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:

CVX

FCX

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

WMT

IBM

MU

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)

ALK

AMZN

SBUX

AIG

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.
-ZT