Lg-Cap Portfolio Review

Markets remained volatile this week following the UK Brexit vote last Friday. Monday traded another 2% lower to start the week, but the next 4 days recovered all of the losses prior to the pivotal vote. The SP500 finished the week higher by almost 3.5%, but the biggest shock was the reaction in the FTSE 100 Index which is the 100 largest companies listed on the London Stock Exchange.

Due to the seemingly disastrous repercussions of the Brexit vote on their stock market, there is no question that this is the chart of the week:

FTSE 100 (London)

Despite all the fears and predictions surrounding the separation of UK from the European Union, the FTSE closed Friday at 11-month highs. 

Not only did the London market recover this week, but also broke above neckline resistance of a nearly 1-year Inverse Head/Shoulder base. This pattern has long-term bullish implications for the FTSE which most investors will be using as the lead index for global markets following the referendum.

From a strictly market perspective this recent action is actually more supportive of higher prices than had there been a "Stay" vote. With the "Leave" vote winning and surprising the market to the downside, only to see it reverse higher and then breakout has caught many more participants by surprise. Therefore the "surprise" of the outcome followed by this new surprise of positive price reaction can create a powerful imbalance in market sentiment. 

Large, sustainable breakouts often will give a shakeout of excessive optimism (as we had heading into the Brexit vote, polls showed "Stay" winning) and will embolden bearish participants to increase Short positions, only to quickly turn on a dime and launch higher. The unwind of sentiment can be spectacular to watch and I believe we only got a glimpse of that unwind this past week. 

As long as it can hold above neckline resistance at 6,400 the Bulls have to be given the benefit of the doubt and we have to prepare for higher prices in the future. 

With the close of June our Lg-Cap Portfolio added two new Long positions: entering Verizon and Costco. 

With these new additions we now hold Long positions in FB, GE, AEP, PCG, PM, UNH, SHW, PEP, MSFT, MDT, LOW, CVX, CMCSA, CSCO, COST, VZ

Short positions in BAC, C, GILD

We are now 95% invested. Of that exposure we are heavily weighted toward high yielding, Consumer based investments, while avoiding the more troublesome trends. With global interest rates remaining low higher yielding groups will continue to see inflows and Banks who require higher interest rates will continue to weaken.

FB

Facebook is currently in a consolidation phase within a long-term uptrend. This past month posted a lower high and lower low vs the previous month, but is well above our stop at $89.35. 

GE

General Electric continues to post higher lows and hold above primary base support. Stops are at the $27 pivot low. 

AEP

PCG

Utilities, especially AEP and PGC, are now breaking above very defined Cup/Handle base formations. With the recent breakouts to new highs stops can trail to $60.15 and $56.39 respectively  

PM

Phillip Morris is in the process of consolidating its strong rally and recent multi-year base breakout. The Consumer Staple sector remains in high demand and we can trail stops to March's $90.79 breakout bar low. 

UNH

United Health powered to new highs in June. Breakout follow-through continues and stops remain at $119.35. 

SHW

Sherwin remains in base build mode but is consolidating within the upper range. The stage is set for a continuation higher soon. Stops at $270

PEP

Stop: 97.50

MSFT

Microsoft is setting up another consolidation above the previous breakout. A resumption higher would allow us to trail stops. For now we need to be conservative and give this plenty of space. The low of the massive breakout bar from October 2015 is a fine reference point for long-term Bulls.

MDT

Medtronic continues to lift off following its nearly 18-month base breakout. Stops remain at $74.35.

LOW

Lowe's remains above its breakout and at ATH's. The recent outperformance over rival Home Depot is notable as well. Stops at $74.55

CVX

Chevron has been able to hold above its 20 MMA since recapturing it in April. So far the positive turn is holding in the Bulls favor. Stops at $92.43.

CMCSA

Stop: $59.60

CSCO

In typical Cisco fashion the stock hasn't gone anywhere since our entry at the end of May. Lets hope this isn't like the last couple decades where the stock just chops around going nowhere. Our stops remain at $25.80

+COST

Costco gave us a clean entry at the close of June. The stock has consolidated for the past 8-months and recently broke through downtrend resistance within a long-term uptrend. The June low and rising 20 Month SMA at $148.55 will act as our stop. COST hasn't closed a month below the 20 MMA since the 2009 Bull market began. A break of that trailing average would be a sign something is changing. For now we will jump on for the ride. 

+VZ

Verizon also created a very strong entry signal for our system at the close of this past month. Following a sharp multi-month rally off the range lows, the stock pulled back for 3-months into prior resistance and the rising 20 Month SMA. June brought a continuation of the prior rally and closed at new decade highs. An entry here with a stop at the $49 swing point makes this an easy trade to execute.

Zooming this chart out shows why I'm so positive on this new position:

Following the massive Technology bull market in the 90's VZ underwent a substantial repricing. From 2002 through 2012 the stock built a base in the formation of a Double Bottom. This is a textbook Double Bottom pattern:
1. Two major lows where the second low undercut the first low.
2. A clear "high pivot" in between the two lows.
3. A large momentum divergence (MACD) as the stock made a lower low in 2008.
4. The stock broke above the pivot high in 2013 and consolidated above the resistance for 3-years.

Another encouraging pattern is the large shakeout move that we saw in August of last year. This is exactly the kind of sentiment jolt that can propel a stock into a sharp rally as many participants sold, were stopped out, or Shorted into that brief panic decline. The stock has since been on a nearly 50% rally and has just now taken out the overhead resistance going back to 2013.

It appears to me that a very big shift is occurring here. If you take a long-term perspective the upside could be considerable. And why not take a long-term perspective with a stock that pays a 4% dividend just for holding the shares? It seems like a no-brainer to me.

Short BAC (Weekly)

Stop: > $14

Short C (Weekly)

Stop: > $44.50

Short GILD (Weekly)

Stop: > $88.25

If the market remains strong I have no doubt we will be stopped out of these Short positions. As of last week all 3 rallied sharply off the lows but remain in longer-term downtrends and below major resistance.

We can't ever know for sure what will happen in the market so we follow the price action. During the Brexit mania two weeks ago our Bank Short's helped us significantly outperform vs the broad market averages.