Spring CleaningUS markets continue to press against new all-time highs.
SP500 range chart
Coming into the week our Lg-Cap Portfolio was fully invested, but this week we need to clean out a few holdings that are a drag on our returns. $LMT $PPG and $IP are trading at the lower end of their ranges while Indexes trade at the upper end. This means one of two things is likely to happen:
1. Indexes fail at the upper range creating sell pressure. This would likely cause lagging stocks to lead to the downside.
2. Indexes breakout and continue to rally. In this scenario we want to be able to position toward the new leaders making highs instead of hoping the laggards bounce off lows.
Either way we want to have some free capital for protection at the upper range OR to put to work in new leading names.
The breakout attempt can be seen better on the daily chart below. PPG reported a decent Q1 earnings and the stock rallied early in the day. However it was met with strong selling and closed on the low of the day. This is a sign of distribution and this week's breakdown reinforces the bearish posture.
The exits above fit this new criteria I'm experimenting with. While none of these holdings have broken our stop levels (and in fact are very near to lower range support areas), they are clearly showing relative weakness and have been for some time. The SP500 made a new high this week while LMT, PPG, and IP continued to show weakness and trade lower thoughout the strong week.
I realize we can't expect to outperform 100% of the time, things ebb and flow. But by holding lagging AND losing positions while passing potentially new market leaders is counter productive to our idea of owning the strongest stocks in the market.
The key to our process is to eliminate losses quickly and let winning trades continue to work in our favor. Having a criteria to eliminate losing, meandering trades I believe can enhance relative returns even further.
This concept challenges the boundaries of traditional trend following, but I feel it can add value by cutting lagging holdings even before they truly invalidate the initial entry criteria. This line of thinking is backed up well by the following quote:
When you are right, have the patience to be right big; when you are wrong, have the discipline to be wrong small.
Trailing StopsWe are able to trail stops in $SBUX $AAPL $DIS and $UNH.
Charts shown are daily bars to better show supply/demand levels:
UNH continues to hold up and consolidate orderly. Sideways consolidation allows for moving averages to catch up and that allows us to continue to ratchet stops higher. Eventually this will breakdown and rollover, but for now we will stick with it.
These four stocks display perfect trending behavior for strongly supported growth stocks.
We want to see stocks breaking out, this is bullish behavior. But as the trend develops we also want to see the stock find support along its rising 50 DMA. The best trends will "rest" and consolidate often. When they turn to resume their uptrends it's considered an additional sign of strength for that to occur above that 50 DMA.
We will be watching to see how the market handles its upper range resistance and which stocks emerge as the new leaders. Our portfolio now has 20% available cash to put to work, so we will be looking for the best opportunities that present themselves going forward.