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. 


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