Lg Cap Portfolio Review

The market took a rest this week with the SP500 declining -1.6%. The pullback appears to be little more than a retest of the prior breakout level and polarity support at 2,065. The two levels to watch going forward will be this 2,065 retest and most importantly the swing lows at 1,995.

SP500 weekly chart

While Friday's reaction to the better than expected Payroll number was a bit disconcerting, the intermediate trend remains higher as we continue to see higher highs. You have to be willing to stomach a little volatility if you wish to remain aligned with long-term trends. This is why we have rules in place to encourage us to act in a competent way when stress begins to elevate.

Looking at our Large Cap Portfolio this week, we do have one Exit and no new entries. After a 14-month run we will be closing our 20+ Year Treasury Bond (TLT) position. While rates and rate sensitive names continue to get beaten, the overall picture for our portfolio remains on solid footing.

EXITING TLT

It was a good run for our Treasury position. While we did give back some gains at the end (as will always be the case with a trend based strategy), clearly we stuck to our trade until the trend showed serious signs of deterioration.

With the convincing break of support this week, we will step aside collecting a 15% gain and all those 1st of the month payouts along the way. Overall it was a super trade and we stuck with our plan all the way.

This week we are going to look at our remaining positions on a Year to Date basis to see how each is performing so far in 2015. The SP500 is currently sitting on a 0.5% gain for the year.

Daily Charts YTD

SBUX

Stop: $79

BA

Stop: $120.75

DIS

Stop: $90.95

UNH

Stop: $100

BMY

Stop: $57.50

AAPL

Stop: $106

IP

Stop: $51.50

HON

Stop: $95.88

LMT

Stop: $188.35

CSCO

Stop: $26.35

PPG

Stop: $219.80

TWX

Stop: $77

UNP

Stop: $111.90

PCG

Stop: $49.50

10 out of our 14 holdings are currently outperforming the SP500 so far in 2015. What we need to focus on closely are our lagging positions. Winners take care of themselves, so we have nothing to do there except continue to let them work. 

Stops are in place to protect our account from suffering too large of a loss. As long as we stick to our plan of cutting our losses quickly and letting our winners run, we will be just fine.

Most of our holdings have seen reasonable consolidations after making new highs and no further action is required at this time. PCG and UNP are our most vulnerable holdings currently and will need to be watched closely.

Everything else looks just fine and to abandon those winning positions now would only be due to an emotional/fearful reaction. Always make your plan when the markets are closed, and most importantly always stick to that plan.

Follow on Stocktwits and Twitter @ZenTrends for up to date charts and market reaction.

What NOT to Look For

Energy still looks lousy

Last week I posted what to look for when buying a stock. These were high probability setups for strong upside with limited risk.

Oil and Oil Stocks look about as opposite to that as possible. Today we're looking at the Top 10 holdings of the Energy etf, XLE and Lumber Liquidators.

WEEKLY CHARTS

XOM

CVX

SLB

KMI

EOG

COP

OXY

PXD

APC

WMB

With the exception of KMI, which is still in a manageable uptrend, the entire Energy group looks weak and in a clear downtrending cycle. I know this is the area most people are focused on and trying to call the bottom in oil. But this trading behavior is the best way to implode your account equity.

Oversold can become more oversold and cheap can always become cheaper. These are not reasons to own downtrending stocks, they are excuses for losing money

Energy will present a fantastic opportunity, eventually. But we must be patient until the trend begins to turn in favor of the Bulls.

Garbage IN, Garbage Out

Lumber Liquidators (LL) Weekly chart

The big story in the news this week was the investigation and obliteration of Lumber Liquidators. A 60 Minutes expose discovered some major health and quality violations and the stock is currently down -45% from last Friday's close. That's horrendous.

What's more horrendous is that people are actually Long this stock!! 
I mean...WOW! Really?! What possible reason could people have to own this stock at any point in the last year?

As you can see LL has been trapped below a declining 20 WMA since the end of 2013 and is down more than 66% from the initial violation of the 20 WMA on 11/22/2013. Each attempt at a rally has failed at or near the declining 20 WMA.

Momentum (a lagging indicator) has been in a bearish range since April of 2014. That "lagging" signal still came at a weekly closing price of $85.68...Still a 61% markup from today's close.

If you had disregarded all of that prior decline and sold at the close LAST WEEK, you would have saved yourself 45% of your position equity.

Its never too late to sell, but the point is you should never be in a situation like this to begin with. The time to exit this stock was in early 2014 after seeing lower lows and lower highs while Momentum broke into a downtrending environment.

If you adopt a trend based approach you won't pick the bottoms and get out at the tops, but you will also never implode your account by falling into the trap of buying a meltdown. Most advisors will talk about compounding returns and long term results. But research has shown that avoiding negative compounding is much more beneficial in the long term.

If you lose 50% of your money it will require a 100% gain just to break even. Avoiding losses is the #1 thing you can do to improve your long-term returns. To do this you need only to identify highly probable situations and have the discipline to stick to a consistent strategy of buying winners and not buying losers.

"Temptation is always present for us to fight the overall trend no matter which direction that trend may be." -Charles Kirk

Run That Winner

Let's look at AAPL. The stock has ripped, more than doubling in the last 2 years. I'm hearing lots of chatter about selling the stock here. To preface, I'm no Apple fanboy. I have an iPhone 6+ and love it, but I'm more of a PC guy. That said, I'm a trend trader and currently a shareholder.

The stock has gone up, a lot. Sure it has, but so have others and many will continue going higher. 

How greedy are we that we can't let a stock that's run over 100% have a 10 or 15% cushion to make sure its uptrend is invalidated? That method has served us well thus far, why abandon it now? Because we have a nice profit and might as well call it good?

Look, I'm a practical guy, I understand the logic. We've made a lot of money. But why sell your winning position because it's gone up? Isn't that the point. You bought it because you thought it would go up and it's started to, but you really think you can pick the top now? People try to do this constantly and it rarely works. What does work though is holding onto winning positions and eliminating losing ones. Picking tops, trying to catch every wiggle, those very rarely work.

There have been many places in the past 2-years where the top-callers have foreseen its demise. Yet all it does is move sideways for a couple months and then resumes to new highs. 

AAPL is just an example, the larger trouble is most people sell their best ideas early to "protect profits" and hold their worst ideas too long "hoping" it will come back. Selling winners and holding losers, that's a recipe for disaster. Or as legendary investor Peter Lynch has said, "that's like pulling the flowers and watering the weeds". 

This is a common trap that the overwhelming majority of traders fall into. Their accounts are too small for highly active trading and commissions from movement like this will eat up their returns. We are our own worst trading enemy. It's a repeating and self destructing cycle. 

The more effective and reasonable solution is to have a process that rewards winning ideas and eliminates losing ones.  It should stick to the single most important and often disregarded principle of successful investing:

Run your winners and keep losses small.

If you can rethink your investment strategy to reduce market movement to only what is necessary, you will stop hemorrhaging your account, and put yourself in a position to make consistent money in the market.

Follow @ZenTrends on Stocktwits and Twitter

What I Look For in the Market

*This is a post I sent out in early 2014. I feel it is a very important concept to understand. This is how I approach all opportunities in the market. I thought I'd offer an update to how the "New Base Opportunities" played out since this last post, and I have included some current ideas I'm either Long currently or are on the cusp. I hope it helps your results in 2016. 

The best advice I can give to a new trader is to look for stocks moving sideways. That might sound strange coming from a trend trader. But the key is how a stock emerges from a sideways period that will tell you everything you need to know to buy or sell. The sideways movement assures that the stock in question is not overbought or due for a correction. It shows that the current price range is an area of support and as long as the stock is above the lows of the range, the risk/reward is tipped in your favor. Almost every one of my big winning positions have come from long-term sideways bases that resolve to the upside.

Ideally these sideways trends occur at multi-year or all-time highs. This shows an unwillingness for traders and investors alike to sell the stock. They are confident in their positions and do not want to sell. This tight supply is what creates the breakout momentum as those looking to buy have to pay up to get in.

I like a base to be at least 6 months, but preferably a 1-year sideways trend gives the most upside potential. Moves from bases this size can be spectacular.

Thriving in the market doesn't come from making wild moves, but rather from managing risk and being consistent. The beauty of a sideways trading range (consolidation) is that it defines the risk perfectly. If the stock resumes from the base lower, you know something is wrong and its time to look for a better opportunity. But when it resolves to the upside, some of the best trades in the market are made.

Here are some recent examples of large base consolidations near highs:

All charts shown are Weekly Bars

HD

NKE

SBUX

BA

IP

New Base Opportunities:

TMO

Update: TMO +6.8%

UA

Update: UA +7.5%

ISBC

Update: ISBC +8.6%

FB

Update: FB +35%

*These charts were originally posted on 2/27/15 when the SP500 was trading at a weekly closing price of 2,105. I think its important to note that every single one closed the period higher from our original post date. The SP500 is currently trading at 2,056, a decline of -2.3% during that same timeframe. The takeaway isn't that we predicted which stocks would outperform the market or that the market would be poor in 2015. Rather it should be that stocks trading in a tight consolidation, especially near all-time highs tend to trade strongly when they move out of these bases to the upside. We don't have to predict the market to do well. We simply need to observe and react. A simple strategy of buying relatively strong stocks moving higher out of multi-month base formations can be an excellent way to identify great risk/reward opportunities. 

Current Opportunities (12/28/15)

LOW (Long as of 11/20/15)

TSN (Long as of 10/9/15)

PANW

LOGM

PLKI

TSLA

With exception of LOW and TSN these other opportunities have not broken out of their current base formations. Until they do they should remain of watchlists for this particular strategy. But as we have seen before, stocks that consolidate sideways at new or multi-year highs tend to become market leaders when/if they do breakout to the upside.

They don't always work once they trigger, but you put the odds greatly in your favor with a setup like this. If they fail, your exit point is obvious and well defined. If they move in favor, one or two of these moves can make your year. Good luck out there in 2016! 

For ongoing analysis and new base formations, please follow @ZenTrends on Stocktwits and Twitter.

Lg Cap Portfolio Update

Markets continued to move higher this week thanks to an afternoon surge on Friday. While the SP500 was mostly flat on the week (prior to Friday afternoon), many individual stocks traded very well, several of which we currently own in our portfolio. 

Focusing on trend and relative strength will keep you positioned correctly in the market. Our job as money managers and traders is to be Long the market when its is going up and protect capital when it is going down. The best way I have figured out how to accomplish this is by seeking out the strongest and smoothest trending stocks. They tend to hold up best during corrections and also lead on rallies higher, outperforming the market averages. 

Looking over our Large Cap Portfolio I would say we are succeeding at that task so far in 2015.

AEROSPACE/DEFENSE

One area of the market that has been breaking out all over the place is the Aerospace and Defense sector. We currently hold Boeing (BA) and as of the close Friday have entered a new position in Lockheed Martin (LMT). United Technologies (UTX) is currently on my watchlist going forward also.

It doesn't matter why this group is leading. I try not to get caught up in the "why" in the market, I focus on the "what". Aerospace and Defence as a group is leading this market, that's enough for me.

+Entering Lockheed Martin (LMT)

Everything I said above applies to LMT. This is a leading stock, in a leading sector, and in a strong uptrend. There is everything to like about this entry: multi-week consolidation, breakout to all-time highs, and a relatively tight stop offering a favorable risk/reward.

I only want to own this stock above the recent consolidation lows and rising 20 WMA. If LMT were to correct below this area it would suggest more digestion is needed. For our initial placement we will have our stops set at $188.35 on a weekly closing basis.

BA

Despite the market's tepid trading most of the week, shares of Boeing finished up $10. BA just continues to march higher to the disbelief of many left-out bulls watching from the sidelines. As the saying goes, "the bigger the base, the higher the move in space". The trend is definitely higher here and the recent strength suggests higher prices in the future. 

TECHNOLOGY

Pockets of the Technology sector have been working for some time. But it has been difficult to get a strong risk/reward in the better looking names. Fortunately we recently received favorable entries into AAPL and CSCO. It took awhile but the setups finally gave us the green light last week.

AAPL

A newer position for our portfolio, some will say that an uptrend similar to AAPL's has gone too far and that we've missed the move. But you can never know exactly where you are in trend. All you can do is take your signal and manage risk, that's what we've done here. Stops are at $106.

CSCO

1-yr Daily view

I wanted to look at the Daily bars here to show the action after CSCO's big gap higher. This is called trading "high and tight" and is a sign of strength.

We need to be aware of what happened in a similar situation back in May of last year. The trading was very much like our current situation. The stock traded strongly for about 1 quarter and then consolidated those gains. It then broke down in October only to surge back higher shortly after.

We may need to leave a wide stop due to a tendency to shake out traders. I said it before, CSCO is setup for a long-term run and we might need to stick with the initial breakout level as our stop longer than usual.

CONSUMER DISCRETIONARY

SBUX

Starbucks looks quite similar to BA currently. The common theme here is both digested significant gains during 2014 and have since broken above their prior highs. When a stock trades sideways near its all-time highs and then breaks through, it can create a tremendous surge. While its certainly possible that this pulls back a bit, the trend is clearly higher long-term.

Another interesting development around this space is the situation with Coffee prices. I've commented recently on social media how Coffee futures have confirmed a Double Top pattern and appear headed much lower. Lower coffee prices are great of SBUX's profits and profits help fuel stock gains.

SBUX was one of my top picks coming into 2015 and so far it has been an excellent place to be.

DIS

Keeping with the consumer theme, Disney continues to be a big winner in 2015. Again we see a multi-month sideways consolidation of a large uptrend that then resolves to the upside and is leaving many traders in the dust. Nothing to do but stick with the trend.

TWX

Time Warner hasn't exactly been the cleanest of trends recently and is currently our only position in negative territory, showing an open loss of about -2.5%. While TWX traded directly into our stop level, it also held that level perfectly and has rallied 10% in the last 3 weeks. This tells me our stop is positioned correctly and a break of that level would surely force us to look elsewhere.

While the trading has been volatile recently, I believe the stock has shaken out many of the overeager traders and sets up a good opportunity to breakout and continue higher over the long-term.

BASIC MATERIALS

I would be willing to bet that coming into 2015 a very small percentage of money managers and analysts would have picked the Materials sector to be an early market leader. I certainly wasn't thinking this way, yet here it is trading at new highs and leading the market. Not all Material names are participating, but the ones that are definitely look strong for continued upside.

PPG

With PPG holding near its highs and the trailing 20 WMA catching up to the recent swing low, we can now move up our stops to the $219.80 level. A break below that would set a new 50-day low and break the rising 20 WMA, invalidating the new breakout.

IP

There is not much to say here that I didn't say in last week's post. IP continues to be strong and I beleive it continues to move much higher.

HEALTH CARE

UNH

UNH set a new weekly closing high this week and allows us to trail our stops to $98.75. It has been a remarkable run for UNH and while a multi-month consolidation would be welcome, it continues to see immediate buy interest on any weakness whatsoever. That should tell you everything you need to know. Own strength.

BMY

BMY is still working off its recent surge and appears quite healthy above the $57.50 support level. Often the best course of action is doing nothing at all.

INDUSTRIAL

With our entry into LMT this week it does put us at 4 holdings in the broad Industrial sector. That is normally a little high for me in terms of sector concentration, but the cross section of what we hold is more diversified than the general category would suggest. We hold the two Aerospace/Defense names above as well as UNP (railroad/transportation) and HON (diversified machinery).

HON

Honeywell has had one of the quietest moves to new highs that I have seen in some time; there is hardly anyone mentioning the strength here. The stock has been routinely making new all-time closing highs since mid November while the market has been a churning mess.

I also love the support/resistance polarity in play. The $96 level was strong resistance for all of 2014, and has now become substantial support on any retest that has come into the area. Our stop at $95.88 seems solid to me.

UNP

UNP set another weekly closing high this week.  

BONDS/UTILITIES

While many continue to insist that rates will rise, I still feel there is not enough evidence to support that yet. Certainly rate sensitive names have experienced a pullback recently, but their strong uptrends are still intact for my longer timeframe.

TLT

I shared this chart on Twitter on Friday and still believe this is a counter-trend move in nature. The sharpest corrections tend occur after long-term trends reach extreme levels. These moves usually scare the newly bullish and embolden the persistent bears. But if EVERYONE is still expecting higher rates in the near future, TLT has done a great job of getting many leaning in the same direction.

There is a very solid level of interest between $126-$124. To me it appears to simply be a throwback move after setting new highs just 3-weeks ago. A break below this support range would be enough to convince me that something larger is in play here. We have held our positions in TLT since February of 2014 and I see no reason to get antsy here with such a notable level just below.

PCG

PCG isn't even close to retesting its monster breakout level at 48.50. While many have also called the end to the Utility run, PCG hasn't even given back 1/3 of its recent rally. Its so typical of short-term thinking to see a sharp shake-out move and say the uptrend is over. I fortunately don't suffer from that sort of thinking. After setting record highs just last month there is no reason to jump the gun here. Until this breakout fails I have no interest in selling my shares.

In fact I would rather be a buyer should the stock build a support base and resume higher in the near future. As long as its above the 48.50 breakout I will be looking to add to positions rather than dump my modest gains on the first sign of profit taking.


Notice that we do not have any Financial, Staples, or Energy exposure at this time. It doesn't take more than a glance as these groups to know why we don't have holdings here. While Financials and Staples don't look horrible, there just simply aren't any stocks currently leading the market higher. Until this changes we will continue to look elsewhere for potential opportunities.

Energy still remains the weakest sector and despite its recent bounce, the group is still nowhere near where it needs to be for consideration as a "market leader". We will continue to avoid this space. 

For current position updates and watchlist ideas please follow me on Twitter and Stocktwits @ZenTrends.