Friday, September 23, 2016

Monthly Breakout Watch

August and September have been marked by modest consolidation. I'm finding many stocks that are either extending from previous breakouts or currently building flag patterns. At the moment only a few that meet my criteria are showing new signals. The market's digestion of the recent July breakout has been orderly and constructive. I have little information that suggests we breakdown from here as the path of least resistance remains higher.

With so few new signals for September I am inclined to not act on these and await a more diverse selection as my portfolios are currently 90% invested. At this point I can be picky choosing the stocks to fill out my holdings.

That being said these are valid signals and valid signals have value.





Saturday, September 17, 2016

My Fundamental Research

Being a Price based trader I am asked often if I use fundamental data when choosing my trades/positions. When investors discuss "fundamental data" it can be anything from a news event, balance sheet, or company management press release. Personally I find most fundamental data noise and most research a complete waste of time. I can do all the research in the world, hours and hours worth, but if the stock goes down I still lose money. The key to this game is to make money, not build this web of story lines that justify why I'm in a position.

That being said I do feel certain fundamental criteria can be helpful when filtering watchlist data. The primary focus of my fundamental research is to buy stocks that are growing in a positive direction. This means I (mostly) look for companies that have positive EPS and positive Sales growth. If the company in question is profitable AND there is continuing demand for their product that's a good start. *Note: I will still take positions in stocks with poor fundamental growth, but I generally treat them as more speculative, and therefore trade them with smaller position sizes.

When I build my growth portfolios I run a simple scan at the close of trading each day, you can do this using free software like or using more complex trading software (my TC2000 software will scan for the same criteria but also will add more technical filters as well). But to get started all you need is

In the fundamental scan area select:

-EPS Growth 1-year > 0
-Sales Growth 1-year > 0
-Sales Growth Q/Q > 10

This tells me all I need to know; the company is profitable over the past year, whatever product they are selling consumers are buying, and in the last few months consumers have increased interest and are buying even more.

I then go a step further and add a technical filter to my search:

-New 50-Day highs

This tells me not only is the business on firm footing but also that the market is rewarding the strong posture.

Again all the fundamental research in the world won't make a lick of difference if the market is not rewarding the narrative and its trading lower.

I use this filter as a way of building potential buy candidates, this is by no means a complete process for investing. Fundamental data, i believe, should be used as a starting point only. The execution of the trade should come down to a positive trending stock and good price structure.

Fundamentals tell you what to buy and price action tells you when to buy. Putting these concepts together can create a very powerful trade process.

Monday, September 5, 2016

Lg-Cap Portfolio Review

The SP500 finished the month of August mostly flat. Following the breakout in July this appears to be very reasonable consolidation. Considering the choppy trading action that we've had over the past two years it's refreshing to actually see a breakout hold for more than a day or two. 

SP500 Monthly
It's clear to me the trend remains higher on the larger time-frames and we need to continue to be aligned with that price action. When it changes we can worry about being bearish, but for now that's simply not the reality.

One clear standout over the past month has been the relative out performance of the Financial sector. Maybe this is linked to a possible rate hike...who knows. The fact is the market is telling us something and it likely pays to listen. 

We did a little maneuvering of funds to make room for a few new entries I find very attractive. Our Large-Cap Portfolio has entered Berkshire Hathaway, JP Morgan, and EOG Resources as of the close of August.

+Berkshire Hathaway (BRKB)
While Berkshire is not a true Financial stock, it does trade as a member of the XLF. The stock is setting up a very solid trend resumption from a nearly 2-year consolidation at its highs. BRKB retook the 20 Month SMA back in March of this year and then built a 4-month "flag" consolidation right on top of the moving average. August showed a strong breakout from that flag area and is now challenging all-time highs once again. We want to be long this name if it stays above July's low and the rising 20 Month SMA. We will call it $140.85 for our purposes here and that stop is on a monthly closing basis. 

+JP Morgan (JPM)
JPM has been tightening since the middle of 2015; price formed a triangle pattern, in August it bounced right off the 20 Month SMA and made new 13-month closing highs. This remains the leading large-cap Financial stock and it won't take much to move to new all-time highs. I like this above August's low at $63.30 on a monthly closing basis. 

+EOG Resources (EOG)
I can't help notice how resilient the Energy stocks have been relative to the price of Crude Oil. Since the June high near $53/barrel Oil has now traded down to the mid-40's. What is interesting is that Energy stocks like EOG above are making new 1-year highs.

What this tells me is the market believes the price of Oil has stabilized; it appears likely Oil will remain in a trading range between ~$60 and ~$30. Since prices have more or less found their equilibrium, now Energy stocks can resume a more calculated trajectory where new growth/dividends/etc can once again be drivers of value.

EOG has always been a strong performer in the Energy space and I see no reason why that can't continue should Oil prices remain neutral. The stock is now emerging from a 26-month correction after peaking at $120 back in 2014. While EOG has rallied solidly off its lows, the 3 tight monthly closes in May, June, and July followed by a strong breakout of the downtrend suggest buyers are eager to take this higher.

We want to be long this name should August's lows hold on a monthly closing basis. Above $78.25 this is a very attractive Long position. 

High Yielding/Rate Sensitive Stocks Ahead of the Fed
Staples and Utilities seem to be bull flagging/retesting breakouts into the "assumed" September interest rate hike by the Federal Reserve. This looks positive to me and sets up a strong trade should rates remain unchanged. 





There is absolutely no question as to the direction of these long-term trends. All are trading at or above their prior highs. Until interest rates begin to substantially increase I believe these will remain in high demand for investors looking for income.

It would make sense that during the historically worst month for stocks and ahead of a presidential election we see some risk-off behavior for the next several weeks. Nothing major likely but a rotation back toward Staples, Utilities, and REITs would reflect a bit of a safety trade for the near term. Should the Fed not raise rates in a couple weeks, which makes sense due to uncertainty in the near months ahead, these names appear ready for another leg higher.

As always though we must stick to what the market is saying. If it keeps rocking higher, you can't be the guy sitting on the sidelines or short because you expect something bad to happen. Banks are looking strong here while higher yielding stocks have softened, and this trend could just keep on going. We can't assume they must change trajectory here until we actually get some validation through price that this scenario is playing out.

Monthly Flags Galore 

Across the rest of our holdings (which are a good mix of Technology, Healthcare, and Industrial) price action remains firm and stocks are showing many "flag" like consolidations.













 We also remain Short GILD on a weekly closing basis

I know there are a lot of investors that will never be convinced that GILD can go lower, yet the price structure continues to be very bearish. Every rally is being sold sooner than the last and weakness follows the bounce failure. As long as the stock remains below the "bear flag" high near $82.20 we want to stay with this to the downside.

As always we will stick to our stops and let the price action determine our actions. With all the news flow we will be bombarded with in the week's ahead, whether it be Election related or Federal Reserve policy, understand that its just a way to make you more emotional as a trader.

Stick with the trends, ignore the noise, and do your best to not let emotions drive your portfolio decisions.

Thanks for reading