Lg-Cap Portfolio Review

The SP500 Monthly chart remains the one to watch. Next week will close the March bar and how it finishes in relation to its long-term moving averages will be important.

In the context of the longer-term view this remains a range-bound correction rather than a bear market. Testing the underside of the 20 Month SMA remains a major obstacle for the uptrend to continue. Generally speaking the market is said to be in a bull market when it is above the 20 Month SMA and a bear market when below. 

The trend of the top 90 stocks in the SP500 that are trading above their rising 20 Week SMA's continues to strengthen and this week printed its highest participation rate since May of last year. Now just less than 50% of these stocks are above +20 WMA's. We saw a strong positive divergence in our trend model from the September and February lows. Now the trend is improving but is between both oversold and overbought levels. Markets remain mostly in no man's land.

We are at a crossroads after a sharp short-term rally within the context of a slightly lower sloping, volatile trading range. To become more bullish we would need to see the SP500 close above the 20 Month SMA and hold, then get through the key 2,100 resistance level.

This market has something for everyone with half the major stocks in uptrending posture and either new or pending breakouts. The other half are nearing very appealing risk/reward short setups. The recent rally has exposed many of the weaker stocks and extended them to overbought readings right back into key resistance levels.

My best advice going forward is to continue to be patient. Keep solid reserves of cash and have a list of names both long and short at the ready should a more definitive direction emerge.

Our Lg-Cap Portfolio is just under 40% invested. Long- FB, GE, PM, AEP, PCG, SHW, UNH;
Short- GD; 60% Cash.

The Portfolio is currently trailing the return of the SP500 YTD with a -2.4% loss. Considering the market lost -11.5% to open the year followed by a +12% surge to get back to even, I'm quite comfortable with our stable, defensive positioning. We never saw a larger than -3% drawdown during the decline and have been slowly stepping back in as stocks setup again. Should the uptrend continue we are positioned in leadership stocks and have Cash to deploy into new emerging setups. If however we see a resumption lower our high Cash position protects us from volatility and we have many stocks that we would look to short should we receive downside confirmation.

FB

Facebook made a new all-time weekly closing high. I'm very pleased with the leadership of this name and see no reason to rock the boat. I would welcome a consolidation/pullback so we could trail our stops higher. Currently there is little defined support for our timeframe above $95. We will continue to keep our stops out of the way and let this work.

GE

GE is nearing its multi-year highs and continues to act very well. Nothing much to do here but sit back and let this one work.

PM

Philip Morris could use a rest, but who knows? The multi-year base it is emerging from was massive and those can lead to explosive moves. I believe its still very early in this developing trend.

AEP

AEP set another all-time weekly high. We can trail stops to the breakout highs of the recent range near $58.50. As I have stated before I don't want to trail stops too quickly as I really like the long-term trend in place. We are in no hurry here.

PCG

PCG is bumped right up against its prior all-time highs, but we can trail stops to its recent breakout also. Until this consolidates more we will simply stay out of the way and collect our 3.4% dividend.

SHW

Sherwin had some big news early in the week by agreeing to purchase rival Valspar for $11 Billion. The initial reaction to the offer saw SHW decline more than 6%, yet by the end of the week most of the losses had been recovered and no harm was done to the recent breakout. Should we see some consolidation here for the next few weeks we may be able to trail stops higher.

UNH

UNH keeps rolling and once again made new all-time highs. I expect some consolidation soon and have some limit orders near $118 should we see any sort of pullback/retest develop. Stops remain far out of the way for now.

Short GD

Our only Short position saw some welcomed downside confirmation this week and appears quite weak relative to the overall market. We own May $120 Puts and will be looking to take half off on a retest of the lows. 





Watchlist- Long

XOM

MSFT

SPG

MDT

GOOGL

Watchlist- Short

GILD

AAPL

BAC

C

Stay open-minded to any possibility and keep your lists ready.

Thanks for reading
-ZT

Leaders, Laggards, and Bounces

Markets continued higher this week and the SP500 is now positive year-to-date. The rally continues to impress and is meeting zero resistance. Movements do remain volatile and the weekly trend remains lower. A notable gap was filled this week from the open of the year. January started with a plunge, leading to a 10% drop in 3 weeks. We've now recovered that move. 

In the spirit of the March Madness basketball tournament, an analogy for this market recovery is similar to a team falling behind and having to try to catch up. They play lockdown defense, full-court press, and exert tremendous energy to close the deficit. If you have ever seen a team make a big comeback run, it is clear it takes a toll on them physically. The market is no different. After a run like this often a period of rest is needed. Don't be surprised if the torrid pace slows and even takes a step or two back. 

SPX Weekly Gap Fill

Often when a major gap is filled a process of consolidation occurs. A very positive development would be to see the market digest this strong recovery and gap fill, then resume higher back above the gap zone. 

As we have discussed before gaps tend to be areas of interest and provide strong support or resistance. After the run we have had to fill this gap expect a breather in the near future to regroup. 

How the digestion plays out will be important to watch as well. The most constructive scenario would be to see several weeks of tight consolidation. If you recall the last consolidation in Nov/Dec was very volatile and sloppy. It proved unstable and then broke down, leading to the January swoon. To avoid a repeat of this pattern we will want to see a tighter range develop and allow the market to rest without large scale selling taking place. 

When we assess market strength it's important to be aware of what groups are leading the rally higher and their relative posture compared to other sectors. Typically in strong market environments participants seek risky assets that will grow quickly as economic conditions improve. In weak environments participants seek out safer assets that won't be as sensitive to economic changes, those that pay dividends and sell products people generally need regardless; products like tobacco, toilet paper, and electricity for their homes. 

This week we are going to review the strength and weakness present in the market and draw our conclusions as to whether this market is healthy or not.

Leaders

 XLU- Utilities

Utilities remain one of the only two major SPDR Sector ETF's to be regularly making new 52-week highs.

Short-term this group is extended along with the market but there is little doubt of the strength present. 

XLP- Consumer Staples

The other SDPR Sector to be at new highs. This group is composed of those very products people need rather than want. Companies like Phillip Morris, Procter and Gamble, and Coca Cola. When these stocks are leading the market it shows risk aversion rather than confidence. 

The long-term chart of XLP shows not only 52-weeks highs, but all-time highs. 

REITS

Real Estate Investment Trusts tend to be high dividend paying investments. Participants seeks these when they foresee lower interest rates and are in need of income generating assets. 

While this group is not making new highs as a whole, the action looks very similar to the environment in early 2014. 

XLI-Industrials

One very encouraging sign is the emergence of the Industrial group. These tend to be more cyclical companies that outperform when economic conditions are strong. To see them as one of the better positioned groups is a positive so long as it continues. 

The weekly chart has also improved as the XLI is now trading above its Nov/Dec highs. The 20 WMA is now sloping higher and we want to see that area hold as support on the next pullback.

Laggards

IBB- Biotech

Biotech, the clear leader of the entire bull market, currently cannot catch a bid. If the market were truly strong and participants were seeking risk, Biotech would be amongst the leading groups. The fact that it barely bounced on this recent market surge is notable and this space should be avoided until it can prove buyers are willing to step in. 

When people mention a "canary in the coal mine", Biotech seems to be sending a message. Despite the broad market strength, true "risk on" behavior is not present at this moment. 

XLV

Spinning off of Biotech, the entire Healthcare Sector remains quite weak. There remains a clear trend of lower lows and lower highs. While a group like Industrials just took out its prior swing high, XLV is currently > 10% below its prior swing. 

The longer-term view confirms this weakness as the group was rejected this week off a test of its declining 20 WMA. 

XLF- Financials 

There is a saying "as the banks go, so goes the market". Well banks remain relatively weak and also are more than 10% below the prior swing highs. 

While the Financials have bounced back with the recent rally, they are still trapped below major supply levels. Some of the most promising Short setups I'm watching are in this group. C, BAC, GS, are my favorites and are getting close to key resistance levels.

Bounces

No question the most exciting groups in the market right now are Energy and Materials. The questions everyone wants to know are have they bottomed? Will the rally continue? These questions cannot be answered absolutely. We have seen some pretty interesting volume activity recently that tend to resemble major bottoms. But in reality these are still just bounces off of multi-year lows...Bear market lows. There is nothing in the trends that suggest these moves are over. It will be necessary to see how the pending pullback plays out to determine how much or little damage has been repaired.

XLE

The Energy group has rallied sharply during this recovery, trading some 30% off its recent low. However as you can see they are nowhere near their Nov/Dec swing highs. There remains a lot of work to be done before we can call an end to this bear.

The Weekly chart continues to show a dim picture. This trend is firmly lower and it seems most have forgotten this. 6-weeks ago everyone was convinced Energy was headed down the tubes. Companies would be going bankrupt, Oil gluts would never be relieved, etc. Fast forward to today and now everyone is convinced the lows are in and the Energy Bull is on.

I just want to be sure we are checking our sentiment and not getting carried away. On January 21st I made this post why I was bullish on Crude Oil. It happened to be a good call, but in reviewing my process I am in agreement that this is most likely a short-term relief rather than the start of a new bull market. My thesis that Oil remains in a "lower for longer" environment is not deterred by the fact that Crude just rallied 50% in the last 6-weeks. And it shouldn't be influencing you either. We tend to be emotional beings with very short-sighted bias, getting bearish at the low end of a range and bullish at the high end. There is nothing wrong with changing your opinion when facts change, in fact its necessary for our survival in the markets. But there is an important distinction between changing your mind to a real change in the trend compared to simply reacting to an oversold rally in a lagging sector.

Hey maybe Oil and Energy has truly bottomed, that would be great. But if it has bottomed and a new bull market is beginning, you don't have to be the first one in or lunge at current prices. There will be plenty of chances to participate should the trend continue and we see a longer-term higher low and higher high establish itself.

XLB

XLB is arguably in a much better position than Energy and the other lagging sectors. The recent strength has brought it back to the Nov/Dec highs. A breakout above that level would obviously be a positive. The move has been steep in the last several weeks so some rest would be beneficial to sustaining a viable breakout.

The weekly chart still shows a bounce off a multi-year low. We will want to see the next pullback hold a higher low and then resume above the previous swing high. This seems to be on decent footing and could be a sector to watch in the near future.


Bottom Line: The current sector movement and money rotation continues to favor defensive, risk adverse behavior. It appears conditions are improving but there is still work to do. The recent rally has been sharp and relentless, but until we see how a pullback is handled we won't know exactly what to make of the next likely move. Continue to ride short-term momentum and always take the signals your strategy offers. However this remains a market to be skeptical of until more offensive groups take the lead and we see some sustainable higher lows.

Thanks for reading
-ZT

Structurally, Silver Attempting a Major Low

To preface I am not a precious metals Bull. I'm not a Gold Bug, I'm not a "perma" anything. I like to think of myself as an opportunistic realist when it comes to the markets.

Silver appears to be in the process of setting a major low and potentially initiating a new Bull market in the near future.

-Currently it takes 80 ounces of Silver to equal one ounce of Gold on an absolute basis. 80-1 tends to be a major turning point for the ratio throughout history. Only a couple occurrences have exceeded that disparity.  The historical market average is about 50-1, although there is a fundamental argument by some that the real ratio should be closer 16-1. The all-time historical peaks for the ratio are 98-1 and 92-1.

-SLV:GLD Ratio is the lowest since 2008 and lowest since the $SLV began trading in 2006.

Typically Silver is the beta play of the precious metals and will lead Gold during a Bull run but will under perform during a Bearish trend. Trend changes tend to occur when extremes are reached between the two . The previous low for the ratio in 2008 re-ignited Silver's massive Bull rally into mid-2011.

It should be noted that at Silver's peak value in Feb 1980 the ratio was 15-1. The other high in April 2011 had a ratio of 30-1, both well below the historical ratio average and both far away from its current value.

A weekly Descending Wedge pattern is complete. We've seen volume expansion on the breakout and subsequent rally after the throwback attempt.

Silver Daily shows a clearly defined resistance level at $15. A breakout above 15 would confirm the intermediate-term uptrend with a higher low/higher high pattern.

There is a very important confluence of resistance at $15 for $SLV. It is also where the 20 Month SMA resides and the downtrend line from the 5-year bear market.

Breaking out above this area would align all major timeframes and confirm the higher lows on both the weekly and daily charts.

For risk management purposes we would only want to be Long above the $14 swing low on a weekly closing basis.

Bottom Line: A breakout above $15 makes me very bullish and Long SLV. It appears to me that a major secular bottom could be in place. 

Lg-Cap Portfolio Review 3/11/2016

Markets continued higher this week and are now more than 200 points off the lower low set just 5-weeks ago. Its hard to guess what should come next; normally after 12% straight line rallies markets consolidate for an extended period of time and/or correct lower. As we discussed a few weeks ago our environment has been one of a modestly down-trending range with large swings in either direction. Just as it seems the market will never stop its relentless move (up or down) it finds an equilibrium and eventually reverses. I expect this pattern to continue.

I've discussed in the past how I like to use the Weekly MACD indicator. Typical analysis (lazy analysis) tells us when the MACD line crosses above the signal line that it creates a bullish event. In my experience its much more important to view the overall position of the indicator rather than whether its in a "crossed position" or not. In fact the "bull cross" that occurs after a strong move into negative territory (below the zero line) is almost always an awful timing indication. Its a trap signal that fools those who take little time to study the actual momentum. We are currently seeing this "bull-trap" crossover. If you look at what happened the last week of October 2015, we saw a similar crossover that occurred 30 points from the ultimate high (this came after a nearly 200 point rally in 5-weeks).

Here we are again. 200 points off the low and NOW it appears to be a good time to follow the indicator Long? I guess some people actually think this way, god help them. If history is any guide this signal should tell us the ordinary, lazy man is bulling up on stocks here and is just about to have his head handed to him again. Thank you sir may I have another.

SP500 Monthly

Bear in mind we are only a third of the way through the month, however it should be emphasized we are at a critical resistance area on the long-term timeframe as well. In fact our current positioning looks strikingly similar to another time in our recent history:

This is the monthly view of the mid 2000's Bull market which was of course followed by the 2008-2009 Financial Crisis.

Typically these key moving averages act as support during uptrends and resistance during downtrends. How the market responds at this level will be very important for the continued health going forward. A monthly close back above the 20 Month SMA will put the market back on stronger footing. But the longer price stays below this critical line, the higher the chances we do enter into a prolonged downtrend and bear market.

Of course in our current environment it doesn't take too long of talking bearish before your prophesy is fulfilled. Rather than continuing on about why we are doomed to go lower at some point, lets take a look at a couple new Long positions we opened this week and our remaining Lg-Cap Portfolio holdings.

We follow price and Relative Strength. Getting too worked up about what could happen in the future is generally why most fail to keep up with the market.  Successful management means not having a strong opinion of what we can't control, but instead focusing on strength and leadership from where ever it may come. 

+Entering Sherwin Williams (SHW)

Offensive leadership in this market is rare to find. A name that continues to impress on this bounce is Sherwin Williams. Something to note is while the SP500 made a lower low during the Jan/Feb correction, SHW made a higher low and now a higher high. This is precisely the kind of leadership you want to find develop during a market correction.

In corrective markets the indices continue to make lower lows yet some individual stocks will begin to bottom sooner and be diverging prior to the absolute low in the indices. This may be what we are seeing with SHW here. There is no telling whether the low for the market is in, but if it is Sherwin will likely be a leader in the next rally. 

When looking at the Daily or Weekly view the stock seems pretty extended due to its recent rally. But when you take the move in the larger context of the Monthly timeframe it's not extended at all.

Monthly

We've seen a year long sideways consolidation that has allowed the rising 20 MMA to catch up to price. There have been two tests of the average and now appears ready to break away again. 

For risk management purposes we can use the swing low near $240 as our stop. That would break the recent uptrend and take price back below the 20 MMA support. Because of the slightly wider stop our position will be a little smaller than normal. However should this trend continue we will have plenty of opportunities to add to positions as we raise our stops in the future. 

+Entering United Healthcare (UNH)

UNH has had a very orderly correction through time rather than price over the past 18-months. This week we saw the highest weekly close ever for the stock. While there still remains some resistance  at this level, its a very constructive sign to see a prior leading stock like UNH back to new weekly highs.

Similar to SHW above, UNH has slowed its ascent enough for the 20 Month MA to catch up and act as support on the recent consolidation. Over the last 6 years, tests of the rising 20 MMA have been tremendous buying opportunities and have led to strong rallies. Until this pattern changes we will follow along.

Monthly

Using both the weekly and monthly support levels we will place our initial stops at the recent swing low at $109.25. That gives us a solid cushion to work with and also allows us to stay long the stock provided it holds above its long-term average price. Since the bull market began in 2010 this stock has not once closed a month below its 20 MMA. Lets ride it while it lasts.

-Exiting CVS Short

With the market rallying relentlessly it only makes sense that CVS follows along. While it remains a relatively weak stock overall, by breaking above above the critical resistance level at $100 means we have to step aside. This was a small price to pay to see if weakness would prevail. Since it did not we take our lump and move on. 

FB

Facebook held a test of its 20 WMA this week and continues to hold above first support levels. Should it move to new highs we will be able to trail stops near this week's swing low. Until then however we have to keep them out of the way at the most recent pivot low near $95.

There is no sense getting antsy here. In terms of relative performance FB has been one of the best names to own in the market.

GE

GE held its prior breakout level and is now attempting to resume to higher highs. Due to the recent consolidation and subsequent strength we will trail our stops to the latest swing low ($27). While it hasn't been confirmed yet with a higher high, I am confident knowing that if this recent low should fail we could step aside due to a failed long-term breakout.

Also because of the higher trailed stop we can increase our position size by about 40% and still keep our open risk at .5R. 

AEP

AEP resumed its uptrend with a higher swing high since breaking out several weeks ago. This is now just 2% from its all time high set in early 2015. I see little to suggest it will not surpass that and move to new highs soon.

Utilities remain the strongest sector in the market

PCG

PCG had a good week and is only slightly trailing behind AEP. This remains poised for higher prices, not to mention a fat dividend for enjoying the ride.

PM

PM despite some softness on Friday this continues to crush following its multi-year breakout. Little reason to be worried about this name. Sure it may pullback, but the trend remains firmly higher.

Short GD

 GD remains a Short for our Portfolio and is currently the only open Short we hold. Below the swing high at $138.50 I like the chances for lower prices.


With the recent strength continuing across the markets conditions are no doubt improving. However the strongest setups I am seeing remain Shorts rather than Longs. Most still need some time for optimal entry points but I think given some consolidation they could be ready in the not so distant future. Here are some things I'm watching on both the Long and Short side:

Watchlist- Long

MDT

HD

XOM

HON

Watchlist- Short

AAPL

C

BAC

GILD

V

 Thanks for reading
-ZT