Welcome to 2016

Anyone expecting a change in the calendar would bring a different market than the one we had in 2015 was sorely mistaken. Granted the turn of the New Year can bring about some changes, but in terms of market trends and price action it matters not.

The SP500 declined -6% to open 2016, the worst first week to a year in the history of the stock market. That's saying something considering the Dow Jones Industrial Average has been around since the late 1800's; we saw more than 100 years of history made this week. If you have been following along and heeding my advice, you likely did not suffer this same fate. For months I have been preaching patience and high cash balances. This still remains the case. Granted the market is oversold on a short-term basis, so we may get a reprieve from the waterfall selling we saw this week, but its still no sure thing.

It's my opinion based on the current price action that the broad market continues to be in a large trading range. The boundaries of which at 2130-1870 will tell us if this will continue or if something is about to change. The story individual stocks are telling is we will see resolution of this range lower. I'm sure you have been inundated with stats discussing the average move of most stocks in the SP500 during 2015, most are locked in substantial downtrends and continue to point to lower prices.

As we saw following Friday's Jobs Report, any and all rallies continue to be sold. This is very typical as price moves from one end of a range to another. It seems relentless at the time and participants become heavily biased in which ever direction price is moving. This sentiment has been on display for much of the last 6-months. Investors became very Bearish in late August, flipped Bullish by early November, and are now back to low levels of Bullish participants. I have two things to note on this topic:

1. Sentiment in Ranges tends to be Bullish near the highs and Bearish near the lows.

AND

2. Sentiment follows price, not the other way around.

In this business only price pays. If the market goes against us we lose and if it goes with us we win. If you get too involved in year-end predictions, historical sentiment and seasonality, and everything else "you think you know", you will be focusing your attention on all the things that don't matter as to whether or not you make money. Rather than listening to elaborate theories about where the stock market will be a year from now or how stocks are "cheap" here, focus on the one thing we all share equally in real time: Price. The market will tell you what its general intentions are, and it pays to listen.

We've seen for months that this market is not healthy or moving in any sort of discernible trend. This has caused us to take a more defensive posture with our portfolios and kept us out of any real trouble.

SP500 Weekly

    The trend is definitely weak. Either its flat or transitioning lower depending on your method of determining trend. Something that can help determine where the overall trend in the market is leaning is to watch the Weekly MACD. When its > 0 the trend is said to still be positive and up-sloping. When MACD < 0 it is suggestive of a downtrend. What we have seen recently with regards to momentum and MACD is that the October rally was nothing more than a counter-trend bounce and this week's move is the beginning of a new trend lower.

Conclusion: The best possible scenario is we are in a wide and noisy trading range. Worst case scenario we are beginning a new trend lower. Either way this is not a market to be doing very much; a heavy cash balance is typically the best way to handle uncertainty like this.

Our Lg-Cap Portfolio only declined -1% this week vs -6% for the SP500, mainly due to our high cash position and Short American Express, which we closed this week. We did receive stops on AIG as well. This leaves us currently with 70% Cash and Long $UUP, $COST, $LMT, $FB, $GOOGL, $GE, $LOW.

Exit Short AXP

 Make no mistake, this remains in a firm long-term downtrend. My exit has nothing to do with the trend in the stock. I owned Jan 67.50 Puts which will expire this coming week. The fact that we got this huge move (AXP dropped 10% this week) in front of the expiration was a nice gift that we will gladly take. Shorting stock should be treated a little differently than being Long. When shorting, especially with options, its often best to close positions after strong moves to the downside. The likelihood of the decline continuing are still high, but due to our timing with the options contracts taking this week's gains was worth doing.

We may revisit this name again down the road, but its had quite a waterfall move and will likely base at some point soon. We gained +300% on the capital invested on our Put options and that made up for the rest of our Portfolio's losses this week.

Exit AIG

 This was an easy exit for our strategy. The stock failed the key swing point at $59 strongly and its time to step aside.

UUP

 UUP is our largest long position at almost 7% of our total capital. The setup remains strong and this week made new Relative highs vs SP500. Soon we can trail stops to just under the current consolidation at 25.30, but we will need a higher high to do so.

COST

Costco came within cents of hitting our stops. For now we will give it a week to see what it can muster.

LMT

Lockheed held up relatively well this week and remains comfortably above key swing lows. Stops are set at the prior breakout level. Above that area this is still a fine hold.

FB

FB took a hit this week and looks to be in fairly rough shape. We are giving this a ton of room as we simply have no swing point to trail stops to. I was looking for a weekly close above $108 to trail stops, but we never got that print. Long-term this trend is not invalidated until the prior breakout fails and I expect buyers to step in at some point to defend this substantial winner from 2015.

GOOGL

Google could be in a similar boat as Facebook except that it did make a couple higher weekly highs through this recent consolidation. Our stops are placed at the earnings gap support from 10/23. The case could be made for giving this a wider stop, but I am happy keeping this one tighter considering the potential "failed breakout" in motion from 12/29.

GE

GE simply has no support on the weekly chart to suggest trailing stops. Unfortunately we might just have to watch this backslide to our original stop level. But with a rally this relentless, I expect many missed the initial move and will be looking to step in at some point soon. Where that level will be I do not know. But until we have some identifiable support to work with, we've just got to let this one play out longer-term.

LOW

Lowe's took a turn for the worse this week and is just 1.5% above our stop level. I was asked on social media a couple weeks ago why I didn't have my stops at $74. My response was that the $74 swing low, while appealing, had not been confirmed as a viable swing low because we had not seen price make a higher high following the recent low. This week's move came right through that level and stopped out anyone overeager to place that stop. Now that may prove to be a shrewd move on those traders behalf should the stock continue to sink. But for my strategy and timeframe the trend will not be invalidated until the confirmed swing low at $70 is taken out on a weekly basis.


An important takeaway from this week's action is to know that violent moves do happen in the market and if you are not properly prepared to manage risk, risk will become a reality for you. During corrective periods the weaker names will be cleared out first. Those left standing are the true market leaders and will respond strongly when price balances back out.

The fact is no one knows if this devolves into a full blown bear market or if we just rip right back to the highs. All we can do is honor our stops, hold the strongest names and let the market determine how we are to position going forward. What this market is saying to me is that holding high cash balances continues to be a prudent move, while also sticking with the strongest names as long as we reasonably can.

Thanks for reading
-ZT