Lg-Cap Portfolio Review (3/28/15)

We should be calling 2015 "the year of the roller-coaster" because that's exactly what it's felt like. Every time the market has moved higher traders have begun to feel very comfortable and confident in their stock allocations. Yet each grind higher has been followed by that inevitable crest, that once tops out creates a vision of uncertainty and rush of emotional terror.

Last week markets rallied strongly and were just about to make new highs (Russell Small Caps did make new highs). This week the SP500 gave back 2.2% and almost all of last week's move. So here we are again, back to support and wondering if we will get a shot back up or if there is another wave lower to this unsettling ride.

SP500 (Oct 2014-present) Daily chart

The SP500 since October has been one sharp directional move after another. This has caused many traders to overtrade and become more emotional than they have in a few years. Where most go wrong I feel is that they place too much emphasis on what the major markets are doing and let that impact their trading. Instead of letting the best stocks lead, they try to synchronize each swing in the market with their individual stock signals. What that creates is a lot of second guessing and ill timed decisions.

When it comes to managing a portfolio of individual stocks we need to let those stocks shine through. If you want to trade the Averages then just buy the SPY, but if you want to own the best stocks in the best setups you have to let Relative Strength work.

If the market is pulling back and a particular stock is breaking through highs, that should tell you everything you need to know. We focus on strength.


While not much real damage was done due to last week's buffer, our Lg-Cap Portfolio did have one casualty. We are exiting UNP after it failed to hold its weekly closing support and triggered our stop.

-Exiting Union Pacific Railroad (UNP)

We have had our doubts about this holding for the last couple weeks as it really struggled to muster any kind of strength. In the face of broad market weakness this week, UNP caved in and signaled a more cautious posture going forward.

While I have little doubt that UNP is and will continue to be a long-term winner, the support failure this week says the intermediate trend will need more time to find itself.

Our goal is to keep losses small and to target the strongest and best opportunities in the market. By exiting UNP here we are limiting losses and raising some cash should higher probability setups present themselves.

Not a single one of our positions finished higher this week, a few outperformed, but all ended up lower. There are a couple in particular that we need to watch as they are approaching support.

CSCO

Cisco has given a nice hard shake since its strong breakout 6-weeks ago. But the trend remains intact based on our timeframe, and despite the 10% correction off the highs it is still holding above its large breakout area. As long as the lows hold at $26.35 we will also.

WFC

What appeared to be a quality continuation last week was completely reversed this week. Price has moved sharply back into the trading range and the RS line rolled back below the downtrend resistance.

While this is not a positive development, the uptrend remains in play as the swing low at 51.64 has not been violated. One more week like this though and we will likely step aside.

TWX

Similarly TWX shot back into its prior trading range after a nice breakout last week. But like WFC, the uptrend is in no doubt based on the higher highs and higher lows. This is the primary factor that determines our positioning.

Our stops are still out of the way, but it will take several more weeks of price stability to move them higher. The next logical trailing level will be around $82.

PPG

PPG has come back to test its support area, but managed to bounce right off of it and keep the trend valid. We will be watching this over the next few weeks to see if this was just a kiss and go for more upside or more of a significant trend failure. For now our stops at $219 are in a good location.

PCG

I continue to remain stubbornly optimistic about PCG. I like this base breakout and I still believe the correction is counter trend. The momentum indicator suggests this market is still in an uptrend as it is trading above the zero line. I also indicates however that the stock could fall further in the intermediate term before it finds a lasting bottom.

At this point my best guess is that it will retest the breakout. That is where I have placed my stop for the entire trade. PCG is still fishing for a higher low.

IP

IP likes to rip and consolidate, rip and consolidate. We have now seen a retest of the breakout from 7-weeks ago and the stock has seemingly found some interested buyers in this area. 3 weeks in a row price has poked through the 20 WMA near 55-54 and has bounced back each time.

I am still in the camp that IP works its way higher over time, but it sure likes to make us wait for it.

HON

Honeywell keeps working its way from the lower left to the upper right. It hasn't exactly been a smooth ride, but the trend is clear. Since 2015 the stock has found consistent buyers at the 20 WMA and that continued this week.

This one is still working fine that there is nothing to worry about. Our stop remains just below our entry point, so we essentially have a risk free trade in one of the best companies in the world. I'll take that all day.

LMT

Lockheed is in one solid trend. The February breakout continues to be defended by buyers in the $198 area. Our stops remain out of the way below the recent swing low at 188.35.

AAPL

Apple has been consolidating its recent surge on lighter volume and in an orderly manner. The two areas I'm watching here are the 118 breakout as a potential trailing stop, and the confirmed swing low at 106.

There has been a lot of angst surrounding AAPL in both the financial media and on Twitter. Traders are worried about giving back profits and are selling prematurely. In my opinion they are picking up nickels in front of a steam roller.

The trend is clearly higher and intact. There is nothing to do but pray it pulls back to build a new support base so we can add to our current positions.

BMY

Higher highs and higher lows for BMY. Looking strong and a leader for the best sector in the market.

BA

Boeing continues to consolidate its surge on lighter volume and we are just waiting for a higher swing low to be set so we can trail stops. Until it pulls back further we will just have to give it plenty of room to find support.

DIS

Disney is a beast and is nowhere near danger. We need this to come in some so we can have a new support low to trail stops. Currently its in runaway mode.

SBUX

See Disney above.

UNH

I can't wait for UNH to put in a meaningful consolidation. I would like to increase my position size but simply have no strong support areas to do so against.

FB

After setting a new high early in the week, Facebook eventually turned lower with the rest of the market. Despite the overall weakness this finished almost unchanged for the week. All in all I would say thats a fine result.

We don't need to know where the market will go in the future to have success. All we need to do is focus on the trends of top performing stocks and own those stocks as they continue to set new highs and higher swing lows.

The less complicated you can make your investing process the easier and more profitable your journey will be. Good Luck Trading!

-ZenTrends

New Entries, Trailing Stops and Observations

It was a good week for the markets with the SP500 gaining +2.6%. While it was nice to see the SP500 participate, many stocks have been working consistently for some time now. The start of 2015 has been a great one for Relative Strength stock pickers. If you are able to identify quality setups in strong stocks then you are likely outperforming the major averages. If you have been fighting the trend and attempting to call tops, then you are no doubt in a bit of performance trouble (and its only March).

One stock I have been watching closely is Facebook (FB).  This week we are getting an entry signal for our Lg-Cap portfolio. There has been tremendous doubt surrounding this company after its botched IPO in 2012. But after causing quite a bit of anxiety for shareholders early on, FB has become a huge winner since mid-2013.

+Entering Facebook (FB)

This is exactly what I like to see: A multi-month consolidation at all-time highs. While the stock has been pretty volatile within the range, over the past month or so it has been able to hold near the range highs.

You can see above how in both October and December when the upper range was tested the stock was quickly, and harshly rejected from the highs. On each of these rejections however price managed to rally back a little sooner, creating some modest higher lows. The most recent test in early February only managed to pull back to the $78 area. That, along with the relatively tight trading range (between $81 and $78) over the past 3 weeks gave a hint to what happened this week.

When a stock is trading sideways in a range but then begins to tighten its range and hold near the upper end of the consolidation, its a sign that an upside resolution is likely. We are seeing that resolution right now. Facebook closed the week at new all-time highs. This signals our entry.

We can place our stops just below the tighter range and 20 WMA at $78. This gives our entry a fantastic risk/reward and we will continue to hold our position until that support is violated.

+Entering Wells Fargo (WFC)

An old favorite of our Lg-Cap portfolio, WFC makes yet another appearance. We've seen a solid consolidation over the past year and this week's breakout to new highs tells us all we need to know.

We can use the swing low at $51.64 as our initial stop for now. You can see that similar to FB, WFC has been able to tighten its trading range recently and has pushed through its highs. This stuff works folks. This pattern repeats all the time across markets on all timeframes. Its powerful and high probability.

I believe that we will be able to trail stops pretty quickly to the $54 area should we continue to see upside follow-through away from this trading range. 

Trailing Stops for UNH

Differing from the examples above, UNH is nowhere near a long-term support base and continues to trade vertically. But we don't pick tops, we simply run with the stock and trail stops as areas present themselves. I believe the $106 area represents a good place to do so. It coincides with the swing low from January and now the 20 WMA has caught up.

we can see this area better on the Daily chart:

The daily view shows an even tighter swing low near 112.50, and that will likely be our next trailing stop. For now we want to stay a bit away and give UNH some extra room. In fact I would be interested in being a buyer near this 106 area should we see weakness of that magnitude.

We are still giving the stock more than a 10% cushion to move around and I think any movement above this level is just noise. This is our longest current holding and biggest gainer. We want to give it the benefit of the doubt before we bail on this excellent winner.

Time Warner closes at 13-year Highs

I wanted to highlight a positive development for TWX. It has broken above its prior highs and has closed at its highest level since 2002:

I discussed the bullish posture on social media all week as it continued to take out prior highs. This Friday's close triggers the weekly "cup/handle" formation that has been under construction for almost a year. Initial targets for this pattern are in the $108 area, or 25% above current prices.

We are keeping stops where they are for now, but this is developing into a very nice looking stock to own going forward.

Growth Stocks Have been Market Leaders

Investors have been bidding up companies showing strong Earnings and Sales growth. In fact Ive been seeing many names coming out of large consolidations recently, and behaving well despite the broad market volatility.

Thermo Fisher Scientific (TMO)

Acuity Brands (AYI)

Icon Plc (ICLR)

Once a stock trades sideways for some time, it builds momentum as it coils. The moves that result from a breakout tend to be explosive.

While the market has spent the better part of the year moving back and forth, above and below positive for the year, many stocks like these continue to make new highs.


The Dollar is Extended

CNBC and other financial pundits are singing the praises of the continued strength in the Dollar. Its very typical to see the financial media latch onto an idea quite late in a cycle.

Taking a look at the Dollar via the UUP, I don't see a strong risk/reward trade here. All we hear from the media is how Dollars are going higher...hmmm

 The weekly chart going back to mid-2013 shows a clear 5-wave rally, and suggests the move is long in the tooth. The Dollar built a 1-year consolidation area through most of 2014. It has since surged from its September breakout and rallied 25%.

Now the media says "buy any weakness". The time to buy Dollars was back in September as it was emerging from its support base, not 6-months later after a vertical 25% move.

In my opinion, the price action doesn't suggest getting aggressive in the space currently. If you are Long here I think the trend is intact and would still be holding positions, but for new entry I don't like the odds.


The Market Trend is Higher

Regardless of what you "think" about Fed policy, government, expensive valuations, interest rates, global unrest, oil prices, strong Dollar, etc. This market is at all-time highs. The trend remains higher and if you are betting on some outcome other than making money in a raging bull market, then you are out of position and playing low probability trades.

The market doesn't care about your opinions or what you think should happen. It cares about what it cares about. If you are not aligned with that then its you that has a problem, not the market.

As you can see if you have been sitting in cash or short this market, you have been correct to do so only about 5% of the time and have likely missed one of the best market moves of your lifetime.

Yes eventually this will change and the market will correct substantially, but if you are positioned for this outcome now, you are not listening to the market. All dips continue to be bought aggressively and the market is continuing to make new highs regularly.

You dont have to be a genius or overthink this. Place stops below the uptrend channel and trail them higher each time a higher low is made. Just imagine how your performance over the last 2 years would have been different had you simply stuck to that strategy.

Investing doesn't have to be complicated. You need to be able to identify the beautiful simplicity of the market, while others around you search for more and more complex formulations. Higher lows/Higher highs. Thats about it. If you stick with that strategy you will be amazing to see the results that can come from it.

A successful strategy is one that keeps you invested in the market as it goes higher and alerts you to adopt a more cautious posture when trend conditions deteriorate. This is what we do here, we look for the best trends and ride them until they end.

Building a Trade: 1. Finding Intriguing Setups

Markets move up and down in a seemingly irrational way, how do we make heads or tails about when and what to buy? I want to walk through my trade process starting from the beginning to show just how it is I approach a new potential position. This will be a multi-part series as we identify and select, enter, manage, and then exit a trade. (note, this process will take some time. Finding quality setups and playing out a trade is a long process. But I hope this will be rewarding to you.)

Finding Intriguing Setups

Everyone has a different method for how they identify new potential opportunities. Some use screeners that select stocks based on certain fundamental and technical criteria. Others simply scan charts of a particular index like the Nasdaq or S&P100. However you choose to search for new trade setups, you should be looking for the highest risk/reward ratios; opportunities should present the lowest risk possible for your strategy while still leaving maximum potential reward.

I prefer to use some sort of fundamental filter to insure I'm finding the strongest most stable companies, or that display high growth metrics based on Earnings and Sales increases. 

While I feel it's very difficult to be a "fundamental only" investor, knowing the stock in question is strong can be very helpful when considering a position. Once I identify a strong company, one that's showing positive Sales and Earnings trends, I'm then ready to put it through more rigorous technical analysis.

Once I have identified strong fundamental stocks I simply start looking at charts. Weekly timeframe, Daily, etc. There is no way around it, if you wish to succeed at selecting stocks you will have to look at tons of charts. An important technical scanning criteria can help with this initial process. I only consider a stock to be "strong" if it is at least making new 50-day highs. It can have the best fundamental story in the world, but if the market is not rewarding that story then it doesn't matter in terms of short-term profits.

To recap so far:

-Potential candidates should be displaying strong and increasing EPS and Sales growth
AND
-Should be making at least new 50-day highs, preferably new 52-week highs.

Using this criteria I have recently found the Banking and Regional Banking space quite attractive. My initial filtering process has uncovered several strong opportunities: HOMB, SFNC, SBNY, LION, and PACW.  (click on a ticker symbol for an overview on Finviz.com. My preferred stock screen).

All of these stocks show strong recent Sales and Earnings growth as well as fairly inexpensive valuations. Several pay dividends as well (always a plus). Now that we know they are all fairly comparable with regards to Fundamentals, we need to look at the charts to see which offer the best opportunity.

Weekly Bars

HOMB (Home Bancshares)

Current price: 33.95
Initial stop: $31.30
Distance from entry to stop (Risk): 7.6%

SFNC (Simmons First National)

Current price: 44.33
Initial stop: 39.65
Distance from entry to stop (Risk): 10.5%


SBNY (Signature Bank)

Current price: 131.32
Initial stop: 123.35
Distance from entry to stop (Risk): 6%


LION (Fidelity Southern)

Current price: 16.91
Initial stop: 15.69
Distance from entry to stop (Risk): 7.2%


PACW (PacWest Bancorp)

N/A
No entry due to lack of breakout highs

I think you could throw a dart at this screen and make the case for any of these positions as new entries. But here are a couple things I notice right away:

First PACW has not broken above recent highs like the others have. So right away that one is eliminated (although I feel they do offer the best fundamental structure currently, go figure).

Second I want to look for the distance from current price (entry point) to where I would place my stops:

HOMB- 7.6% risk
SFNC-  10.5% risk
SBNY-  6% risk
LION-   7.2% risk

SFNC is simply too extended relative to the other 3 options, so it gets the boot.
Based strictly on initial risk SBNY looks the most attractive. But since there is only a ~1% difference between the Top 3 candidates I want to look a little closer at the Fundamental picture to see if anything stands out to tip the scales.

Upon reviewing HOMB, SBNY, and LION I notice a couple things:
SBNY pays no dividend and has 95.5% Institutional ownership
HOMB pays a 1.47% dividend and has only a 54.2% Institutional ownership
LION pays the best yield at 2.13% but has a 64.3% Institutional ownership

I don't pretend to know much about Institutional ownership trends, but logically the lower the Institutional position in the stock, the larger potential upside remains should it attract attention.

Therefore I'm eliminating SBNY (but really its so close to call, no problem with buying this stock here).

The final contenders are HOMB and LION. Almost identical initial risk , very close dividend payouts and similar chart formations. What I want to do is now zoom out these charts and see which has performed the best over the long-term:

HOMB Monthly chart

LION Monthly chart

Its abundantly clear to me that HOMB has shown the least downside volatility and especially solid performance during the financial crisis in 2008-2009. While both have rallied dramatically off recovery lows, I prefer the lower downside risks HOMB has demonstrated. This is no guarantee of future results, but we are looking for any edge we can find.

Based on this analysis I will be entering a position in HOMB at Monday's open (3/16/15)

Going back to the weekly chart, I will be purchasing a 1R portfolio risk with initial stops at the 31.30 weekly swing lows and rising 20 WMA.

 Using a $10,000 account size as an example, we know we can risk up to $100 as our 1R (1%) of account equity. That means with a stop at 31.30 and entry near 33.95 we can purchase 38 shares or about ~$1,300 worth. (33.95-31.30=2.65) $100/2.65=37.7 shares

As the trade develops I will discuss the ongoing management as Part 2 of our study.

Good Luck trading!

Lg-Cap Review: Top Performers Lead

Markets remained volatile this week with the SP500 declining -1%. Notable relative strength was seen in Small Caps as the Russell 2000 posted a gain of  +1%.

We had no new entries in our Lg Cap portfolio. Due to the nature of this environment, my growth portfolios have been performing better and showing more potential new opportunities. There just isnt much within the SP100 that looks ready for good R/R. Banks are getting close like WFC and GS. But it is the Small and Mid Cap Regional bank space that looks most interesting.

Russell 2000 Small Caps vs SP500 Lg-Caps 

The media has all sorts of reasons "why" we are seeing a discrepancy between Large and Small Cap stocks here: a strong Dollar, speculation on rising interest rates, falling Energy prices, etc. While all of these are factors, its impossible to say when or if these conditions change. That is not our concern. What we need to focus on is how to navigate this environment and continue to profit in a volatile market. 

Despite this "changing" environment, our top performing holdings continue to show standout strength and managed to achieve gains this week.  

SBUX

DIS

UNH

BMY

This is why its so important to stick with winning positions. They tend to continue winning in the face of all the "fears" swirling around the financial media. Nobody knows when an uptrend will end, but by sticking with the best performing stocks, you give yourself the best possible chance of outperforming. 

We also saw many of our holdings begin to test key trend support this week as the markets remained under pressure. While all these remain above our stop levels, it will be important to see how they deal with their initial supports. 

BA

Boeing isn't anywhere near stops or any kind of meaningful support. For that reason its foolish to try to time when this trend will end. Just stand back, let it come in a bit and build some sort of consolidation. We need to let the market tell us where the buyers are instead of guesses or "feelings". 

That being said, we can trail stops up to just below our entry near $130. A break of that area would suggest the breakout is failing. It would also take out the 20 WMA and make new 50-Day lows.

Don't worry about giving back our measly 15% open gains here. Give it some room to see if it can become the winner that makes our year. Maybe it does, maybe it doesn't...Who knows? Anyone that says they know is lying.

*I heard a little secret too...When Goldman downgrades a stock its not to sound smart if it comes down, its to buy a strong stock cheaper if traders sell it due to their commentary.

Stick with BA.

PPG

We are raising trailing stops to $219.80. A breakdown from there would suggest more caution ahead.

IP

Also raising trailing stops to the lowest close of the last 10+ weeks. 

HON

TWX

AAPL

CSCO

LMT

UNP

PCG

With the exception of UNP and PCG, all of our positions are in clear uptrends and ABOVE all key support levels for our time frame.

UNP and PCG are in the midst of solid pullbacks, -9% and -16% respectively from their all-time highs. Stops are nearing, I will be watching these closely for some new buying interest and stabilization.

Sometimes we give up gains as trend traders, but its because of this behavior of sticking with winners that we are also able to catch the most remarkable moves in the market. The is no free lunch. To achieve outsized winners you have to willing to sometimes watch open profits fade, its just the price we pay as big trend participants.

Thanks for reading. For weekly updates and new trade ideas, Follow on Twitter and Stocktwits @ZenTrends.