Saturday, August 29, 2015

Assessing the Damage

Our Lg-Cap portfolio is now 100% cash. If you missed my post during the week, you can see it here. After witnessing Monday's trading action and broad market damage I choose to adjust our risk to the Daily timeframe on remaining stops. We received exits for SBUX, UNH, FB at Monday's close and HD on Tuesday.

 In hindsight the market ripped straight up on Wednesday and Thursday and ended up with many stocks holding just above key stop levels. Had I not made that adjustment we would still be long those 4 names. Its possible I made an over reactive move and altered my plan's rules in an emotional moment. And that reaction likely caused me to exit our holdings prematurely. But by having watched what transpired Monday morning with SBUX, UNH, FB and HD plunging more than 15% in the first 5 minutes of trading, I made the call to limit exposure as quickly and reasonably as possible.

My #1 rule is capital preservation and managing risk. Trader Mark Minervini summed that concept up well this week on Twitter:

 "My main concern is managing risk. The minute I think I can't effectively control risk, I step aside." -

Here is a look at SBUX's trading range this week:
 From the close on Friday SBUX declined 20% in the first 5 minutes of trading Monday morning. It then managed to surge higher and close Monday down only 4%. The rest of the week it rallied back above key support. 

While it's disappointing that we exited at Monday's close, the alteration of this trend is notable. This week was the largest trading range from high to low since October of 2008, in the heart of the financial crisis. Seeing action like this doesn't encourage me to put my money on the line here. Maybe that was the low and maybe the stock just rips back to all-time highs, but as of now I have lost the ability to manage risk due to such a wide trading range. 

The market rallied strongly over the last couple days, recovering 115 points from Tuesday's low. It appears to me that many are quite complacent with the "correction being over" and that we will just recover right back to highs. While the price action shows a buy the dip mentality, the longer-term trends have come under severe pressure.

SP500 Daily Chart
 The SP500 had traded in a tight range of about 90 points for all of 2015 prior to the last two weeks. From range compression comes range expansion. That expansion can come on the upside AND downside. This time is broke lower and despite the sharp recovery it has only regained half of the initial decline.

We want to keep an open mind and be ready for any possibility, but the path of least resistance appears lower. As important support levels are broken, they then become resistance on the way back up. The first level of support turned resistance is 1990 from the trading support in December and January. That range resolved to the upside and from March until mid-August held on pullbacks to 2040. 2040 is likely to be the toughest area should the market return to that level.

It often takes multiple attempts to break through overhead resistance as each attempt draws out more and more sellers. This is why after substantial technical damage a "base" will form. We will need to see the market establish a floor of support on the next pullback before we can manage risk appropriately. A sling shot off an emotional low is rarely the end of a move. Often those lows will be retested to see if the buying interest the first time was genuine. This new floor of support is what will provide the fuel to eventually launch the market back through overhead resistance levels.

Until we see this "support floor" in place we simply need to be patient and protect our capital. I know its painful watching the market rally without you, but we manage risk here. We don't try to catch every tick in the SP500. The idea is to get your money in when the odds are in your favor and protect it when they aren't. Don't worry, you won't miss the market. When the setups are in place for strong risk/reward investments we will receive new entry signals.

This week I want to take a look at some broad market measures of intermediate and long-term trend health, just to see where we sit and how much damage was actually done under the surface. 

 SP500  SMA's
 Here are the 5,10, 20, 40, 50, 100, 150, 200 DMA's. Price has been filtered to show only the general trend direction. What is notable to me is that ALL of the moving averages are sloping negative. During a normal pullback only the fast averages (5,10,20 DMA's) really fluctuate while the longer-term averages (100, 150, 200 DMA's) stay aligned with the dominate trend.

We last saw this formation in 2011 and 2008, when the moving averages were sloping down together. This isn't always a sign of big trouble, but when this formation is in place it suggests the trends on multiple time frames are pointed down and risk becomes elevated.

Monthly Bear Market Signal
To determine my overall posture on the market I use a signal for long-term Bull and Bear markets. Its a combination of 3 signals using monthly charts. First is a multi-year trendline violation, second is price above/below the 20 MMA, and third is a crossover of the MACD indicator. Only when all 3 signals are pointing the same direction do I consider changing my bias.

Currently 2 out of 3 signals suggest a trend change and the remaining signal (likely the most important) has price sitting right at its 20 MMA. This Monday 8/31 will be the last trading day of the monthly bar. The SP500 will need to gain 4 points on Monday or this signal will be valid.

There have been 3 Bear Market signals in the last 15 years:

1. November 2000 led to a 23-month correction and -41% further decline
2. January 2008 led to a 14-month correction and -51% further decline
3. September 2001 led to a low being set the next month and -5% below the signal close

The first two are legendary signals as they avoided more than 80% of the downside in two of the worst bear markets in history. The third signal in 2011 proved to trigger one month before the low of the decline and then kick started the 3-year bull market that is currently in motion.

Looking back as far as 1977 there have been 5 other occurrences of this signal:

1. May 1977 led to a 14-month correction and -10% further decline
2. August 1981 led to a 12-month correction and -18% further decline
3. May 1984 led to a 2-month consolidation with no further downside
4. October 1987 the real "Black Monday" triggered this signal. It only lasted 2 months but another -12% of downside followed
5. August 1990 led to a 2-month correction and -8% further downside  

Going back to 1977 I count 8 signal events and NONE of the signals set the low for the correction. Some were certainly worse than others, but the point is the signal never marked the absolute low. On the bright side EVERY signal eventually led to substantial uptrends once the decline ran its course.

It should go without saying this is a signal to be heeded. Monday's close will be the signal day, so I will be watching close and update followers to its status. 

SPX Weekly Timeframe
Since 2012 the SP500 has been in a clear uptrend of higher highs and higher lows. There was one attempted break in October of 2014 but that then resolved right back to new highs. We currently sit in a very similar position to last October. The question will be does this decline resolve exactly the same and just race back to new highs. Or does the next rally fail to make a new high and set a LOWER high.

Take a look at momentum for the Weekly timeframe going back to early 2008.. Here are the times when momentum and trend (as measured by MACD) broke below the zero line:
 1/4/08 sparked a 53% decline over the next 14-months
 7/2/10 marked the low of the 2010 correction
 8/5/11 triggered on the breakdown of the 2011 market correction
 8/21/15 signaled two weeks ago prior to this Monday's event

While the results for this signal are not very conclusive, it should be noted in the 3 previous occasions each required multiple weeks of base building and consolidation before developing any sustainable upside action. When the trend is damaged in this way it takes time to work off the signal.  

VIX > 20
The VIX is the ratio of Put options to Call options being exchanged. When the VIX moves up it means traders are positioning in a higher ratio of bearish (Put) bets and therefore puts pressure on the market. The key fulcrum point in the VIX is roughly the 20 level. When the VIX is below 20 the market tends to trade smoothly and bullishly. When the VIX expands above 20, fear is elevated and the market undergoes corrective activity.

As you can see in the chart above that in late 2007 the VIX moved above and mostly stayed above 20 well in advance to the major market meltdown in 2008-2009. It has traded mostly below 20 since mid-2012 through this recent leg of the bull market. The last two weeks saw a strong move above the 20 level. Now the question becomes does the trend now shift to remaining above the 20 level similar to 2007, or does it slip back below 20 and the bull market resumes?

This will be one to keep an eye on as we go forward.

Just in case the rally the last few days has you feeling overly bullish or impatiently left out, here's a reminder the environment we continue to be in:

Ulta Salon (ULTA)
ULTA initially rallied Friday morning on strong earnings and raised guidance. The stock traded as high as $169 shortly after the open. However strength was sold into and the stock finished the day at $159.

I have been seeing this behavior a lot recently, especially the last two quarters. Companies that are producing strong numbers are being sold on the announcements or shortly after. This behavior is typical of a distribution phase as large funds unload positions into the liquidity caused by the euphoric buying event.

This is NOT a symptom of growing, healthy markets. It is a symptom of an aging trend and lessened demand from big investors. When big investors sell is when markets correct and trends change. The "sell into strength" trend has been bothering me for some time. How many times did we see it this quarter? DIS, AAPL, SBUX, AMGN, GILD just to name a few. When the strongest companies reporting the strongest numbers cannot rally, its a sign of caution that should not be ignored. 


Are there any names setting up within our Large-Cap universe? The pickings are slim but here are a couple we will be watching:





Honestly this is as good as it gets in our Sector Top 10 universe of stocks. The few most promising setups are failed breakouts trading within their prior ranges. That's not encouraging.

Out of 90 total stocks we watch for this portfolio only 11 are currently trading above their 20 WMA's. Some of the stronger names out there are simply too loose now due to this week's wide trading range that it makes a high probability setup almost impossible to find. We have no choice but to watch how this plays out over the next several weeks. Once a new floor of support is built, then many new setups will begin to take shape. 

Thanks for reading

Thursday, August 27, 2015

Utilizing Multi-Timeframe Analysis for strong entry (ICLR)

Its been a challenging market. During corrections I like to look for stocks that are holding up better than the market averages. ICLR fits this description. Due to the challenging conditions, risk management is our primary focus with any new trade entry. We will keep stops tight early on to see how this behaves over the near term. Should we see a quick rollover from our entry we will step aside quickly. However should things stabilize we will be positioned in one of the strongest stocks in the market.

Stops will be placed below Tuesday's low at 75.67.

ICLR (weekly)
A strong uptrending stock, pulling back to retest its prior range resistance level and rising 20 WMA. Despite the pullback in the stock, RS vs $SPY is making new highs; the sign of a leading stock.

Price has responded by rallying strongly off new box support and the rising 50 DMA. Bouncing at the 50 Day shows institutional support for the stock.

(30 min bars)
The intra-day trend has been lower since early August. However the last 3 days have been constructive showing two consecutive higher lows and today closing at a higher high.

Monday, August 24, 2015

Whoosh Continued

That was a doozy of an open today with the Dow plunging 1,000 points early on. If it's not clear that risk has elevated then you are simply not paying attention. We came into the week with just over 70% in cash and with 4 remaining holdings: $SBUX $UNH $FB and $HD.

This is a special mid-week post because due to the extreme risk that is currently present I have adjusted my holding time frame from Weekly closing prices to Daily signal triggers on remaining holdings. 

While I don't like to adjust rules to fit the near term outlook of the market, the current environment suggests much more caution than we have grown accustomed to. While the market did bounce furiously shortly after the open, all but 1 of our remaining holdings were below their key stop levels.

Rule #1 in my investing process is Capital Preservation. When the SP500 declines 100+ points in 3 trading days and then follows with a 77 point decline, the time to remain hopeful for strong upside is gone. Due to the potential acceleration to the downside, holding for an arbitrary time gets replaced for more prudent risk management.

I don't take my process lightly and to make an adjustment on the fly like this is challenging for me. But preserving your both mental and physical capital is more important that picking the exact timing for investments. When in doubt get out. We can always reenter our positions should things stabilize and new entries set up. We will then be in a clear mindset and ready to rotate capital back into the market.

 Three of our remaining four holdings broke stop levels today and frankly we were lucky to get the closing prices that we did considering how they traded early on.

Exiting SBUX

 I exited SBUX last week in more aggressive accounts and today was enough to prove that the time to step aside for our conservative accounts had come as well. Seeing SBUX down more than 20% shortly after the open hints at the possibility of what could happen to even the strongest stocks should the market continue lower from here.

Despite the decline off the highs we are still walking away with a greater than 20% gain since late last year. I'll book that and move on.

Exiting UNH
 UNH blew out the lower support of its multi month range today. Despite the stock falling all the way to $95 we received quite the gift by exiting back above $110. Could the low have been set today? Sure it could have. You just won't see me betting my hard earned gains to find out. Should it stabalize and turn back higher I would be interested in being a buyer above the range highs near $125.

UNH has been our longest tenured holding for the Lg-Cap Portfolio. Entering on 2/28/14 we are able to achieve a gain of more than 40%. That is plenty for me at this point and I would be happy to reenter should a new trend develop.

Exiting FB
FB dove through our stop and prior breakout level. There is really no question here that the prior breakout has failed and the stock is back in its year long trading range. The market gave us a $10 gift off the lows of the day and I will take it.

Based on our entry at $83.80 on 3/20/15 we are walking away here with very little loss to our principle capital.

Remaining Holding HD
HD managed to hold above its $112.17 stop level and I guess is still holding trend (if you want to call it that). We will see what tomorrow brings, but for now we will maintain out position here until the market takes us out.

--We saw a combo Black Monday/Flash Crash today. Behemoth stocks like SBUX, UNH, FB that drop 15+ % in less than 5 minutes should give you pause. Yes it certainly could be the bottom, but if its not are you prepared to gamble here with your savings? I'm certainly not. I would much rather be operating from a position of strength when the proper support bases signal entries.

Something notable to me is the push-back I have received over the last couple weeks with regard to selling AAPL, DIS and now exiting mostly our entire portfolio last week. It seems that many are too quick to want to jump back into the market here after the pullback. The point I would like to make is that healthy pullbacks tend to come on declining trading volumes after strong uptrends. When the pullback comes on vicious declines where huge amounts of volume is present it is not time to be the hero.

The market is an opportunity maker. There will always be a new opportunity around the corner should you have enough capital and confidence to participate. I said over the weekend the worst case scenario for exiting Friday was that the market could rally and we would look foolish. That is still the case today but due to the current environment I'd rather look foolish with my capital than look bold and be broke.

The market is about living to fight another day. We have done a great job at managing risk and trend. I see no reason to fight this market and force trades that simply are not there. You don't have to be the hero that picked the low. You simply need the capital and confidence to take advantage of the next low risk/high reward opportunity that will come at some point in the future.

Thanks for reading.

Saturday, August 22, 2015


Ok I believe now. I wanted to see the strongest stocks taken down and the market obliged this week. It was a real beating across the board with the SP500 declining 133 points peak to trough. Thursday and Friday did the real damage and the declines came on heavier trading volume.

SP500 (daily)

I haven't been focusing on the broad averages for much of this year as they have been mostly irrelevant to my longer-term winning uptrends. I manage risk in individual leading stocks and as of Wednesday afternoon everything was following the same playbook.

By Friday's close however massive technical damage was done to our holdings and we have been nearly cleaned out. This week we saw exits for BMY, GS, WFC, AIG, GILD, and HON. We are only left with SBUX, FB, HD, and UNH.

Exiting BMY

Exiting GS

Exiting WFC

Exiting AIG

Exiting GILD

Exiting HON

We cannot worry that we may be selling at the bottom. All pullbacks and bear markets start the same way. It's always some scary news and price comes into support levels. How they respond at those support levels is what determines whether a pullback is simply a buy able dip or a major violation damaging the trends in place.

The SP500 had significant support levels at 2080, 2040, and 1980. The market sliced through all three levels this week meeting no resistance at all

Could the market turn and rally right back from here? Sure it could. That's the worst case scenario right now; If the market rallies right back to highs we will have sold at the lows and looked foolish. But we have our capital intact and ready to deploy into the next round of leading stocks should we receive new entry signals.

We manage risk, that's the best we can do. When stops are triggered we don't qualify them in terms of causation. We don't say "oh that was just because of China fears", or "traders are overreacting about the Fed". We simply honor the signal and exit the position. 

Discipline and sticking to your process is what works over the long-term. Its not critical that we adjust our strategy to maximize our profits on this particular round of trades. These have very little impact on our long-term returns. They are the just the last 10 trades out of the next 10,000 that we will make.

When the market tells you something its very important to listen and respond. Up until last week all of our positions were in the green and were still trending nicely. After this week however most of that changed and lows were violated. We invest with an open mind, and stocks are only good when they are going up. The market is suggesting that Sellers have arrived and are now in control of the market.

Until this changes we will manage our remaining holdings and sit with large cash balances. Our allocations are currently 70% Cash and 30% Long Equities. YTD our Lg-Cap portfolio is now +1% while the SP500 is -4.2%.

Remaining Longs





Our survivors took a real hit this week as well yet are still holding trend for now. Should the market continue to see downside follow-through we will likely lose these as well. If however stocks can rally back as we have seen so many times before, these should be able to establish as the new leading group for another leg higher.

Thanks for reading

Friday, August 14, 2015

Listening to The Market

This market certainly has people shaken up. I hear traders very hesitant to put money to work due to "challenging conditions". The majority of investors and traders have been positioning for a substantial correction that is supposedly just around the corner.

People are talking recessions, Federal Reserve implosions, global market chaos, etc. These "rationalizations" for the current environment are very typical responses of confused and abused investors. In my experience, when I am losing I tend to focus harder and watch more intently. It is also my experience that doing so actually makes the situation worse causing even more confusion and angst. 

Those voicing the biggest complaints are most often the ones stuck in the lousiest positions. They have been caught out of position because they expect a particular outcome to play out. They then tell you exactly why anyone thinking differently is doomed to repeat the great investing failures of the past.

I follow Relative Strength and frankly this market hasn't been that bad at all. I cannot for the life of me justify exiting leading positions based on this "underlying weakness". It appears to me that these bewildered investors are simply looking for ideas in the wrong places.

I have no illusions, I realize that even the strongest leading stocks will come tumbling down. But until I see it in my individual holdings I will continue to seek out the strength that many fail to acknowledge exists. 

We are sticking with stocks in uptrends, its really as simple as that. I don't care if the SP500 has been sideways for 7+ months. It hasn't mattered thus far when we have held SBUX, FB, AIG, DIS, BMY, UNH, etc. I let individual stocks tell me when to adjust my exposure, not someone who has owned Cash, Oil and Gold Miners for the last year.

Individual stocks and trends get a say in my style of investing, its not based on a Top Down methodology. If a stock is making new highs while the market is pulling back it should tell you everything you need to know about that stock and trend.

We had one new entry and one exit for our Lg-Cap Portfolio this week. We let the trends do the talking so we are entering Home Depot (HD) and exiting Disney (DIS)

Exiting DIS
Disney couldn't muster even a bounce and followed through to the downside this week. The Friday close below 107.65 set the lowest close for a week in the last 18 and is below our trailing stop. We will step aside and book our 15% gain since November.

Entering HD
 Home Depot finished at new all-time highs and did so emerging from a 24-week consolidation. Our indicators are aligned and confirming the price breakout. Earnings will be announced Tuesday which should cause some short-term volatility. Due to earnings we will widen our stop a little further and position size against the 109.55 swing lows. A breakdown there would suggest much more caution is needed going forward.

We are not uncompromising bulls or dug in bears, we are simply taking what the market gives us. This week its giving us an exit of a longer-term winner and a new entry into a potentially strong risk/reward position. By listening to the market we are able to confidently rotate our capital into the best opportunity for long-term success...By listening to the market, not opinion and not our feelings.

Hearing The Market?

Here are some reasons why the majority of investors may feel so negative toward their stocks:


We received a sell signal on 9/5/14 (here)




These are all widely held stocks and well known companies. To see companies like this in severe downtrends has got many people worried. And rightfully so. There has been a lot of wealth busted up during the last year in these names. But this is only one side of the story.

Had you been using a Relative Strength rotation strategy you could have instead owned these names over nearly the same time frame: (disclosure I hold positions in each of the following stocks)





People are very quick to listen to a tip or investment advice from someone they have hardly met, yet they won't even consider listening to the market's opinion. To be successful in the market you need to be in tune with the current reality. There are very few who can foresee what's to come in the future, trying to project your views on what should and shouldn't be can be a very costly endeavor. 

I have found it much simpler and profitable to adjust and react to the market that's in front of us rather than the one we think we should have.

Thanks for reading.

Sunday, August 9, 2015

Coming For the Generals

Markets continued to slop around this week. This should be nothing new to readers here, churn and burn has been the m.o. all year. Range bound markets love to catch you leaning just a little too far to one direction. It's not that we've been recently leaning too bullish, we simply haven't been getting exit signals for stocks we've owned since last year. Our leaders have managed to hold up relatively well so far, but this week we saw that change.

Declining leadership has been discussed ad nauseam in 2015 and this week we actually saw some big bull market leaders come slamming down. Last week we discussed our exit in AAPL, when AAPL breaks trend I take notice. When a name like DIS declines 10% I get a little queasy.

Early Friday morning it looked like we would be receiving 3 more exits (TWX BMY DIS), yet 2 of the 3 recovered enough to survive at least another week. We did receive exit signals for TWX as the beating it took after its earnings Wednesday was too much to overcome.

Exit TWX
This is something that you don't want to see if you are long a stock. TWX had all the makings of a strong rally candidate: Large constructive base at multi-year highs, a breakout above those highs, and outperforming relative strength. All these factors were aligned when Time Warner announced better than expected earnings Wednesday morning. The market was up 1% early on Wednesday yet the stock was sold hard losing 10% on the day.

When a stock is setup for a strong breakout yet cannot rally on "good news", it is a sign that risk is elevated. This is something that we focus on here, we want to be positioned in stocks that are behaving well and showing strong risk/reward. When the risk suddenly out sizes the reward we step aside and wait for a better opportunity.

TWX isn't dead in the water here however. On the monthly timeframe it is still holding its "bull market" support line, the 20 MMA.
The 20 MMA has held as trailing support for much of this stock's tremendous rally off the '09 lows. I will keep it on the watchlist to see how it handles this longer-term support area in case this was simply a fake out move within a longer term uptrend.

But for now we sell and await a new signal.

DIS and BMY are getting too close for comfort:

Disney really took a thumping this week. A move we have not seen the likes of in a number of years.
It did manage to hold the swing low support at $108 so we are still with our position, but the environment has seemingly shifted.

Taking a glance at my indicators we saw a volume move that has not been equaled since 2011 and 2008. In both cases the stock continued lower for some time. Our trend momentum indicator, the MACD, appears to be putting in an intermediate term top. Relative Strength vs SP500 is confirming price and holding its uptrend for now.

Both Volume and Momentum have shifted bearish with this week's action, yet Price and Relative Strength continue to hold uptrends. For now we will stick with the position as we have not seen the lower low to invalidate the trend. Price is the final arbiter, we always default to it rather than reacting based on an indicator. The indicators do have value though in alerting us to a potential problem ahead. So it tells us we now need to pay extra attention and be ready to act should we receive a sell signal from the market.

What makes you successful over the long-term is remaining disciplined in your process and sticking to a winning strategy. Our stops are in place for a reason, not only to take us out of a position, but also to keep us in them through trend completion.

BMY took a solid test of support this week and is now below a declining 20 WMA. There should be substantial support in this area, our stops remain just below. Relative Strength broke a year long uptrend which suggests a weaker trend is likely. We will simply need to watch this closely for any further downside follow-through.

FB and SBUX remain strong

Facebook hung in there this week and managed to finish higher. We can now safely trail stops to the 85.23 level which represents the prior all-time highs from Spring and where support held in July. A break of this level, which would also break the rising 20 WMA would be enough for us to comfortably step aside until a clearer picture emerged.

Should the market find its footing soon, FB is setup to remain one of the few leaders left in this market.

Even the mighty SBUX came under pressure this week. It wouldn't surprise me at all if SBUX began a bit of a correction soon, its been absolutely relentless since November. But we never can know where we are in a trend so we won't play the guessing game. We will raise our stops a tad up to the $52 swing point and give this plenty of room to take a breather.

After seeing AAPL go down and the potential of other leading stocks DIS and BMY to follow, should SBUX come under pressure I would become quite concerned with the health of the overall market. The strongest market leaders are always the last to give way before a major correction. When they do finally break, things can devolve in a hurry. The last two week's price action in the true bull market leaders has got me on full alert.

Financials continue to hold up relatively well 



The Financials continue to carry this market. All three of our XLF positions are holding their respective breakouts. Until this changes we will stick with the leading group and let the market tell us when its time to adjust.

Healthcare saw some pressure, but mostly remains strong.

GILD remains constructive as it has held above its prior highs while the market has struggled. We can slide up our stops to the earnings low of two weeks ago. A break of 108 would put me in a much more neutral stance.

UNH held up nicely this week but its still within that pesky 2015 trading range. Momentum still favors more consolidation within a larger uptrend as it has not bottomed out yet. As long as UNH can hold the support lows at 113.20 I think this will eventually create another strong buying opportunity.

And surprisingly HON is just hanging tough. 

Honeywell was cool as a cucumber this week and now sits back at its upper range. Again if the market can cooperate a bit this one has a chance to push to new highs soon. Nice resiliency.

Due to our recent stop outs we finally have some new cash to deploy should opportunities arise.
This is exactly what I mean when I discuss rotation and relative strength as a risk management strategy. The market tells us when and where to position our free capital. When the market is vulnerable we will be seeing exits triggering and not many new setups emerging. This naturally moves us into a more defensive position. We can rest easy while holding extra cash, knowing that when the market regains its footing there will be a plethora of new high reward opportunities presenting themselves. Until that happens however we will continue to let our existing positions run and manage risk as it comes.

Here are a few names I will be watching in the coming weeks:





Thanks for reading