Whip it Good

It was another volatile week for the markets and mostly in a straight line lower this time; the SP500 declined 3.7% from last Friday's close. With next week's Fed decision looming large, it appears many are readjusting their risk to account for the uncertainty of an interest rate increase. Whether you feel this action is justified or not should have little bearing on your positioning. We must continue to listen to the market and be positioned in accordance to what its telling us.

SP500 Daily

The "higher range" I've been watching for several weeks was broken to the downside on Friday's selloff. Also the breakdown came from a failure to hold the 50 DMA for the first time since October.

SP500 Weekly

The weekly bars show more deterioration. The 20 WMA is now declining again and price has clearly violated that line. It also appears we are setting a lower high following the lower low in August. Lower lows followed by a lower high is the definition of a trend change.

While most are clamoring for the dramatic, either positioning for an epic crash or a melt-up rally, I think both may be disappointed. As far as I can tell this market remains in a trading range between the highs at 2,135 and support near 1,860. Until these borders are broken my approach will be based on this range and my risk exposure will reflect the environment.

I won't be ignoring strong risk/reward setups in the strongest stocks, but I also won't be in a hurry to max out my exposure until we have more clarity of trend. My research suggests new positions have a much higher probability of success when the broad market is trending higher. When this trend is not in place I make sure new entries reflect the lower odds given by the lack of trend. I will size new positions smaller in these lack of trend (or downtrending) periods. 

It's not all doom and gloom though, according to the historical seasonality of December going back to 1928 suggests we are nearing the strongest trading period of the year. Here is a chart that was shared on Twitter that I found of particular interest:

Chart posted by @aandragon. 

Now this doesn't mean it has to happen of course, but it does give some perspective to the potential positive that could come in the last couple weeks of the year. 

Regardless of which way we come out of this week's move, I have little doubt the moves will continue to be volatile and challenging to trade. So be prepared for more of what we've seen so far in 2015. 

I remain positioned with at least 50% cash in all accounts and I see no reason to change that at this point. Currently I'm seeing many more breakdowns than breakouts. My review of the S&P100 stocks showed further deterioration this week dropping to just less than 3-1 downtrending vs uptrending names. I know many don't feel it's necessary to watch the indices, but the fact remains if the majority of stocks are failing to trend higher the market will have a headwind. To give some perspective on how this breadth divergence has manifested itself in the price action, we haven't seen more than 50% of the S&P100 stocks in uptrends since the week of May 15th. That reading came exactly one week before the all-time high for the SP500. From that point in May, breadth has continued to trend lower and stocks have performed weakly. 

Again these breadth divergences don't mean a rally is impossible, it simply means the odds of that occurring are less. A big part of our success in the markets hinges on us taking the highest probability trades possible. Studying your past trading performance will go a long way to clarifying exactly when your strategy is at its best and worst. Knowing when to be aggressive or conservative is a very important concept to understand. 

You don't always have to be fully invested. Sometimes we will miss moves by being more conservative, but if the odds don't support an aggressive posture it's important to follow that. Following the longer-term odds will only add to your positive expectancy over time. Since we know the market will always be there, there is little reason to force an unfavorable trade when we can wait for the very best opportunities.

We had no changes to our Lg-Cap Portfolio this week but there are a couple things to note. Costco missed their earnings estimates and AIG broke its 20 WMA and is testing stops.

COST

 The response to Costco's recent earnings were not positive. The stock posted an engulfing bar on higher than average volume. I said last week that with the recent run the stock has had a pullback/consolidation wouldn't be unexpected. In fact a retest of the breakout at $152 would still be quite constructive to the longer term picture. For now there is nothing to do but give it some room. I would expect buyers to show up fairly quickly as this remains a quality name and strong trend.

AIG

AIG gave about as negative a reaction for a new entry as possible. From Monday morning's opening gap lower, the stock had a non stop skid into our stop level. It was able to hold just above $59 to finish the week, but this will be on close watch for a stop out going forward.

Other than these two moves there wasn't much notable from the rest of our holdings. Most held up quite well and are still showing strong trends. If we see more deterioration in the next couple weeks I'm sure more of our holdings will become vulnerable, but we will cross that bridge when we come to it.

Our watchlist took some damage and is now much more narrow. Potentials ECL, GILD, WFC, CMCSA, and UPS all need more stability before they will make the cut. Our most hopeful names to watch are PEP, BAC, INTC, and BA

PEP

BAC

INTC

BA

Thanks for reading
-ZT