Sunday, July 26, 2015

Range bound Chop. Lg Cap Review

Markets closed lower this week and continue to be mostly range bound. The NASDAQ continues to be the leading index as big names NFLX, AMZN, and GOOG have rallied hard after posting better than expected earnings. The SP500 on the other hand continues to see declining leadership within its top weighted component stocks. By my count only 30 of the top 90 stocks by index weight are trading above their rising 20 WMA's. Often as underlying leadership declines it puts pressure on the market and usually pulls it lower. This divergence can be viewed in two ways: First it can be said that the declining leadership creates a headwind for the broad index and a further pullback is imminent. Or the alternative is with 2/3 of the stocks trading weakly (and sharply weak recently) that a recovery rally in those names could be just what the market needs to rise through its recent trading range.

NASDAQ COMP (weekly)

SP500 (weekly)

Historically, declining leadership in the underlying stocks is bearish for the market and is a notable symptom of major market tops. Keep in mind I'm not calling for an end to the bull market yet, but do know as fewer and fewer stocks participate in the uptrend it is more likely to come under significant pressure.

The way I view declining leadership is there are simply less viable options for new entries. This helps protect capital as no new risk is taken because more positions are stopping out than are triggering new buy signals. The Rotation method of investing that we deploy follows the strength in the market; we try to only own the strongest names and avoid the weakest. This keeps us only taking on new risk when strength improves and more new buy opportunities present themselves. Almost all of our current holdings are among the 30 SP500 stocks trading above their 20 WMA's. We did see a couple of our holdings fall below that trailing support this week, but still remain above our stop levels for now.

We had no changes to our Lg-Cap Portfolio but do have some holdings we need to take a closer look at as they are showing vulnerability.

AAPL tested both the upper and lower boundaries of its 6-month trading range this week. Both the high and the low were rejected and price remains in between. I have no idea what the market brings next for this loved stock, but we will take our exit signal should the lower support at 123.25 fail to hold.

Every recent rally for HON has been met with immediate profit taking. The action has been quite messy yet the stock continues to hold above the important $101 level. We are still sticking with this one for now.

BMY initially saw a positive reaction to its quarterly earnings report but was then dragged lower with the market. This week's action created an enormous engulfing bar and closed below the 20 WMA for the first time since our entry back in September.

We will stick with this for a while longer as $63 is providing strong support and we have substantial gains in this name. When you have strong profits in a stock the prudent thing to do is let it run. You win in investing by having small losses and a few big gains. The only way a stock can create a big gain is if you are able to be patient with a winner and simply let it happen. That is where we sit with BMY. With our current stop placement near $63 we have basically assured ourselves of a 20% gain should we stop out from here. This is where being patient and sitting on your hands is the best course of action.

Like BMY, UNH closed below its 20 WMA for the first time since our entry in early 2014. For all intents and purposes this stock remains range bound as this week's action brought it right back into the prior trading range. There is nothing to do here but give this one plenty of room to move around. Lets make a winner like this really prove its ready to roll over for good. Stops at 113.20

After those 4, we are still left with 9 outperforming stocks and a few of those actually closed higher this week despite the -2.2% decline for the SP500.

SBUX announced earnings Thursday and the initial reaction was quite positive. However due to the very weak nature of the market on Friday, the stock eventually gave back about half of its initial gains for the day.

With earnings out of the way we can safely slide our stops up to the prior swing highs and 20 WMA at about 51.50. A pullback would not surprise me considering the recent run this has made, but I would think it would be less than the 10% cushion we are now giving the stock. Again this is a big winner for us and we can certainly give it room to find a new support base.  

FB has been impressive. The stock continues to ramp vertically in the face of a weakening and churning market. With the 1-year base that has formed at all-time highs and this recent breakout, I feel the stock has much more potential upside to come.

They will announce earnings this week Wednesday after the close. After the announcement, should the stock hold up well, we can then trail stops to near the $84 level. But I want to give this plenty of room heading into earnings as the recent performance has hinted at the potential future upside.

For those that like to use options, this current setup is an interesting place to buy some OTM puts down around our $78 stop level. For example our position sits on a +17% gain heading into earnings this coming week. Should earnings be poor (and especially considering the recent ramp in the stock) a sudden correction could wipe out most of our hard earned profits. 

A possible strategy to protect our position would be to buy the 77.50 Sept 18 puts for about $.65. You could for example buy 5 contracts (.65 x 5 = 3.25 or $325) and have downside protection through our stop level. With open gains near $2000 for our Portfolio, a $325 hedge in the event of an unexpected shock could be well worth while. Just another idea to consider. ( Full disclosure I will be looking at these puts heading into ER Wednesday morning)

DIS continues to be relentless. Not much more to say than that. Impressive. Stops remain at the consolidation lows near $107.65.

The remaining holdings are still in longer term uptrends but did show weakness along with the broader market this week.

GILD will announce earnings Tuesday after the close and currently sits right on top of its prior trading range. The overall action remains constructive even though this week's bar was quite lousy for the short term. Our stops remain below the swing low at 103.85 and would require a full breakout reversal to stop us out.

While we certainly dont like to see a new breakout sold in the manner as TWX was this week, it is also important to realize that price is still retesting the upper range and prior highs.  This remains an outperforming position as the stock is still above both the 50 DMA and the 20 WMA (shown above), while the SP500 is trading below its key MA's. The trend of higher highs and higher lows is still intact and I see no reason to get over-anxious as long as the stock can hold above the $83 range lows.

We can trail stops in WFC to the prior highs and recent retest area. After setting new all-time highs in back to back weeks, the broad market selling took its toll on WFC at the end of the week. But it still remains a relative leader and as long as it can hold above its breakout area we will be happy to let this one run.

AIG continues to press multi-year highs and is still unwilling to give back its recent gains. I expect some sort of consolidation soon, but for now we can tighten stops to the lowest close in the last 10 weeks as well as the prior consolidation range just above $58. We are giving this plenty of room, but at this point it's not given us reason to doubt it. 

 Goldman still remains in breakout mode longer term but in a shorter term pullback. It remains a solid out performer on the weekly timeframe as it sits well above its rising 20 WMA. Should GS find its footing here soon we would have a new level to trail stops to, but we will need to see a resumption to new highs before that can happen. For now we will just let it continue to consolidate above its prior range highs. 

The market continues to churn at ATH's and many remain convinced an imminent and violent decline is just ahead of us. Maybe it is, maybe it isn't. There's really not any way to know for sure. While there are certainly some early warning signs present, our leading stocks continue to hold their longer term uptrends and breakouts. I prefer to let the leading stocks tell me how to position my funds and while more stocks are breaking trends, many still look strong. Stay alert out there and be sure to check in for any changes during the week @ZenTrends on Stocktwits and Twitter.

Saturday, July 18, 2015

Market Recap Top Down

The market staged another strong recovery this week as the SP500 regained its 20 WMA after briefly dipping below the last couple weeks. How quickly this market responds is a testament to why sticking to the long-term trends and keeping an open mind are so beneficial for proper money management. During this most recent "meltdown" (where the SP500 declined only 4.2% from peak to trough) the bears and media had us believe we were on the precipice of financial disaster. As has been the case with this entire bull market, the bears have been foaming at the mouth at any hint of a pullback. I have been hearing since 2010 how "the easy money has been made". Let me tell you, there has been nothing easy about sticking with this market. Bull markets do their best to buck us off by convincing us that the end is just around the corner.

Bull markets are born out of panic, rise on fear/doubt, and end on euphoria. We are nowhere near euphoria in this market. Most traders/investors are terrified because "its gone up so much", which is an absolutely terrible rational for a market collapse. The most bullish thing a stock can do is go up, don't let anyone tell you otherwise. Those that tell you to fade breakouts to new highs and buy new 52-week lows "because a stock is cheap" will likely not be winning traders over the long run. While its true that many reversion type strategies work in a raging bull market, as everything just bounces back. In a bear market these reversal plays are likely to eat up trading capital by causing overtrading and low probability setups.

New highs are not a rare thing in uptrending markets. New highs tend to beget more new highs, just as new lows tend to lead to more new lows. Trends and momentum exist due to human emotions, the quicker you realize that and adjust your trading accordingly the faster your equity will grow. This certainly doesn't mean you shouldn't buy pullbacks. You can certainly buy pullbacks, but be doing so within longer-term uptrending markets. You should not be trying to time bottoms in bear markets. We've seen this in oil and other commodities recently. Everyone that has been so quick to call an end to the SP500 uptrend are the same ones who have been trying to buy every new low in Energy prices.

We had no changes to our Lg-Cap Portfolio and our account remains heavily invested. This week I wanted to take a top down look across the US markets to see just where we stand after the recent pullback.

SP500 (neutral/bullish)
Speaking of new highs within a bull market, take a look at the SP500 since 2013. There have been 50 new weekly highs set since January of 2013. I know of many investors who have been calling Tops every step of the way, yet the trend continues to grind higher, leaving them behind and under invested.

This has been a market of rotation. Sectors and groups come into favor and out again, opening the door for the next leader to emerge.  We have seen this quite dramatically in the major indices since the beginning of 2014. In 2013 markets were incredibly correlated and all traded in lock step for the most part. But in 2014 things began to decouple as stock picking became more important for outsized returns.

Comparing the SP500 above to the Russell 2000 Small Cap Index we see quite a performance shift during 2014 and then the opposite in 2015. In 2014 Lg-Cap stocks continued to press new highs and led the way higher. Small Caps traded sideways for 12 months and built a solid foundation to launch a new trend from.

2015 has so far been the year of a "risk on", low correlation, stock-picker's market. We've seen Small Caps and the NASDAQ Composite lead with steady trends higher while the SP500 has been a total chop fest. This will reverse at some point and Lg-Caps will regain the lead, but for now its important to acknowledge what is actually happening and position your funds toward the strength.

Russell 2000 Small Cap (bullish)
Small Caps continue to move away from the 12-month base in a steady trend of higher highs and higher lows. I see no reason to doubt this strength and continue to find opportunities in the higher beta space.

The Nasdaq has been the most consistent market since 2014 and this week made new ATH's.

Nasdaq Composite (bullish)
As long as this market continues to make higher highs and higher lows we will be searching for ever present opportunity. FB is currently my favorite idea in the space and we will look at that later.

Treasury Bonds (bearish)
Bonds have really started to roll over. While we didn't exit at the exact top, we did manage to avoid the next leg lower in prices. I certainly think Bonds can bounce here shorter-term but as long as the trend of lower highs and lower lows remains in place, rallies are to be faded.

There are an awful lot of opinions and predictions swirling over interest rates; when will the Fed raise rates and by how much is the topic of much debate, but you would be ill advised to invest based on this supposition. Price tells us the intermediate trend is lower, that's as good as we can do in the markets.

US Dollar (neutral/bullish)
After a parabolic rise in 2014, the Dollar has begun to consolidate the rally. This formation has the look of a Bull Pennant, but likely needs more time to develop. The intermediate trend is higher, but the short-term price action is to be treated as neutral with no real edge in either direction. Should we see a sustained breakout above the downtrend resistance and above the prior highs, the posture would change to much more bullish US$.

Gold (bearish)
Gold is in meltdown mode and looks like a fantastic short candidate for another leg lower. The next strong support should be near the $100 level for GLD, so some substantial downside could occur from here. Gold is a sad and pathetic trade; It has robbed many honest Americans of significant returns for the last 4 years. Brokers, advisers, and the media have preyed on people's fears and narratives by pressing owning gold as a "risk free" alternative to the wildly risky equity markets.

If you have been invested in gold for the last 4 years, not only have you lost more than 40% from peak to trough, but you have also missed a 75% rally in stocks over the same period. The opportunity cost of owning gold has been tremendous and is completely due to fear induced narratives about currency debasements, rampant inflation, and economic collapse. While anything can happen in the future, to continue to dig in and stubbornly lose your valuable savings based on some "ideology" will likely be detrimental to your wealth.

This trend will turn at some point, but until then this is a space to avoid.

Energy XLE (bearish)
Another Bottom Caller's favorite is the Energy space; Oil, Nat Gas, Solar, etc. These have all be crushed taking the stocks that generate a substantial amount of their earnings from with them. This market is weak and should be avoided from the Long side. Many thought the lows were in in October 2014, December, January 2015 and as recently as two weeks ago. But this is what happens in downtrends; the trend continues lower taking all the bottom callers and stubborn holders with it.

This week's action is a new 2-year weekly closing low and it appears another leg lower is likely. With all the buying activity that occurred over the past 8-10 months at the $75 level, there will be substantial resistance on any attempt back into the prior trading range.

As I've discussed previously, downtrends and bear markets present opportunity eventually. The trouble is people get greedy and try to front run the low hoping they pick the bottom. I have learned the hard way that trying to be the hero that bought the bottom tick rarely works and is NOT a winning method for long-term results.

People are so enticed by declines that they cannot help themselves when they see lower prices. They feel that the "discount" is too great to pass up. But remember, stocks aren't groceries. When merchandise goes on sale in the market (especially during a raging bull market) there is often a reason why. Sometimes it is an irrational move that presents value, but more often than not the investments continue to be a drag on returns. As the famous saying goes, "the market can remain irrational longer than you can remain solvent".

During a declining market I always prefer to let others take the gamble of turning the market around. Let them do the heavy lifting and once the market stabilizes and turns higher all we have to do is go over and pick up the money.

Financials XLF (bullish)
The Financials broke to 7-year highs this week and did so out of a multi-month sideways base. This is very bullish activity and should be acknowledged. The Financial sector makes up the largest weight on the SP500 Index. A breakout and rally higher for the Financials should be a significant boost to the market in general.

As followers know we have been Long some of the leading Financial stocks for some time. We have owned AIG, GS, and WFC since early spring, so it is very welcome to see the broad sector following their leadership and moving to higher highs.

Biotech (bullish)
Speaking of opinion and doubts, the "bubble" speculation around the Biotech space has been deafening for years now. Yet the group continues to march to new highs and this week was no exception. This rally will end at some point and when it does it will likely end badly. But to ignore the strength and returns this space is offering simply is not listening to the market.

Many names are highly speculative and suspect in the Biotech space, but a company like GILD, which we own for our Portfolio, remains a great candidate for further upside and is very reasonably valued. The stock is quite cheap and has fantastic growth metrics. By being selective you can still find ways to participate in this stellar uptrend in a safer and less volatile way. 

Consumer Discretionary (bullish)
Consumer stocks continue to act well and are market leaders of note. SBUX, DIS, TWX, etc continue to make higher highs and trade bullishly. You can attribute what ever meaning to this you want, cheaper oil, improving economy, but the fact remains these stocks are making boat loads of money and to be missing them is another example of ignoring what the market is saying.

Facebook (bullish)
Many stocks have been mentioned above due to the bullish uptrends they possess, but a company like FB is one that sums up this market well. If a company is growing earnings, growing sales, and possess little debt then the trend is likely moving higher and being rewarded by investors.

Facebook has been in breakout mode for the last couple months and is emerging from a 1-year sideways base at ATH's. The setup is in place for another monster rally. While most would think the best is likely behind us for FB, we can never truly know where we are in a current trend. As long as prices can hold above the $78 swing low area, I believe the next move could be significant.

 They report earnings in less than two weeks so we will leave our stops where they are for now. But should they deliver a positive quarter and the market responds well we may be able to trail stops higher soon. For now we will let this setup play out and keep our exit point out of the noise and volatility.

The important takeaway from this week's post is to stick to the dominant trend and don't try to outsmart the market. Listen to what the market is telling you and position your funds in a way that allows you to capitalize on the current trends in place. Stick with winners and avoid losers. 

For up to date charts throughout the week, please Follow on Stocktwits and Twitter @ZenTrends.

Friday, July 10, 2015

Lg-Cap Portfolio Review

Quick and dirty Portfolio review this weekend, I'm headed out to the coast for a camping trip with the family. With all the noise and hysteria flying around about Greece, China and god knows what else, I will not add to the noise with banter of my own. You all know where I stand on opinion and predictions. A straight holdings review this week should suffice.

All that needs to matter to us right now is are our positions holding up or are they breaking down. If they are holding up, then nothing needs to be done. If they are breaking down then we will exit those losers.

I was stopped out of my 20% Short position on Tuesday's reversal attempt higher and close above 2,080 on the SPX. So I rotated those funds back into cash.

There where no new entries this week as my available funds were used for some short-term opportunities that have presented themselves. As usual, here is our Lg-Cap Portfolio, still intact after the recent volatility in the market. In fact we made new ATH's for our Portfolio equity this week while the SP500 remains 2.7% below its high.

UNH is continuing to see buyers at its 20 WMA. For more than a year every test of the 20 WMA has seen a jump in trading volume and always managed to close above. We have seen three recent tests of the line and each one was met with higher volume on the buy side. This is the pattern we will be watching going forward for any hints to future direction.

Starbucks remains elevated and is still churning higher. Stops are in a good place, a pullback into the $50 area would still be normal price movement.

BMY finished the week at higher weekly closing highs and has seemingly shaken off the large selling pressure from May. Stops still remain at the bottom of the consolidation area.

Disney made new ATH's this week. This one just keeps going and with stops below the recent range support, we can continue to let this run comfortably.

AIG bucked the weakness seen by the broader Financial stocks this week. The stock closed higher and engulfed last week's entire trading range. This is bullish behavior. Stops remain at the breakout level as this stock can't even pullback to give us a new swing low. Let it work.

Gilead has come in a bit the last 3 weeks but is still in excellent position longer-term. The price action this week simply revisited the prior highs from last Fall. Stops below $104 give this plenty of room to continue to consolidate.

Facebook is acting very well. Since breaking out two weeks ago, the stock has held tightly to the highs while the broader market has flopped around like a fish out of water. The Relative Strength in this name should not be ignored. The action suggests higher prices from here.

GS is just going through an orderly profit taking period after a strong rally. No damage done to the trend as long as its above $198.

TWX pushed to a higher weekly close this week. The stock remains resilient amidst a very choppy and vulnerable market. I'm still very positive on this name above the recent consolidation lows.

Honeywell is trying my patience and has effectively gone nowhere since our entry late last year. If stops do not trigger soon but performance continues to lag, I will be forced to reposition and look to something with more mojo. Price is currently sitting on our stop level and below a now declining 20 WMA.

WFC dug in where it needed to this week. With earnings on deck Tuesday morning the next move should be decided soon. Currently the stock is positioned nicely coming into earnings as its pulled back a bit from its high and resting on its 20 WMA. Typically Wells performs fairly poor on announcement days, but soon resumes its trend higher. We will see what next week brings. Stops at $54.05.

Last but not least is AAPL. Everyone's favorite stock. Well it came within 3 cents of triggering exits for us this week, but managed to hold onto support with Friday's strong recovery. RS is sitting right on its 18-month uptrend support vs. SP500 and will make a move one way or the other soon. Keep an eye on this week's closing price, going forward that will be our stop.

Have a nice weekend! 

For up to date charts throughout the week, please Follow on Stocktwits and Twitter @ZenTrends.

Saturday, July 4, 2015

Captial Rotation- Why and How

I often say you don't need to predict the market to make money. But what does that actually mean? If you don't predict which way the market is going to go how do you know where to position your funds to make money?

Well the answer is simple, rotation. This term is thrown around on Wall Street often, but all it means is a flow of money from one location into another. When money flows into one asset, that asset's price increases in value; demand is increasing. When money flows out of an asset, that asset's price decreases in value; demand is decreasing.

When the market is strong and rising, many new leading stocks will signal entries and we will buy them. This adds risk to our portfolio just when leading stocks are being bought and increasing in value. On the other hand when the market is weak many leading stocks will be breaking down and triggering exits. This raises cash levels in our accounts, and in a weakening environment fewer new opportunities present themselves. In other words, we flow into stocks as money is coming into them and we flow out of stocks when traders begin to sell, taking profits in those positions.

Rotation is a reactive strategy, not a predictive strategy. When opportunities are plentiful we will have heavier exposure to risk assets. When opportunities are scarce we will have lower exposure to stocks and therefore avoiding serious downside corrections in the market. This is why we dont have to guess, we can simply react to the market, listening to the price action of leading stocks.

How Rotation Manages Risk

100% Invested Portfolio
Market Pulls back
/                                 \
No Stop Trigger                             Stop Trigger 
|                                                    |
Hold Leading Position                Exit Lagging Position
                                                   Reduce Market Exposure
                                                             Raise Cash for New Potential Market Leaders

The flow chart above shows how rotation works in practice. We start with an invested portfolio of leading stocks. The market then undergoes a pullback, some of our positions may stop out and some may not. What this tells us is the positions that did not stop out are truly market leaders as they showed more strength during the decline. The positions that did stop out were showing additional weakness and no longer trading like market leaders; they're becoming market laggards. 

After a pullback in the market you should be left with only the strongest leading stocks and increased cash reserves to use on new "market leading" opportunities that may present themselves. This is a process that is on-going and is called rotation; money flows out of the weak and into the strong.  

Taking this theory to the logical extreme shows that if the market never pulls back and just rallies, we will be fully invested in the strongest stocks and make impressive returns. If the market just crashes we will only be left with cash reserves and no positions as all stocks are declining substantially.

What is interesting about this strategy is that the extreme scenario has been playing out since 2013. Had you been following a Relative Strength Rotation method you would have made strong gains and would have been heavily invested since 2013. If you have been a reader of this blog you know this has been our posture. Rotation rewards strong trending markets and it protects during weak and declining markets.  

-Exiting CSCO
Cisco has been under performing relative to the market since May and last week broke an 8-month uptrend vs $SPY. This week saw strong downside follow-through on that breakdown by gapping lower away from the 20 WMA.

CSCO Daily
The Daily chart shows the recent trading action nicely. I Tweeted out my exit Monday due to the lower low violation. The decline came on heavier than average volume and continued to slide into the end of the week. 

CSCO is a situation where it was our only current losing position and its recent relative weakness made it an easy source of funds as risk elevated in the market.

+Entering Short SP500

The Daily trend was invalidated this week with a convincing decline Monday morning and a very soft bounce attempt the rest of the week. The gap lower open Monday did substantial damage and created a lot of trapped buyers from higher prices. Those trapped bulls will be looking for exits to thier now losing positions should a bounce continue early next week. This will create added downside pressure in the near term. 

The weekly chart below shows the recent higher range that formed between 213 and 208. Each successive range that forms has been tighter than the last. Volatility contractions tend to lead to volatility expansions in the direction of the breakout. This week the SP500 broke out to the downside. Its possible lower prices are ahead.

This week's price action made the lowest close in the last 12-weeks and set new 50-Day lows. The SP500 is now below its 20 WMA. This is how rotation works; once too many stocks are rotated out of, the trends of the indices are no longer able to sustain themselves and succumb to the selling as well.

For risk management purposes if the market can regain Monday's high I would be more positive on the short-term direction of the market and look to exit this initial hedge position. The trapped buyers (overhead supply) should create enough pressure that closing above Monday's high will be difficult to accomplish. $208 on the SPY will be the first level I will be watching to see if buyers can regain. A close above 209.83 (Monday's high) and I will rotate back into cash.

This is the most vulnerable I have seen the market since 2012. The October decline was swift and nasty, but the price didn't have the volatility contraction prior to the drop like it does now. The current formation has the look of a strong launch pad for a move lower.

In light of this I have taken available cash and rotated it into a defensive position, Short the SP500. Our Lg-Cap portfolio is currently 80% long and 20% short. We are still positioned for longer term upside in the market, but with risk becoming more elevated we are also taking some protective measures should this pullback scenario play out.

As always we will continue to let the market tell us where it wants to go. We won't have to guess, we will simply take stop signals when they trigger, entry signals when they trigger, or we will sit tight on a large cash position. We rotate out of the weak and into the strong. If there are not any strong places to enter, simply wait patiently for a new opportunity to present itself.

For up to date charts throughout the week, please Follow on Stocktwits and Twitter @ZenTrends.