-1 within the next two weeks. This doesn't change any of the company dynamics but it will cut the price of the stock in half. Using past examples as our guide, stock splits tend to create buy interest and an upward bias following the split. I guess people like more shares and a lower price tag.

Watchlist Ideas

With 2014 about to wrap up I have updated our watchlist stocks, sticking to the current holdings of the SP500 Sector Top 10 holdings list. Here are a few names I'm watching:

FB

LMT

TWX

INTC

NEE

EXC

CSCO

KMI

Only the Best

You can only control so much in the markets. You can't control which way the market goes and you can't control if your next trade will be a winner or not. What can be controlled are how much risk to take and which stocks to pick. If this is all we can control then we need to make the best decisions possible.

Stock selection and risk management, this is as good as we can do. Since we can't control how the market moves, there is no reason to waste time worrying or predicting where it will be in 4 weeks, 4 months, 4 years, or whenever. We need to focus our attention and study on our preferred risk parameters as well as the stocks we choose to buy. If we use a consistent and quality buy/sell signal (based on what's actually happening now), while only risking a small percentage of our capital, we should do very well.

Investors that attempt to figure out where the market will be at the end of the year, or how successful this company's new product will be, they will not be focusing on the things they can control and will more often than not be wrong with no exit strategy. I will be wrong often as well, except i know exactly where I'm wrong and will act accordingly to protect my capital.

What I attempt to do in the market is find the best looking setups, the stocks that are being accumulated heavily and breaking to higher trend highs. Once I find those setups, I own the very best of the best. Once I own the best setups, I let them play out until my entry rationale is proven no longer valid by price.

The idea behind this simple (not easy) strategy is to own the strongest stocks for as long as they are strong. If we sell a stock that begins to lag, we find the next best setup available and we rotate our funds into that idea. What this amounts to is letting big winners run, creating large profits, cutting losing positions once they are invalidated for small losses, and then move those monies into the next best risk/reward opportunity. Wash, rinse, repeat.

We focus on the best. I want to see stocks making higher highs, higher lows and just generally moving higher over time. I do not try to figure out if a declining stock will be the next big comeback story. I don't buy stocks that are falling and "cheap". Cheap is a very relative term, cheap can always get cheaper. I want to see stocks challenging all-time highs, this tells me the underlying company is beating its competitors and is getting stronger. They are earning MORE money, they are growing their business and are successful. One way to improve your success is to do what successful people do. One way to improve your investment returns is to own successful stocks and companies.

Since we don't know where the market is going next (I really don't have a clue), lets focus on what we do know, and that's where our current positions sit in relation to the predetermined risk levels.

Weekly Bars 2-years

Disney (DIS)

Stop: $88.50

Nike (NKE)

Stop: $87.15

Treasury Bonds (TLT)

Stop: $118.50

United Healthcare (UNH)

Stop: $85.35

Berkshire Hathaway (BRKB)

Stop: $136

Starbucks (SBUX)

Stop: $73.50

Bristol Myers (BMY)

Stop: $50

Goldman Sachs (GS)

Stop: $176.90

PPG (PPG)

Stop: $203.90

Gilead Sciences (GILD)

Stop: $100

Bank of America (BAC)

Stop: $16.20

Hain Celestial (HAIN)

Stop: $98.70

United Parcel Service (UPS)

Stop: $95.75

PG&E Corp (PCG)

Stop: $44.30

International Paper (IP)

Stop: $46


The markets saw some profit taking this week after the torrid run since mid-October. The longer-term charts are still very far from trouble and our stops are well out of the way. Hopefully we will see some orderly consolidation that will allow us to move our trailing stops higher. For now we want to let our strong positions work and try to not be emotional or force any trades.

After a big run like we have had its normal to want to harvest some of the gains for fear of giving them back. But that is what "feels" right and is simply an emotional crutch, actions like that will hurt long-term performance over time. The common investment maxim "nobody ever got hurt taking a profit" is an emotional excuse to appease our senses of fear and greed. The correct winning strategy is to let winning positions run until they are invalidated and cut losing trades quickly. As legendary investor Peter Lynch once said regarding taking profits on winning positions, "selling winners and holding losers is like cutting the flowers and watering the weeds." Instead we should be much more willing to let what's working work and replace what is not quickly with something that might work better.  

Chart of the Week

Why We Sell

Freeport McMoran (FCX)

Do you remember this chart? I posted this exit signal in early September. Selling stung a bit at the time; the setup had looked quite promising initially and yet it just rolled right over, stopping us out for a small loss. The decline was steady and relentless. By the time I sold I had watched the stock fall for 7 out of 8 weeks since my entry. This was clearly "oversold" and getting "cheap" after the 12% decline in only two months. However, my signal said to sell, so I sold...

Here is FCX 14 weeks later:

Wowsers! Not only has this continued lower, falling 12 out of the last 14 weeks, but the stock declined another 16% just this week! That's now 38% below our exit point. Sure the 12% drop wasn't the preferred outcome, but it had a relatively minor impact, while a 50% decline can cost you a year's worth of gains.

This is why "oversold" and "cheap" are relative terms and not an investment strategy. They can and will go further than you think is reasonable. Most importantly, this is why you ALWAYS take your exit signals when they trigger. By taking quick, small losses, you never get into a situation where a small loss becomes a BIG loss.

Entering Bank of America (BAC)

Bank of America (BAC)

While Bank of America deserves its fair share of criticism, I myself was critical of the recent breakdown in prices at the beginning of 2014, it is hard to contend currently that the posture of the stock is not bullish.

The recent consolidation over the past 10 months has created a nice support base to launch another extended rally from. Since the "Warren Buffett bottom", BAC has rocked over the past 2 years. The stock has rallied nearly 300% off the lowest prices and the recent pause appears to have been just a rest before a new leg higher.

There is a lot to like on multiple viewpoints. This week we are seeing the highest weekly closing price since early 2010. The breakout as the look of a continuation Cup/Handle pattern and projects prices 20% higher as an initial target.

The risk is also well defined as the "Handle" low at $16.20 is only 8% below current prices. A break of that level would also break the rising 20 WMA as well as the 2-year uptrend support that has contained this entire rally. A weekly close below $16.20 and we would step aside.

There is still resistance in this area going back to the financial crisis and 2010 highs so it won't be easy.

But we have a clean breakout, a defined uptrend, and a very manageable risk/reward. Plus our indicators still suggest the uptrend is well intact and likely headed higher from here.

This now brings our XLF holdings up to 3 with GS and BRK.B, so we will be maxed out in Financial stocks after this purchase. The group looks poised to lead the market here, lets see if we can catch a nice ride.