Saturday, January 24, 2015

The Green Light?

Due to the firming price action this week we received a new entry in Boeing (BA) as it managed to create a marginal new swing high. We also received an exit for UPS (UPS) as the stock gapped lower by 11% in Friday's trading session. My proprietary Trend Signal also received a new bullish Buy signal and suggests a positive shift for stocks. 

Something interesting about receiving signals during a choppy environment is that your emotional response wants to wait "to see" if the move is really valid, even though the System suggests getting aggressively long. I always like it when my system signals entries when my and other's feelings suggest remaining cautious and indecisive. Your backtest didn't dwell on whether it is a choppy, uncertain market. It takes all signals and disregards any emotions at the time.

 The emotional aspect of investing is always interesting, especially when a successful system signals moves that your brain doesn't want to take. Our brains however have proven to be inferior when making financial decisions, especially financial decisions involving unknown risk. It is for this reason that I try to always follow the system, and not my emotions. 

If you need a fundamental reason to buy, look no further than the ECB's massive stimulus program It unleashed on Thursday. The European Central Bank will purchase 1.3 trillion Euros worth of European government bonds over the next 2 years and that should prop up global markets.

Another important takeaway with a trend trading approach is that the entry signal is the least important aspect of the trade. Its far more important to size your position according to your predetermined risk tolerance, and most importantly placing effective stops that not only protect against outsized losses but also keep you in a trade long enough to ride the trend to completion. 

Actually taking the "initial signal" is the most inconsequential aspect to successful investing. So regardless of whether its a clear buy signal or a muddled one, the most important thing is to have a robust EXIT strategy that manages risk and keeps you properly positioned.

Now that we know our system likes the market here, lets take a look at the notable moves in our Portfolio this week:

Exiting UPS  

UPS opened Friday with the dreaded "pre-announcement", stating they anticipate a more challenging future environment than was originally expected. Maybe they do, maybe they don't. All I need to know is that price decisively broke my stop level and moved back into the prior range. This rejection from highs created a failed breakout and with so many other winning stocks setting up, we can look elsewhere. 

Do note that I don't consider this one dead just yet. Similar to prior breakout-shakeouts in this bull market, this may stabilize and retrigger at some point in the near future. It is certainly one to keep on the watchlist, but as for risk management we will cut our losses quickly as this has taken a sudden and unexpected turn for the worst. 

Entering Boeing (BA)

While price just poked above the prior weekly swing high at 134.36, the Relative Strength is showing a clear breakout and outperformance during the recent turbulent conditions. The MACD has also found support at the zero line and is headed back higher. 

A clean break of the $120 range lows would act to invalidate our trend resumption rationale and would cause me to exit the position. 

To gain a little more perspective on the longer term, lets look at the Monthly chart too:
Since the torrid run BA made in 2013, the stock spent all of 2014 digesting that surge. The recent correction has been orderly and tight. This also has allowed the 20 MMA to catch-up and price has bounced right off that trailing support. 

I feel the risk/reward is very much tipped in the favor of the bulls here and with the weekly breakout signal, it appears now is the time to get involved. 

SBUX blasted off to new highs this week after reporting record profits for Q4. It appears this is ready to run again and a move similar to what occurred in 2013 is not out of the question. We will keep our stop below the breakout consolidation and let this baby work. 

HON had a very nice breakout to all-time highs this week on a strong Q4 earnings report. Nobody was talking about this today, but I always think its worth noting when a stock is up 3% on a down day for the market. Continue to ride this winner. 

UNH continues to shine and despite the great run it has had over the past year +, the stock rallied 10% this week on a strong earnings report. With the new breakout it is time to slide our stops up to the 95.75 level. I would expect some consolidation and profit taking soon, but there is not much in the price action to support such an opinion. Right now we just need to stay out of the way and let it build some kind of support base. 

As usual we continue to run winning positions and cut losing ones. We will take new signals as they trigger and manage risk as our top priority. Good luck with your positions next week!

If you want to track our holdings during market hours be sure to follow me on Stocktwits @RelativePerformer. I will be posting updates and charts on any notable activity throughout the trading week. 

Saturday, January 17, 2015

Portfolio Review: Managing the Correction

For this weekend's review I would like to share how I deal with a corrective market. I will note that anytime in the past 2 years that I have blogged about a "correction" or mentioned caution, it has almost exactly marked the low in prices before they ripped back to new highs. So keep that in mind :)

But if this time is different....

I try to treat all corrections the same. The most important thing is to stick to the strategy as that will allow me to make the most correct decisions when stress is at its highest. Taking losses in the market hurts. No matter who you are, it doesn't feel good to be proven wrong and worse yet you had to pay money to find that out. This fear of loss can create a lot of mixed emotions and incorrect decisions.  If you are investing money in the market, it will happen often. Your positions will be in the red a lot. So if this is going to be a common and recurring event we better have a way to move through it as easily as possible. This is how I attempt to manage corrections in the market.

The four things I try to be mindful of during corrections are:

1. Manage my current holdings
2. Raise cash to reduce overall market exposure
3. Build a watchlist of stocks behaving well
4. Have Patience 

The most important thing to do during a market correction is to manage your current holdings. Everything else comes secondary to this. You cannot allow an acceptable loss to become a large loss. To do this you need to focus on your predetermined stops and execute your strategy.

Exiting Bank of America (BAC)
Along with the rest of the Financials, BAC rolled over hard this week and violated my stop level. The stock has been beaten the last 2 weeks, so a bounce may be likely. But we don't wait around for hopeful outcomes. Our stop was triggered, we take our loss and move on.

The next part of managing your holdings is to identify which positions are behaving weakly and nearing their stop levels.



Also we especially want to pay attention to the positions that are showing strength and bucking the overall weakness. These have the best chance to be leaders when the market turns for the better.
Traits I look for here are stocks continuing to set new highs and those holding above a key breakout level. Fortunately most of our holdings are fitting into this category and acting like leading stocks.











The last part about position management is to note which stocks are trading with the general market and performing inline. Watch these because they could turn for the better or worse.




Okay so we know where we stand with our holdings should further weakness occur. Now we need to be vigilant for when we need to execute exits for those weakening positions. As the market takes out our weakest holdings, our cash position will rise therefore reducing our overall market exposure.

Reducing risk is the name of the game for surviving corrections. Selling weak positions and raising cash is a very effective strategy for risk management and works much better than attempting to time the lows in a downtrend. Continually buying in the hope that you will pick the bottom will eat up your account through overtrading. Overtrading during poor market environments is one of the major issues that traders have.

4 out of 5 stocks trade in the direction of the general market. I don't try to fight that wave and prefer to be more aggressive during favorable times. Some will disagree with me when it comes to using the overall market as a filter for my individual positions. Many believe that you can pick market winners in all environments. This may be true but I prefer to swim with the current and not against it. Investing is hard enough, let alone ignoring the gravitational pull of the indexes on your holdings.

By using a simple trend filter on the overall market can help keep you only adding risk during favorable trends and protects you from increasing exposure during a downtrending environment. Successful investing is not a sprint, you don't have to always be aggressively in the market. I choose to remain patient and keep my risk exposure aligned with the dominant market trend.

This week's closing trend signal suggests we are still in an uptrending market despite the recent volatility. The corrective period we have seen should still be viewed in the context of a larger uptrend that remains intact.

SP500 weekly

In addition to what my holdings are doing during a correction in the market, I like to know which stocks on the watchlist are acting the best also. Taking note of the strongest performing stocks will prove helpful once the correction ends as they will likely begin to lead higher on the next advance. A few names that are of particular interest to me currently are:





The central binding theme to this process is PATIENCE. You must be able to exercise patience when you approach the market and managing risk. You must have patience to continue to let your existing positions run and you must have patience to simply observe a downtrend without lunging at every wiggle in the market. Build a list of the stocks performing the best and wait for the market to regain its health.

When the correction finally ends your portfolio should only be left with the strongest stocks in the market. These survivors are the ones that eventually become the big winners. By eliminating the weakest stocks and raising cash you can then position toward other stocks on your watchlist that are displaying exceptional performance.

Your portfolio should become stronger and stronger with the corrections that come and go. It is for that reason I have learned that corrections in the market are to be embraced, not feared. What is there to fear about eliminating the weak and acquiring the strong?

Saturday, January 10, 2015

Chop Suey

This market has been a mess since early Fall. Its chopping up and down, big swings down followed by huge swings up; the volatility is hard for many investors to stomach. Despite the amazing rally we saw in October, due to the recent whiplashes, the market currently sits only 1.5% higher since September. While the market has gained 1.5%, we have seen the SP500 swing from a low of 1,818 to a high of 2,092 (thats 14% from peak to trough).

6-month Daily

Depending on your timeframe you have either profited well, lost a ton of money, or been about even over the last 5 months. Results are all over the place and most traders have had their accounts chopped to bits. Fortunately we have adopted a slightly longer time frame for our holdings and have been able to modestly outperform the averages in this difficult period. Our Portfolio sits on a 5% gain since September and considering how much up and down we have seen recently, most of our holdings are faring pretty well.

Financials took an especially hard hit this week. Even when the market staged a solid recovery from early weakness on Monday and Tuesday, Financials as a group closed out near their lows. Most of the Sector Top 10 holdings from the XLF have broken through their rising 20 WMA's and are issuing a warning as we head into the bulk of bank earnings next week. While most are still above key trend support their leadership status is not looking great as we begin 2015.

Financials have acted similarly each of the last couple years. In 2013, 2014 and now 2015 we saw rotation coming into the space into year end, but then saw the group struggle to keep up with the broad market averages for the rest of the year. Will 2015 be a repeat of the previous couple? From the early price action I think its certainly possible, but we will learn a lot more as earnings begin to roll in starting on Wednesday and Thursday.

GS (announces Jan 16 BMO)

BAC (announces Jan 15 BMO)

Our two bank holdings will announce earnings this coming week and as we approach those results both stocks are weakening but are still above our stop levels. We still have about a 5% cushion for any pullback that might occur, but these will be something to keep a close eye on as we head into next week.

As for what has worked so far this year, anything that is attached to lower interest rates has continued rocking.

TLT (20+ Year Treasury Bonds)
As the inverse to interest rates, bond prices have continued to soar. TLT set a new record high this week and also finished the week at its highest closing price ever. I am beginning to become concerned about the sustainability of this move as the recent action has the look of vertical acceleration.

Trends become unstable once they move away from their trend slope average and begin to go vertical. Due to this and my second measured target for TLT being aquired at $132, I removed another 1/3 of my holding this week.

Something to watch moving forward will be the relationship of TLT to the Financial stocks. Banks will be able to increase profits if interest rates begin to rise. With banks sitting on support and Bonds looking extended, it will be interesting to see what comes in the next few weeks.

PCG (Utility)
Our Utility holding, PCG, has continued to rally. High dividend paying investments tend to see inflows when interest rates are low. PCG has clearly been a beneficiary of these historic low rates. If rates begin to rise names like PCG will struggle, but by looking at the fierceness of this recent rally, a little cool down should be expected and met with patience.

The other factor playing a big role in shaping the market environment is obviously the continued weakness in Oil. Energy sector names continue to get hit as well as most material names that have a large part of their sales linked to commodities. Our Portfolio holds no Energy exposure and only modest Material exposure. What material exposure we do own is on the favorable side of cheaper commodities. PPG purchases a lot of petroleum product to create their paint and coating products. IP also uses energy resources for their paper production and distribution. Both of these names have held up well recently.



With oil trading so low we would expect the consumer and retail space to be doing very well. Its hard to argue too much with these results:




Starbucks has been sideways and sloppy recently but still manages to hold above its next obvious trailing stop level.

A list of what's working in this market just wouldn't be right without some Health Care stocks thrown in. Health Care has been a monster for years now and it seems to be continuing.



The remainders

HAIN -Daily chart
I was a little troubled last week with Hain not being able to keep up with the overall market and this week again failed to rally back strongly. We are looking at a daily chart for Hain here because the recent pullback and weak bounce has the look of a developing Head/Shoulder top formation. 

This bearish pattern won't be confirmed until the lows at ~$54.50 are broken and held, but the implication is that this stock is weakening. 

Our stop continues to be a weekly close below $52. This is one we will need to watch closely. 

Ups is looking fine and I like the two long bullish wicks that have formed (both this past week and 3-weeks ago) near the previous breakout level at 106. Twice in the last 4 weeks price has pulled back to retest the prior highs breakout, each time those sellers were met with strong buyers as they drove the price right back higher. 

This new buy support means that we will soon be able to move our stops up to the $105 level. As a break of that would be a failure of the recent demand we have seen there.

HON looks fine.

BRKB looks fine. 

Sometimes when volatility strikes it's best to be able to just do nothing. That doesn't mean giving up and being ignorant to it, what it means is sitting on your hands will keep you out of a lot of trouble and stress. 

Size your positions and risk to the point that you can have a little wider stop and not be worried about every market wiggle. Don't be so obsessed with picking this top and that low. Just try to keep yourself aligned with the current dominant trend and try to hang on for dear life.

The idea with a trend based trading plan is that ideally you find the best stocks and hold them for as long as you safely can. You don't need to be flipping holdings every day or week. Just hold what's working and adjust with the flow of the market. 

Sunday, January 4, 2015

Commodites Wrap Up

It was a horrible year for the Commodity space. I hope that you practiced strict risk management with any Long exposure you might have had, and avoided much of that pain. The only names I had exposure to in 2014 were Corn, Cocoa and Palladium during the first half of 2014. Once I received exits, things got out of hand in the 2nd half of the year almost across the board. Oil and other energy groups crashed hard as well as Copper and the precious metals.

Most of the soft commodities and grains continued a relentless skid and the others remained directionless. The few bright spots were WOOD, NIB, and PALL. Lumber, Cocoa and Palladium still remain in uptrends and are not too far away from being interesting if the Dollar can take a rest in 2015.

Lets take a look at the few Relatively strong groups and then a quick glance at really ugly declines in Oil and Copper.

Shares of WOOD have once again been testing the highs from 2008. Yet on this attempt to breakout, price has been able to hold near the highs instead of correcting back significantly. The more times a level is tested the more likely it is to break. Considering how the entire commodity space looks, WOOD has been Relatively strong and is one of the few investable commodities currently.

One way I would look to take advantage of the strength here would be through a fast growing company called Boise Cascade.

BCC- Boise Cascade Company
Since going public in early 2013 the stock is up roughly 50%. On the Weekly chart we have a strong breakout to new highs, following a retest of the prior range high. Based on the increasing profits of BCC and both the long-term and short-term view of the stock, I think this is poised for much higher prices.

This could be a volatile situation here however and caution is advised when holding the position. Size this one small and give it plenty of room to move around. I like stops below the $34 swing low on a daily closing basis.

I will be entering a position at Monday's open for my aggressive private accounts.

NIB- Cocoa
Cocoa still looks fairly positive to me. There is a confirmed Double Bottom pattern in motion, however price is now revisiting the breakout of that pattern for the second time. The lows at $36 will have to hold for this to be viable for consideration.

PALL- Palladium
Palladium is still in a nicely defined uptrend and is trading near long-term support. PALL will have to resume higher and not break below the lows near $71 for me to have any interest. The most recent correction has the look of a continuation Bear Flag and price is being rejected after rallying to the declining 20 WMA. This is one to watch.

That's it for the good. The majority of the commodity space just looks awful. Lets take a look at the worst of it.

This is what a crash looks like. I'm going to need to zoom in on the recent breakdown to show the trend:

In terms of reaching a climax of selling, I think OIL is getting close to a reasonable bottom for the foreseeable future. The slope of the decline has begun to accelerate to an unsustainable level. At some point soon this should form a modest to moderate base formation. I think 6 months or more sideways would be expected as price digests the recent plunge.

This doesn't mean I believe OIL is buyable here, because its not. But I would be really surprised if a sideways consolidation didn't take place in the very near future. Ugh, just ugly!

Corn is getting crushed. While there have been marginally tradeable rallies, this is in a massive downtrend. Stay away or Short.

JO- Coffee
Everyone has been raving about the prospect of rising coffee prices over the past year, but in actuality the recent rally looks like nothing more than a typical counter-trend bounce. The recent breakdown last week could set a new leg lower and should be a tailwind for coffee producers. I like SBUX.

UNG- Nat Gas
While it appeared that a bottom may have been forming, it now looks like this may not be the lows after all. Always be on the lookout for false breakdowns in a space like this, but until something changes this remains a dangerous trade.

JJC- Copper
Copper is in a nasty bear market and it looks to be continuing. There has been a break to lower lows as well as a violation of the 61.8% Fibo retracement. The longer price stays below the $35 level, the likelihood for a retest of the '08 lows increases.

For trend traders, the December monthly bar offers a new Short position opportunity. I would place stops above $35

SLV- Silver
Once again Silver finds itself at lower lows. There is absolutely no reason to be Long the SLV for any reason right here. Silver bullion is continuing to get cheaper, so all those physical buyers can continue to average down for a lifelong investment. But there is absolutely no reason to be trading Silver short-term unless its Short.

I'll spare you the rest of the dilapidated commodity space as there is just nothing to be done with any of them. Focus your money on what is working and avoid what is not. Apart from a couple of Relative leaders, it is a better idea to just avoid the entire commodity space until some trends begin to change.

Who knows, last year it looked like commodities had a chance for a really strong year. Yet those hopes were fizzled out quickly and then the selling took over. With the Dollar being so strong over the second half of this year, it just killed any hope the commodity Bulls may have had. Maybe 2015 is the year they look terrible but then stage a tremendous reversal. We will just have to wait and see.