Lg-Cap Portfolio Review

The market extended its winning streak to 6 straight weeks. When this rally will tire is anyone's guess. Since October its ascent has been relentless. The SP500 is now trading 12% off its low from 9/29 and is just under all-time highs at 2099.

SP500 Weekly

I have to imagine we will see a pullback from these levels soon. But I've been expecting that to happen for almost a month now, so who knows where this all goes.

Something notable is that this is the first week in the last four that I have not received any new Lg-Cap entry signals. What I am seeing are leading stocks (FB, GOOGL, AMZN, NKE, MCD, etc) quite extended above substantial base support. This means the risk/reward in these names is becoming lopsided and consolidation is needed. Opposite the extended leaders are the laggards that continue to rally strongly in a counter-trend way and still have declining weekly moving averages. These stocks are now back to significant resistance levels (SLB, PG, EOG, CVX, CAT, DD, AAPL, etc).

What I will be watching for is how all these stocks handle themselves when the market does turn back to the downside. Markets do go both ways folks; not just up or down, but rather up AND down. Can the leading stocks hold near their highs and simply work sideways while they digest their gains? Also can the lagging stocks form higher lows on the next pullback or do they just rollover and make new lows? These are my questions going forward, until we have these answers its best to be patient and let the market come to us. Now is not the time to chase stocks that have rallied for 6 straight weeks. We will need to see prices supported on a pullback to prove this isn't part of some elaborate maximum pain scenario where the market continues blowing both bulls and bears out of the water.

With the Fed announcing that they will likely raise interest rates at their December meeting, markets should have a nervous and volatile month or two ahead in anticipation. Its not that a rate increase of .25 basis points will impact the economy, but the psychology on market participants will be shifting from one of an easy monetary policy to that of a tightening policy. This I expect will cause increased gyrations in asset prices for the foreseeable future.

One group that stands to benefit from higher interest rates are the Financials and they showed strength following the stronger than expected October Payroll report on Friday. Here are a few names I will be watching:

BAC

WFC

JPM

AIG

If economic data continues to come in strong, these will be names to have on your radar. A stronger economy suggests a more hawkish Fed and therefore Financial stocks should benefit.

Our Lg-Cap Portfolio remains 30% invested and 70% cash. This allocation suits the current environment for my timeframe. Granted we've underperformed over the last month, but this market is still suspect and not behaving in a healthy way. We continue to see tremendous swings in both directions leaving many stocks extended and messy for now. Some tightening price action would do wonders for the majority of charts out there and allow for more favorable risk/reward entries.

COST

Costco keeps motoring higher along with the market. A multi-week consolidation would setup the next leg nicely.

LMT

Lockheed saw a pullback following its reversal bar last week. A pullback near $200 would be harmless to the trend.

FB

Facebook shot higher after its strong earnings report. There was a lot of noise in the media this week regarding FB's elevated price, it now has a market cap greater than General Electric and Amazon. The commentary was the opinion that the valuation of Facebook is absurd, in a way. Without saying it, they were saying it. This kind of distraction is exactly the thing you should be ignoring when it comes to your market positioning. All we care about here is trend and the market's reaction to positive/negative catalysts. Is the stock making us money? Yes. Then we continue.

Could the stock pull back? Or course it could. In fact its quite extended from its major moving averages and some consolidation would do it good. But this is why we use stops. To manage risk and to let the market tell us how we should be positioned. You don't need to be listening to punditry and social media for whether you should continue holding your stock positions or not. Let the market do the talking and follow its lead. FB is strong here and is making new all-time highs, what more could you want from an equity holding? 

GOOGL

When it comes to being extended, GOOGL has little competition. This has been absolutely vertical for 6-weeks. The long-term patterns are in place for significant upside in the future, but in the near term expect some back and fill.

GE

GE continues to press multi-year highs. Strong follow-through after a breakout is a very positive sign. But again for a company this large to rally over 20% in a month is a bit much in a short period of time. The recent breakout has long-term implications for higher prices, we will just need to work in that direction a little slower than our current pace.

Short AXP

AXP was able to post a green week along with the Financial sector. However a quick glance at the rest of the Financial group and you can see an obvious difference compared to AXP. This stock is routinely making lower lows and remains trapped under a ton of price action from the last couple years. As long as it is below the $78 resistance level, I like this as a short in my portfolio.


Huge breakout for the US Dollar

 The weekly breakout for the Dollar is fantastic. I love everything about this chart. Its an easy long with stops below 24.40. I will be deploying a portion of my free cash to take a momentum position in the $UUP.

It appears the Dollar is beginning a new uptrend after consolidating the huge gains from 2014. I could even say that this is potentially the start of wave3 after the completion of the wave2 correction.

Another surge higher here will act as a headwind to multinational corporations that comprise the majority of the SP500. This will be an important indicator to watch, especially following the plethora of bottom calls in commodities such as Oil and Gold.

Thanks for reading
-ZT