Santa Claus is Coming to Town

It is well known on Wall St. that the end of the calendar year is the strongest in terms of market returns. This end of the year strength a.k.a "the Santa Claus Rally" is consistent and powerful. In fact it is so consistent that there are usually major implications if it doesn't happen; As the saying goes:

"If Santa should fail to call, the Bear will come to Broad and Wall."

If stocks fail to rally at year end, there are much larger forces putting pressure on the market. How the market behaves during this time is a good general health gauge for risk assets. US stocks should do well at year end for a number of reasons, but most importantly because we are a consumer based economy and the majority of retail sales are made during the holiday shopping season. If stocks perform poorly at the end of the year it is likely because those sales are weak and consumers have less disposable income to help stimulate the economy.

Fortunately for us it appears that Santa Claus is on schedule this year as we saw a huge surge in stock prices for the last full trading week of the year. We now would hope that the strength continues into year end as is the typical pattern. The SP500 has rallied 95 points in the last 3 days and had back to back +2% rallies on Wednesday and Thursday. The Federal Reserve maintained the status quo this week by announcing a continued patience before raising interest rates. The market was waiting for an excuse to rally and with oil finally slowing its relentless skid, market participants had all they needed to spark the buying surge.

SP500 Daily bars- 6 months

Depending on your investment timeframe, the past couple weeks have either been very stressful (if you trade a shorter timeframe) or simply consolidative action (if you trade a longer timeframe). By stepping back a bit from the daily noise of the market, the weekly charts reduce your emotional reactions and keep the larger trend in better perspective.

SP500 Weekly bars- 2 years

What has surprised me the most, probably because I invest both shorter term and longer term, is how volatile the shorter term has felt while my weekly stops were never even close to being tested. From a comfort perspective, the longer term view is remarkably peaceful compared to the shorter term, for whatever that's worth. 

As we head into the two remaining holiday shortened weeks of the year we have one new entry signal and a couple of trailing stops that need to be moved higher. Lets take a look. 

+Entering Honeywell (HON)

This is a position we entered in late July and were quickly stopped out as the breakout signal failed. Shortly after our exit HON took a sharp dive that looked like a full trend breakdown. However since that time the stock has shot back higher and this week closed at all-time highs.

I really like how the Relative Strength is breaking out to the upside showing a strong rotation of money into the stock. For risk management purposes I want to the use the support range lows at about $94.80 as my initial stop area. HON last week pulled back to retest that breakout level, the fact that it held and then resumed to new highs signals strong buying interest.  

I find when trades fail but then quickly re-trigger tend to be quite reliable and successful. This is likely due to the stubborn attitudes of humans and being proven wrong. We don't like to admit being wrong. We really don't like admitting being wrong again in such a short period of time. It is damaging to our fragile egos and therefore most would just prefer to look elsewhere for an "easier to swallow" opportunity. But if you are impartial enough to get right back in there, you are often handsomely rewarded. 

"From false moves come fast moves" as they say, and a stock coming off a hard shakeout can create a very good opportunity as sentiment has not been able to properly catch-up to the rapid price shift.


PPG

PPG has demonstrated remarkable strength since our entry 4 weeks ago. With the 20 WMA now caught up to the weekly pivot low, we can move our stops to that level at $204. 

HAIN

What a winner HAIN has been! We have given this a lot of room since entering our position but now the market is telling us we can move it on up. There is now a strong confluence of support at $104 and a break of that level would suggest more caution is needed. 

Something of note is that HAIN stock will be splitting 2-1 within the next two weeks. This doesn't change any of the company dynamics but it will cut the price of the stock in half. Using past examples as our guide, stock splits tend to create buy interest and an upward bias following the split. I guess people like more shares and a lower price tag.

Watchlist Ideas

With 2014 about to wrap up I have updated our watchlist stocks, sticking to the current holdings of the SP500 Sector Top 10 holdings list. Here are a few names I'm watching:

FB

LMT

TWX

INTC

NEE

EXC

CSCO

KMI

Only the Best

You can only control so much in the markets. You can't control which way the market goes and you can't control if your next trade will be a winner or not. What can be controlled are how much risk to take and which stocks to pick. If this is all we can control then we need to make the best decisions possible.

Stock selection and risk management, this is as good as we can do. Since we can't control how the market moves, there is no reason to waste time worrying or predicting where it will be in 4 weeks, 4 months, 4 years, or whenever. We need to focus our attention and study on our preferred risk parameters as well as the stocks we choose to buy. If we use a consistent and quality buy/sell signal (based on what's actually happening now), while only risking a small percentage of our capital, we should do very well.

Investors that attempt to figure out where the market will be at the end of the year, or how successful this company's new product will be, they will not be focusing on the things they can control and will more often than not be wrong with no exit strategy. I will be wrong often as well, except i know exactly where I'm wrong and will act accordingly to protect my capital.

What I attempt to do in the market is find the best looking setups, the stocks that are being accumulated heavily and breaking to higher trend highs. Once I find those setups, I own the very best of the best. Once I own the best setups, I let them play out until my entry rationale is proven no longer valid by price.

The idea behind this simple (not easy) strategy is to own the strongest stocks for as long as they are strong. If we sell a stock that begins to lag, we find the next best setup available and we rotate our funds into that idea. What this amounts to is letting big winners run, creating large profits, cutting losing positions once they are invalidated for small losses, and then move those monies into the next best risk/reward opportunity. Wash, rinse, repeat.

We focus on the best. I want to see stocks making higher highs, higher lows and just generally moving higher over time. I do not try to figure out if a declining stock will be the next big comeback story. I don't buy stocks that are falling and "cheap". Cheap is a very relative term, cheap can always get cheaper. I want to see stocks challenging all-time highs, this tells me the underlying company is beating its competitors and is getting stronger. They are earning MORE money, they are growing their business and are successful. One way to improve your success is to do what successful people do. One way to improve your investment returns is to own successful stocks and companies.

Since we don't know where the market is going next (I really don't have a clue), lets focus on what we do know, and that's where our current positions sit in relation to the predetermined risk levels.

Weekly Bars 2-years

Disney (DIS)

Stop: $88.50

Nike (NKE)

Stop: $87.15

Treasury Bonds (TLT)

Stop: $118.50

United Healthcare (UNH)

Stop: $85.35

Berkshire Hathaway (BRKB)

Stop: $136

Starbucks (SBUX)

Stop: $73.50

Bristol Myers (BMY)

Stop: $50

Goldman Sachs (GS)

Stop: $176.90

PPG (PPG)

Stop: $203.90

Gilead Sciences (GILD)

Stop: $100

Bank of America (BAC)

Stop: $16.20

Hain Celestial (HAIN)

Stop: $98.70

United Parcel Service (UPS)

Stop: $95.75

PG&E Corp (PCG)

Stop: $44.30

International Paper (IP)

Stop: $46


The markets saw some profit taking this week after the torrid run since mid-October. The longer-term charts are still very far from trouble and our stops are well out of the way. Hopefully we will see some orderly consolidation that will allow us to move our trailing stops higher. For now we want to let our strong positions work and try to not be emotional or force any trades.

After a big run like we have had its normal to want to harvest some of the gains for fear of giving them back. But that is what "feels" right and is simply an emotional crutch, actions like that will hurt long-term performance over time. The common investment maxim "nobody ever got hurt taking a profit" is an emotional excuse to appease our senses of fear and greed. The correct winning strategy is to let winning positions run until they are invalidated and cut losing trades quickly. As legendary investor Peter Lynch once said regarding taking profits on winning positions, "selling winners and holding losers is like cutting the flowers and watering the weeds." Instead we should be much more willing to let what's working work and replace what is not quickly with something that might work better.  

Chart of the Week

Why We Sell

Freeport McMoran (FCX)

Do you remember this chart? I posted this exit signal in early September. Selling stung a bit at the time; the setup had looked quite promising initially and yet it just rolled right over, stopping us out for a small loss. The decline was steady and relentless. By the time I sold I had watched the stock fall for 7 out of 8 weeks since my entry. This was clearly "oversold" and getting "cheap" after the 12% decline in only two months. However, my signal said to sell, so I sold...

Here is FCX 14 weeks later:

Wowsers! Not only has this continued lower, falling 12 out of the last 14 weeks, but the stock declined another 16% just this week! That's now 38% below our exit point. Sure the 12% drop wasn't the preferred outcome, but it had a relatively minor impact, while a 50% decline can cost you a year's worth of gains.

This is why "oversold" and "cheap" are relative terms and not an investment strategy. They can and will go further than you think is reasonable. Most importantly, this is why you ALWAYS take your exit signals when they trigger. By taking quick, small losses, you never get into a situation where a small loss becomes a BIG loss.

Entering Bank of America (BAC)

Bank of America (BAC)

While Bank of America deserves its fair share of criticism, I myself was critical of the recent breakdown in prices at the beginning of 2014, it is hard to contend currently that the posture of the stock is not bullish.

The recent consolidation over the past 10 months has created a nice support base to launch another extended rally from. Since the "Warren Buffett bottom", BAC has rocked over the past 2 years. The stock has rallied nearly 300% off the lowest prices and the recent pause appears to have been just a rest before a new leg higher.

There is a lot to like on multiple viewpoints. This week we are seeing the highest weekly closing price since early 2010. The breakout as the look of a continuation Cup/Handle pattern and projects prices 20% higher as an initial target.

The risk is also well defined as the "Handle" low at $16.20 is only 8% below current prices. A break of that level would also break the rising 20 WMA as well as the 2-year uptrend support that has contained this entire rally. A weekly close below $16.20 and we would step aside.

There is still resistance in this area going back to the financial crisis and 2010 highs so it won't be easy.

But we have a clean breakout, a defined uptrend, and a very manageable risk/reward. Plus our indicators still suggest the uptrend is well intact and likely headed higher from here.

This now brings our XLF holdings up to 3 with GS and BRK.B, so we will be maxed out in Financial stocks after this purchase. The group looks poised to lead the market here, lets see if we can catch a nice ride.

Energy is Crashing. Who Wins, Who Loses?

Something I have been enjoying the heck out of recently has been watching the crash in Crude Oil and the stocks that represent the Energy sector. I have enjoyed it because I have ZERO exposure to Oil in my portfolios and haven't since mid Summer. This is what Relative Strength investing does; it keeps you positioned toward the strength in the market and away from the weakness. Relative Strength and trend analysis signaled problems with Energy names several months ago and have avoided most of the recent declines. Let's take a look at a couple Energy stocks to see how this has played out.

Halliburton

The stock of Halliburton, one of the world's largest oil service companies, has crashed nearly 50% from its highs just 5-months ago.

Looking at the Relative Strength trend for this timeframe shows two distinct exit points where the flow of funds was shifting negatively:

Once the stock failed its 20 WMA, RS had already broken its steep uptrend support and was signalling that the the trend was failing. That was your first signal to sell; worst case scenario was for that sell signal combination was an exit at the $62 weekly close.

If you had taken a longer-term view you may have been willing to give it more room to prove the uptrend wrong. By waiting for the longer-term (blue) uptrend line to fail would have signalled an exit in the ~$50 area. Either way you slice it, following this simple trend recognition signal could have saved you much of the pain from this meltdown.

EOG

EOG is one that I have personally been heavily involved in since early 2013. Above are my actual exit points for my personal accounts. The first exit was for my very aggressive short-term accounts and the second was the full trend invalidation for the Weekly timeframe I use for managing private investment accounts.

In hindsight the first exit was clearly amazing, although at the time I didn't know if it was going to be just a pause in the uptrend or a full trend reversal signal. This is what a very aggressive trend strategy will get you, but it will also often just be a pause that then resumes higher and makes it difficult to get back in once you sell.

The second exit was about as clear as a long-term trend invalidation gets. Price had consolidated at the 20 WMA, but then broke those support lows, the 20 WMA and the 2-year uptrend support trendline. Using RS as a confirming indicator we can see that it too suggested a change in trend at that same time:

Remember when I said to be patient and not go rushing into Conocophillips (COP) and that the key support would need to hold?

Here is what happened...

This is a great example of what tends to happen when a stock rises rapidly and unsustainably steep. All big trends eventually end badly, COP has found some support around the $64 area but will need to hold that NOW to fend off another steep drop lower.

ALL OF THESE ENERGY STOCKS ARE IN "NO TOUCH" MODE.

We don't try to pick tops and bottoms with a trend method, in my view none of these stocks are showing signs of a sustainable bottom being set. There will likely be sharp rallies that convince many that the lows are in, but that is a sucker's game. We will need to see significant firming price action before our signals begin to trigger new entries into these names.

I think now is a great time to make a list of your favorite Energy names and be ready for when the trend shifts back upward. You want to know exactly what you will buy BEFORE the trend changes higher. That way you will not be second guessing yourself and just emotionally buying whatever the pundits on TV say to buy.

Large declines present opportunity...eventually. The trouble is most people try to front-run the actual bottom by continually taking shots a catching the lows. It is a much higher probability to wait for the trend of lower highs and lower lows to end before even attempting a new entry.

So watch Energy for new opportunities in the coming year as all trends, both up and down, will eventually reverse course. You will want to be on the right side of these stocks when the trend turns for the better.

So Who Wins?

So if Oil is tanking and Energy stocks are following, who is set to benefit by these lower prices?
Anything Consumer focused should do well, as well as anything involving Transportation, i.e. Shippers and Travel.

Lower Oil prices mean lower gas prices, lower gas prices mean more discretionary income for consumers to spend and lower costs of fuel for vehicle operation.

A couple of my favorite picks that are already benefiting from these lower prices are:

Starbucks (SBUX)
Carnival Corp (CCL)
United Parcel Service (UPS)

Each of these benefit from from lower gas prices and higher discretionary income from consumers. Their price charts reflect this shift:

SBUX

CCL

UPS

Each of these stocks hit higher highs this week, in the case of SBUX and UPS those highs were new all-time highs. These names and many others like them will continue to benefit from reduced oil prices. The nice thing about these names as well is that the price of oil doesn't even have to continue tanking for them to see benefit. The longer oil stays below about $80 these companies will see increased traffic and lowered costs which equal increases in earnings per share (EPS). As earnings rise, stock prices rise. Lower costs and higher sales are a pairing made for record stock prices.

The beauty of these setups are that the decline in oil has been so rapid that we have not even seen the effects reflected in the quarterly reports yet. These reduced costs should fuel EPS for several quarters before their true values are understood. Continue to go toward the strength in the market.

Long-Term View Suggests More Upside Potential

At the end of each month it's important to take a look at the long-term view for all your stocks to keep a bigger picture perspective. So much can get lost in the daily noise of the market, seemingly insignificant movement on the long-term timeframe can evoke a lot of emotion in the shorter term. By running through this simple exercise each month will keep you aware of why you really like the setup and how the position can reward you for more than just the next week or two.

The monthly bar charts I feel are generally too slow of a signal to be traded, but the general direction of the stock or market is much more apparent from this broad perspective. This view allows us to see the forest and not just obsessing over each little sapling in the undergrowth. 

We always want to be investing with the long-term trend in our favor. Being able to identify that general direction will do wonders for your account balances. 

Let's look at our holdings in monthly bars to see what the big picture has to say.
Charts reflect monthly closing prices as of 11/28/2014.

DIS

Our newest position, Disney, has the look of a runaway uptrend. Since breaking out above its consolidation area in 2012 DIS has never looked back. This sort of parabolic rally will concern some, but as Charles Dow once said, you never can know where you are in a trend. A trend will continue beyond what most feel is reasonable, so it's better to find a place to jump on until it comes to an end. By managing your risk you can still own a stock that has moved significantly higher  because we know where we are wrong and will step aside before anything too damaging occurs. 

Disney is a winner, there is no doubt about it.

NKE

Nike has made a moonshot over the past few months, but that move came out of a nice continuation "flag" area. As you may recall we entered the position just as the stock was emerging from that consolidation. This is exactly the kind of action you hope to see when you buy a stock. Most people would want to sell here, but let me ask you, why would you sell when the stock moved how you hoped it would? 

TLT

Treasury Bonds have been a choppy long-term trade, but since the beginning of 2014 the trend has been exceptional. There is still a clear pattern of higher lows and higher highs, so we would expect another new high based on how it has moved over the past 10 years. 

UNH

Since breaking above it's prior highs near $60, UNH has been on a tear. The 8-year base has the look of a Cup/Handle pattern and would still suggest more upside to come. Regardless of the fancy names you give it, since 2010 price has consistently made higher swing lows and higher swing highs. This is strong trending action and we want to continue to take advantage of the move until it ends. 

BRKB

Berkshire has been extending strongly since 2013 and after breaking through the 10-month consolidation coming into 2014, the stock has been a leading performer. The move is getting a bit steep but as long as we continue to trail our stops and manage risk we can stick with it until it's done. 

BMY

BMY had a huge month of October closing at new highs. The recent pause has created yet another higher swing low and the trend is still obviously higher. Using NKE has an example, price here could still be getting going since resting for over a year. The bigger the base, the higher the move in space. 

SBUX

I believe Starbucks is ready for another leg higher. Since working off its huge rally, price as corrected over the last year +. This formation has the look of a continuation "flag" pattern and could extend significantly higher. The last time the stock behaved similarly was in 2012 which led to a nearly 100% move. It's certainly possible that something similar happens again. 

GS

Goldman is just now emerging from a significant base formation. Breaking through $180 was a major psychological win for the a stock. The type of move that can come from a base this size could surprise many. I think a retest of the all-time highs is very likely and possibly a move beyond is certainly not out of the question. 

PPG

I really like how PPG handled its recent correction and is now resuming to new highs. While the correction seems muted on the monthly chart, the weekly and daily charts show the high volatility from that October swoon. In hindsight this appears to have been just a shakeout move before continuing another leg higher. 

HAIN

HAIN has emerged strongly from its 10-month consolidation and is pushing to new highs repeatedly. When a stock moves this hard in our favor it is best to just get out of the way and let it work. To see another brief pause after this big move would be constructive, but longer-term this trend is about as good as they come. 

UPS

So many of these setups look similar to one another but are just at different stages. UPS is just now breaking out from its support area and looks poised to make another strong surge. 

PCG

PCG looks ready to explode to the upside. After trading sideways for the better part of 7 years the breakout above the resistance area shows a sentiment shift for the positive. What I like about this chart too is that despite correcting during the financial crisis, prices regained their footing quickly and have been pressing against all-time highs for a couple years now. This shows a strong underlying support for the stock and should propel it higher now that the primary resistance has been broken. 

IP

Speaking of ready to explode, IP looks ready for a pop after resolving its sideways trend over the past year. This has it all, a strong uptrend over the past 5 years, a year long support zone to launch the next move higher and new decade highs are being printed regularly as the trend resumes to the upside. When we look back on this breakout in several months I bet we see this previous 10-year trading formation as a type of Cup/Handle pattern; the recent consolidation certainly looks like a nice handle formation. If this is the case the stock would have serious long-term prospects. 

GILD

GILD has been a monster performer since 2012 gaining more than 400% during that time. Shares have recently experienced some increased volatility but the long-term trend is obvious. As long as you use sound risk management principles there are still plenty of chances to participate in a stock like this. Just know that went a trend like this ends it doesn't usually end well. Holding onto a losing position as the trend begins to fail could cost you and your account balance dearly. Be sure if you choose to invest in a name like this that under no circumstance do you get married to the position. If it begins to turn against you, get out and protect your capital. Trends like this are great to participate in on the way up, but they can be equally spectacular on the way down, so plan your trade accordingly.