Spring Cleaning, Trailing Stops, and New Potential Leaders

Spring Cleaning

US 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.

OR

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.

Exiting LMT

LMT made new 50 day lows and closed for a second consecutive week below the 20 WMA. A rally attempt mid week was rejected after they reported weaker than expected earnings. The long-term relative strength trend was broken as well. 

IP

IP also made new 50 day lows this week although it did bounce from the lowest levels. Price is at a decent support but you can see how weak the Relative performance has been since March. There was an attempt to rally back 3 weeks ago, but that bounce was completely reversed last week and this week followed through to the downside. All the while the SP500 has been challenging new highs. 

PPG

PPG was rejected from its attempt at retaking the 20 WMA. Price initially was able to breakout above, but couldn't hold and left a bearish upper wick on last week's bar. We then saw strong downside this week confirming last week's negative action. 

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. 

Daily view

A couple months ago I had the privilege to hear legendary trend trader Ed Seykota speak in Seattle. Something he discussed, which I have been working with since, was the idea of setting a "time limit" on lagging positions. This time limit wasn't an exact period, but more of developing a way to filter out lagging positions from your portfolio that haven't necessarily stopped out. These holdings are a drag on your relative returns and occupy precious trading capital that could be used in more fruitful ideas.

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. 

-John Boik

Trailing Stops

We are able to trail stops in $SBUX $AAPL $DIS and $UNH.

Charts shown are daily bars to better show supply/demand levels:

SBUX

Starbucks was a rocket ship this week gaining just under 10%. After a breakout to new highs on Thursday, we had a confirmed higher swing low at $45.70. The post earnings reaction Friday only increases the strength of the overall trend.

AAPL

AAPL found support along its rising 50 DMA and is resuming its uptrend. Earnings will be reported Monday after close.

DIS

DIS looks a lot like SBUX here and with its new high this week, we can trail stops to below the recent congestion area. Nice trend here.

UNH 

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 want to be positioned toward this strong trending behavior and remain skeptical of those not displaying it.

Watchlist- New Potential Leaders

GILD

ECL

AIG

GOOG 

KMI

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.