A Position Rebalance (HAIN)

For the Longer-term focused Portfolio that I share here weekly, I like to manage each position on a fairly even risk level. How I do that is maintain a similar percentage of space for each holding within the account. When a stock has a prolonged rally, the size of the holding grows to a larger percentage than the other holdings.

What I like to do when managing a portfolio is to make sure one or two positions don't get disproportionately larger than the rest. I like to keep a fairly balanced list of holdings, therefore when a stock becomes too large in my account, I simply trim off some gain and bring it back in line with the majority of holdings.

HAIN has grown 30% larger than most of the other positions in our Portfolio over the past few months, culminating today in a very large spike in prices. I'm not just selling to sell either. It was brought to my attention yesterday by a friend that HAIN was becoming quite extended on an intermediate term basis. Today is finally the day that it has moved beyond my "extended" reading. For all accounts I am bringing HAIN back into balance with the rest of my holdings; I'm selling 1/3-1/2 of the holdings I have in HAIN depending on the aggressiveness of each account. Basically for my shorter term, more active accounts, I am selling 1/2 of my total position. For the longer term accounts I am selling down 1/3 of the holding.

We've seen a large breakout from the prior consolidation and today's action has blown the stock beyond the upper Bollinger Band and has extended the stock more than 13% above the 20 WMA. While selling when these conditions are in place isn't always perfect, it does tend (roughly 80% of the time) to cause the stock in question to at least consolidate sideways or pull back into longer term support.

Again, do know that there is nothing wrong with reducing a winning position into extreme strength. What you don't want to do is try to call an absolute top for the uptrend. Basically you can trim your winners, but you can not sell all of the position. We never know where the top is; the top might be today or it might continue to rally another 100%, who knows. But when a stock reaches an extreme level I think it is prudent to re balance the holding back in line with the rest of your portfolio.

Looking Ahead to 2014

To wrap up our end of year/beginning of year analysis, I think its important to take a step back and look at the long term uptrend in the market and identify what is currently going on and what needs to be highlighted moving forward.

When we look at the SP500 on a long term view its important to realize where the true turning points could be, as well as where a potential correction is likely to find buying support. Being that the market is up so much over the last year, we could see a large correction of 15-20% and still be within the long term bull market uptrend. I have two primary support levels that I am watching very closely; the lines in the sand, if you will.

 The first "line in the sand" is the area we are most familiar with when reading over our weekly reviews.

 The intermediate term uptrend from November 2012 to our current date is the more aggressive trading support. Meaning that stocks can be heavily owned above these levels; the primary support of interest is the intersection of the uptrend support line, the rising 20 WMA and recent consolidation lows at 1,767-1,747. A clean break of that area of support that violates all of these levels of interest would be enough to seriously alter our current market exposure in the near term. The lower end of this support range will likely continue to rise as that currently corresponds to the rising trend support line and 20 WMA, those will likely be closer to the 1,767 swing low by the time any real threat to that area comes into play. So for now, focus shorter term positions against the 1,767 support low. If that low fails to hold on a pullback, we would likely need to play much more defense than our current allocation suggests.


The second key level for the market really is the BIG ONE. If this support zone fails then the entire validity of the bull market comes into question. To get the right view of the support we have to look at a Monthly bar chart going back to the 2000 highs.

 If we highlight the prior range highs, a "retest" of that inflection point would occur at the 1,570 area and even extend down to about 1,535. We then look to the rally support off the 2009 financial crisis lows which intersects our support band and nearly matches the 20 Month Moving Average. This confluence of support signals suggests that this "retest" scenario would present a fantastic risk/reward buying opportunity, but also is the long term line in the sand for stocks moving forward. We would want to be focused on equities above that support area and likely sell out completely from any Long exposure to stocks below it.

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Now that we have a very clear view of where our risk levels reside, we should also take a look at an interesting view of the SP500 that I have been noticing recently. This is a hypothetical scenario and should not be considered as a viable investment plan, but it does present an interesting outlook going forward for the market. If you want a prediction from me heading into the new year, this is as close as you will get...

It is commonly said that history repeats itself. I tend to feel that historical pattern recognition, whether it be financial markets, politics or general human interaction, tends to rhyme more than it repeats. Saying that something will occur exactly like it did before is a little silly, but understanding that a similar outcome could come to pass is reasonable. With that preface in mind here is a situation evolving right now that I feel could have a similar "rhyme" to it.

Looking at our recent market history, it is clear to see that after being sideways for the better part of the last decade, stocks seem to be attempting to push higher out of this sideways range. Many market participants feel that seeing that we have moved such a great distance off the bear market lows in 2009 that the market simply can't continue much higher without another "crash" situation. But if you use history as your guide and look for patterns in the price, its interesting to see that this recent 10-13 year range we have been in is strikingly similar to the market view from the mid 80's into the early 90's. Which was right before US stocks took off, climaxing in an amazing bull market peak in early 2000.

Lets take a closer look at these two periods.

First we look at our current environment. Within the past 13 years we have seen two quite similar  +50% declines for the SP500. They both took roughly 2 years from peak to trough and both declined a similar amount. We have recently seen a very solid breakout and follow through from this range suggesting higher prices to come...But how much higher is possible?

For that, we turn to the pattern from the 80's which I feel holds more information as to what is possible for us next in the stock market. While many "main street" folk are beginning to venture back into stocks, people still seem generally distrusting and disinterested with the market. This is one reason why I think we could possibly have lots of upside to come in the future. The financial media has grown incredibly short term in nature and are constantly fixated on the daily ups and downs in prices. I feel they lose the forest for the trees and are not considering the possibility just how much better things could become before this rally comes to an end.

The time period from about 1986 to 1991 seems very similar to where we are currently. The reason I say that history rhymes and doesn't exactly repeat can be seen by comparing these two charts. In our current environment the sideways trading has lasted more or less 10 years, while the comparison view only took 5 years to play out. Our current range had two roughly 50% declines and covered 2 years each. The previous range saw losses of 20-30% and lasted about 6 months peak to trough. While the decline amount and length of the moves was dramatically different, the same psychological effects of the price movements takes place. Prior to each decline prices rallied strongly and then went through a bear market decline (a bear market is usually defined by a correction of more than 20%). Investors were elated at the peaks and desolate at the lows. Yet each decline brought about a new, refreshed rally that made up for all the prior losses. We then see the cycle repeat. And we may be seeing it happen again in our current environment.

What the comparison is meant to show is that regardless of the dates attached to the bottom of the charts, investor (human) psychology does not change. During the bear markets in the 80's and into the 90's the US saw very high unemployment levels, was involved in the Gulf War and uncertainty was amok. Yet once the issues slowly resolved and the economy began to turn, markets rallied for 20 years to heights not imaginable except in hindsight...

  
Here you can see the remarkable rally and the prior consolidation base we have been looking at. To compare where we currently would find ourselves based on a rhyming scenario would likely be somewhere in the breakout surge in 1996. This prior pattern would suggest that dramatic upside could still be in store for stocks over the next decade or two.

The US will be going through a similar demographics phase beginning in the next 10 years that was very much like the Baby-Boomer's rise to power. We are the Boomer's kids, we happen to be larger in the number of people that were attempting to enter the workforce in the late 80's and could see a similar economic spike once we gain stable employment and reach our peak spending ages; this is typically defined as from our early 40's to mid 50's. That is the age where most of the age group is fully employed and looking to upgrade to their 2nd home as their children begin to head into teenage years. We have reached a higher income level at that stage and is typical that we buy new cars, new homes and continue to be spenders in a consumer based economy.

While that's quite an economic theory and based entirely on the past, so far the technical patterns we are seeing suggest more upside to come. It might just roll over and play dead in the next year or so and all of this is rendered worthless. Or we might just be entering a new chapter in the continued strength of the US economy and be setup for dramatic upside in the not so distant future.

Again I'm not one for predictions in general, I just thought this historical context was interesting for where we currently sit with so-called "elevated" stock prices. Am I basing my investment strategy on this theory? No I am not. I continue to defer to what price is actually doing and not what I think will happen. But this is an interesting nugget of information that we shouldn't just ignore and pretend the past doesn't matter.

This will wrap up our year in review/preview series and beginning next week we will get back to our standard format of following our watchlist stocks and continuing to use Relative Strength as our guide.

Year in Review 2013 part 2

When applying Relative Strength analysis to your investment decisions it is always a good idea to keep a close eye on which industry groups are leading and lagging. The primary method for using Relative Strength investing techniques starts with picking stocks from the strongest groups. You assess which groups are acting the best and then you find the individual names within those winning sectors. A common way to analyze your sector strength/weakness is to look at how each group has performed, relative, over the last year. Fortunately we find ourselves at the beginning of a new year and now would be the perfect time to look back on 2013 and see how each group performed relative to the broad market averages. Determining which groups are leading and which are lagging will give us a clear picture to begin forming our plans for 2014.

Lets take a look!

We will be looking at Daily 1-year charts. The SP500 relative comparison will be shown as a % overlay on each sector's chart (the SP500 YTD return is the pink line). If the price is above the SP500 pink line it means the sector outperformed the broad market; if price is below, the sector lagged vs the market.


Consumer Discretionary (XLY)  +41%

The best performing S&P Sector for 2013 was Consumer Discretionary. Up a stellar 41%, it lead the markets higher all year. A very good sign for a recovering economy is to see discretionary companies posting record profits; this is what we saw in 2013. With this sector performing so strongly last year, I expect it to continue to lead into 2014 and will also be a strong indicator for when this rally may be coming to an end.

Health Care (XLV)  +39%

Health Care had a very strong year in what I believe is a continuation of a trend that could continue for many more to come. The Baby-Boomers aren't getting any younger and therefore will have even more dependence on health insurance, pharmaceuticals, and medical devices. If I had to pick one investment group to bet on for the next 30+ years, it would be through healthcare companies. We don't currently have a Health Care stock for our top 10 list, but I have my eye on several that might make an appearance.

For those who would like to check out a few names, i particularly like Abbott Labs (ABT), United Health Care (UNH), a few of the big bio-tech GILD, AMGN, CELG...There are a lot of things to like about all these companies going forward and if you have a longer time horizon on your investments, I recommend you take a look at the space.

Industrials (XLI)  +38%

The Industrials have been the major market leader over the past couple months and should be set up to continue leading higher into 2014. After trading more or less in lockstep with the SP500 for the better part of the first 8 months, Industrials broke higher and haven't looked back. We do have a new support base to move up our trailing stops. With the recent sideways consolidation from November to the end of December, we can move up our invalidation point to $49, just under those support lows.

Financials (XLF)  +33%

Financials are set up to push the markets higher as we enter 2014. The first couple trading days of the new year have been generally rocky, but not for the XLF. Many banking stocks and insurance companies are trading at fresh 52-week highs and some at new all-time highs (WFC for example) at the close today and look as though the next leg higher has begun. When the Financials lead, the markets always perform well.

Technology (XLK)  +24%

Now we come to the groups who have struggled more than some this year. While a 24% return is nothing to scoff at, Technology has lagged the broader averages all year. Only recently has it begun to play some catch up. Its not there yet but I am hopeful that the XLK can overtake the SP500 soon and add more fuel to the continued bull market.

Energy (XLE)  +24

Energy has not been an easy trade for us all year. It has constantly been tantalizing as a breakout candidate, yet then it fades. We have seen multiple attempts this year and it just hasn't been able to rotate into a leading group. While the current price action suggests more upside to come, it does still seem that this could struggle to really take off early in the year.

Consumer Staples (XLP)  +23

Staples have been a weird group in 2013. While they closed the year with a respectable 23% gain, they have caused a lot of confusion for investors. When the market was in full rally mode from January through May, the Staples were one of the leading groups. After taking a pause over the summer the SP500 has managed to distance itself from the XLP and looks like another positive phase could be coming to risk assets.

I use the Staples sector as a good judge of investor appetite for risk. When the market is nervous after a big move, investors will position themselves into Staples for safety, yet still wanting to participate in the upside in some way. Typically it has been bad for the markets near term future when Staples lead and it is typically good when the Staples lag. We look to be at a point where the market wants to leave the more risk adverse in the dust and motors right ahead with the XLP trying to play catch-up.

Because of the recent lagging behavior in the XLP, I will be using the low at $41.69 as our tight stop.

Materials (XLB)  +23

Similar to the other more choppy groups on our list, Materials is having a hard time putting together any sustained rallies. While the most recent action over the past couple weeks has certainly been strong, I want to see some continued out performance over the next couple months. I think a near term pullback could be in order, but I hope we can see some real buying come into this group soon.

Utilities (XLU)  +9%

Now we come to the really nasty ones from 2013. Utilities hardly did anything this year finishing up 9% and severely lagging the SP500. Now I shouldn't say they didn't do anything, because nearly 10% capital return from the Utility sector is actually pretty darn skippy, especially when you consider the almost 4% annual dividend the XLU pays out as well. But that's not what we do here; we don't put our heads in the sand and hope Utilities have a good year. We assess sector strength and rotation and we allocate toward the leaders. While Utilities present an intriguing value and easy risk/reward, we trade on strength, momentum and breakouts...Those things have certainly been lacking this year for the XLU.

20+ Treasury Bond (TLT)  -15%

If you invested heavily in Bonds this year in fear of a market crash, you got hit pretty good. 20+ Year Treasury Bonds traded lower by 15% in 2013. If you invested in the TLT this year, not only did you lose 15% on whatever you allocated toward Treasuries, but you also lost the opportunity cost of being invested in one of the best years for equities. So you lost 15% on bonds and missed the other +30% from stocks...This is why we use charts and Relative Strength, to avoid these troubling situations. There will come a time when Treasuries are a great buy but that time is not now and not likely in 2014 from the look of this chart.

Gold (GLD)  -28%

And rounding out our 2013 list is the investment that should never go down. Gold will save you when the end of the world comes...or something like that. One of the best quotes I read this year was from Barry Ritholtz, "the end-of-the-world trade has been a sucker's bet since the beginning of time". I just love that! I'm an optimistic kind of guy and I don't want to have to dig out bunkers and barter with gold bricks. I like to think that things are improving and that the United States will be more or less the same for my kids as it was for me.

That's not what the gold bugs and "Cash for Gold" people will tell you. They think we are doomed and the only way to protect yourself will be with guns and gold. Well, my question is then, why isn't the price of gold factoring in the dooms day scenario? Since they all seem to think this is imminent, why has gold lost 30% of its value this year? If the world would be ending, you would think there would be a little more demand for the shiny stuff. My best guess is because the world is not likely to end any time soon and the use for gold is simply a defense against the unthinkable occurring.

Which brings us to the chart. That's one nice downtrend! If the markets were ready to substantially correct, we should see gold take off and breakout from its intermediate term downtrend. Until that happens we need to stay sidelined or short gold (as we currently are).

In my current view, it is probably best to think of Gold as insurance and not as an investment class. It likely couldn't hurt to have some hidden somewhere, but as a major allotment of your portfolio, it likely should not be.

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When trading with Relative Strength the idea is to be Long the strongest groups and Short the weakest groups. We have been quite consistent with this plan throughout 2013 and it has worked well. Our Portfolio is currently Long XLF, XLY, XLI, XLK, XLE, XLB, XLV, and XLP, and we are currently Short Gold. We also have no position in XLU or TLT and we have not in 2013. We have managed to stay aggressive the strongest groups and avoided the weakest ones.

Those who say you can't time the market are not understanding the concept of what we are trying to do here. Timing the market (to me at least) does not mean picking the exact tops and bottoms. To me timing the market has more to do with identifying trends and strength, and positioning our self in sympathy with those groups. We're not attempting to call the top or pick the bottom tick. All we want to do is find the leading stocks in the market and jump on for the ride. That is timing the market; being able to target a certain positive expectancy scenario and expose yourself to the higher likely outcome. As you can tell from following me this year, we have been able to do quite well while keeping our risk very minimal. The buy-and-hold folks have done well this year too, but they risk 100% of their accounts 100% of the time for an average annual return of 8%. They use no stops, no risk management and have to deal with inevitable market corrections at full exposure. By controlling our risk we are able to maintain a very aggressive allocation when times are good and still keep very controlled risk parameters to our accounts at all times. If things turn negative we shift our allocations to where the strength is and away from the weakness. We haven't seeing it in 2013, but there will come a time (lots of them in fact) where our current leading stocks will be the dregs leading the markets lower and we will need to adjust. Now however is not a time to adjust.

So lets just continue to do what we do heading into 2014. There will be a ton of talk and prediction about what to expect in 2014, but we simply need to treat the next 12 months exactly like he have the previous 12. We will watch for trend shifts, leadership changes and high expectancy outcomes. We will align ourselves with the dominant trends and assess risk carefully on every position we enter. As of the close on January 3rd, our Portfolio is aggressively positioned and currently 85% invested.

Year in Review 2013 part 1

The next couple weeks will be dedicated to reviewing the past year. We need to take a look at how our picks performed relative to the overall market, which Sectors fared best in 2013 and what looks like it will continue to lead into 2014. This week we are going to review our Top 10 Holdings one by one to see trend and patterns that will give us hints toward future performance.

Some of our selections dramatically outperformed the market averages and others did not. We had a few big winners in DDD, HAIN, and PBW, while several names traded more or less in line with the SP500 like WFC, CMI and HD. We then also saw several names dramatically underperform the averages such as F, AAPL and ENB. This is mostly what we have come to expect when picking groups of stocks; some of the picks do very well, some fall in line, and others fail to live up to potential. Whatever the outcome turns out to be in hindsight, it doesn't change a thing in how we approach the next setup. We simply take each stock on its own setup of trend and trade it without bias. For example AAPL has been a poor relative performer overall this year finishing up only 5%, yet we are currently up over 18% in our position since entry, which would in fact be a pretty decent year relative to the averages. So it really depends how we manage each position and not necessarily the exact YTD returns that matter. But it is good for review purposes to at least take a look at the passive return of each pick to get an idea of underlying strength/weakness in the market.

Lets take a look at our Top 10 Watchlist stocks. The charts will reflect the Daily, 1-year view.


DDD     +155%

3D Systems was the big winner this year for us. Up a stellar 155%, this is what everyone hopes for when they pick a stock. Everyone loves a "double" and DDD didn't disappoint. After some very volatile trading in the beginning of 2013, it took a 6 month sideways consolidation breakout to really blow this thing open. This type of "explosion" in share price though is why we like to follow sideways consolidations near all-time highs after big rallies. Typically they allow for the stock to cool off and for supply and demand to gather equilibrium. Then once balance of supply and demand shift (by breaking out of the consolidation) you can see very powerful moves that make your year. I will continue to do my best in identifying these types of setups as we have done this past year. From coiling, tight trading ranges, come violent moves that can be extremely profitable if one can correctly identify them ahead of time.

HAIN    +65%

Hain was a very solid runner up for 2013. Finishing with more than twice the return of the SP500, Hain was  impressive. The stock had to deal with the large selling from Carl Ichan's liquidation of his stake in the company this year, and I was surprised how well price digested that surge in supply of shares in the late summer. Most people consider big investors like Carl almost bulletproof in their actions, yet Hain gathered itself orderly and has now made two new all-time highs since his sale in late August. I read a few articles calling for "the Top" for Hain after Ichan's sale, but I continue to yield to what price actually does, and here the price trend suggests more upside to come. It doesn't look like price cares what Carl did with his shares, the stock simply absorbed the sale and is ready to move forward.

Basically from the peak in late August though price has traded more or less sideways between $88 and $72. This past week however it seems that the consolidation could be over and the next leg higher is beginning. It looks to me that a breakout is underway and we could see a nice strong surge heading into the next earnings report. We can also move our stop up to the lows just below $80 now. This has been a consistent winner and we need to continue to follow the trend higher.

PBW      +54%

Clean Energy made an impressive showing this year. I don't like to pat myself on the back or anything, but we did pretty much nail the bottom so far in the Clean Energy space. We are seeing one reversal setup flow into another and each one is larger than the last. This is what we look for in terms of positive price action and secular reversal moves. Energy use is expanding in the US and with a Democratic president in office it is often Clean Energy that gets a strong funding boost. While we have recently taken a cash position in this space, I do expect this to continue to setup bullish price action and create many more profitable opportunities for us as we go forward.

PPG       +38%

We switched to PPG midyear, but it continues to show strength. PPG replaced a failed watch list stock (MOS) and has since been a leading performer in our Portfolio. I have been watching this recent, 3-month sideways price action for a while now. It is interesting because it is occurring above the prior channel resistance barrier and at all-time highs. When a stock can extend beyond upper resistance levels and hold them, it is a very bullish thing. Once again though it will be a break of the range that will be of importance. A break below will likely cause a correction down to the lower channel support, while a break above will simply indicate more upside to come. I believe this will resolve itself higher, but will be watching the support levels at $180 closely.

WFC      +33%

Wells has been a solid performing stock this year. It has been a leader in the XLF group and a laggard as well at times. We have recently reentered a position into WFC and I believe this continues the uptrend higher. Basically all the gains for the year were achieved between January and July. Since that July high the stock traded sideways and is only now emerging from that range. With the recent break to new highs, Wells could have a lot more upside ahead. Our new trailing stop on the position is going to be just under the $43.25 lows.

HD         +32%

HD looks to be regaining its mojo from the beginning of last year. Similar to WFC, HD had nearly all of its yearly gains in the first 5 months. The stock has been choppy and range bound for over 7 months and is only now breaking through that upper boundary. I've been hearing a lot of chatter out there about how the next 5-10% pullback is truly imminent, but I look at a chart like this or WFC and I see a stock (a leading stock at that) that has been correcting through time for the better part of 6 months and is only now emerging from the trading ranges. When more people start guarding for protection, that is when the market keeps leaving them in the dust as it climbs higher. This is just an observation of my charts and the noise I am hearing. My charts say that a significant correction has occurred over the last half a year, and now these old generals are ready to step back into a leadership role.

CMI       +29%

Cummins was the example of a "market perform" stock in 2013. It had its moments but they were short and if you missed them, all that you got was chop for multiple months at a time. However at the current moment it appears that CMI is emerging from one of those ranges into a "good" period for the stock. The stretch from late June through early September was truly sweet. The stock rallied 30% over a 3-month period of time. It then corrected through time for the next 3 months and now seems poised to surge once again.

  I think CMI will see strong new highs in 2014. There is currently a large Cup/Handle formation in motion for CMI with a projected target of $162-174 depending on where you draw your Cup neckline. I seem to favor the closer of the two targets because the $162 target acknowledges the breakout and throwback at the end of October. The corrective move retested the $122.50 neckline perfectly and seems like the pattern level the market is paying attention to most.

The point is this has significant upside potential going forward and I think its just getting started.

SP500    +29%

The SP500 had a record year. It was just a fantastic year for stocks. This rally has had many doubters and has left them all in the dust. We continue to see support levels hold and new highs being set. As long as that's the case, we are very constructive on stock prices going forward. 

F             +18%

Ford has cooled off lately, but if it can regather itself, 2014 could be another good year. F was really humming along for the first half of the year, but has since experienced a similar fate to many of the larger stocks. The corrective action from July to December had been more or less constructive. It was the breakdown last week that has changed the picture here in the near term. I was really expecting $16 to hold as strong support, when it failed, we closed out our remaining position. If this can turn around quickly here I think it would create an very interesting false breakdown and would be worth a look back into our account. There is still the massive base formation under construction and that could lead to dramatically higher prices in the future.

AAPL     +5%

This one made great strides in the last half of the year and seems poised to lead into 2014. While many of our prior leading stocks were taking a breather from July through December, AAPL was just getting itself together to give the market a well timed pick me up. When names like HD and WFC were topping for the year, AAPL was bottoming in a major way. We have seen a textbook uptrend over the last 6 months and prices still seem poised to continue higher. The stair-step action here is very encouraging as it creates very reasonable trailing stop locations along the way. Lets stay with this as long as we can, they say big things are in store for Apple in 2014. We'll see if the stock agrees.

ENB       +0%

Enbridge really had a tough second half of the year, but I remember a time early last year where it seemed it would never come down. Now its holding at a flat return for the year. If it can maintain the $40 level as support, I think it could go on a nice run.

Total Top 10 picks       +42%    vs   +29% for the SP500

While we had some big leaders and laggards this year, our total 1-year passive return for our picks outperformed the SP500 by 13%. This is exactly the type of return i hoped to see when I selected these stocks for our list at the beginning of last year. Lets see how they get this new year started.

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Often at year end most people will try to predict what next year will bring. They dig up any study that suggests that due to the strength this year, next year will be strong/weak based on their findings and they will stick to that prediction when making current portfolio choices. This is something you will NOT find me doing.

I will not be one for trying to predict what next year will bring good or bad, I will simply maintain a flexible approach to the market and let it tell me when my investments are poor or strong. Here's a little hint, nobody knows what's coming...the future is uncertain, that's what we have to deal with. The best we can do is recognize strong movements and weak movements, and position ourselves as correctly as possible relative to the strength and weakness.

That being said, currently our charts suggest strength for the intermediate term trend heading into 2014 and we will continue to be positioned that way until the market proves our current holdings wrong.

Weekend Update: The Fed Tapers and the Markets say...Yay!?

What a week for the markets, but first thing first, we had 3 changes to our Portfolio that need to be addressed prior to next week. We have added 2 positions and lost 1 as of Friday's signals. We have finally received a strong entry signal for the Financial ETF (XLF), we entered a short position in Gold and we sold our remaining position in Ford. Lets take a look at each of these individually, then we will get to this week's wrap-up.

 Entering Financials (XLF)

I have been watching this breakout to new highs for the XLF but hadn't received confirmation from volume and the Relative Strength trend vs the SP500. Well this week we saw too much price action confirming a bullish bias. Since price has taken out its prior highs it has consolidated nicely and retested the prior resistance level. This week saw a strong push off of that level confirming the breakout, but this time volume surged with the move. We also saw XLF:SP500 make a breakout of its own...

While the breakout is very early, we have been waiting for a sign that the Financials were ready to outperform the market and take a leadership role. This week's action in price as well as RS shows that money is flowing in strongly and I believe the XLF is ready to lead once again.

Entering Short Gold

I have made a separate post for this trade here. Being that its a Short position and is new to our study I think its important to look at it a little more in depth. Please take a look at it even if you are uninteresting in shorting positions. I am showing and introducing that trends can be traded in either direction and that the entry/exit signals are nearly identical. Being that we are in a liquidity filled Bull-Market, shorts are not as favorable in strong uptrends. However there will come a time when our bias lean heavily short just as they now lean heavily long. Markets trend in cycles and we will see a time where the trends are down. This is just an introduction to taking the other side of a trade, if you are interested in that.


Exiting Ford (F)

We have been neutral on Ford for some time now. We were maintaining a half position from our original holding and this week's action showed enough weakness that we will step aside and book our remaining gains. There are about as many signals as I can have triggered simultaneously; the prior significant swing low from $15.70 failed to hold, as did the 18-month rising uptrend support. We have also seen the move come from beneath a rolling over 20 WMA and it came on VERY high sell volume. This all occurred on one of the best weeks for the market all year as well. When we are talking Relative Strength, this fails the test miserably.

It is true that there seems to be the formation of a massive 12-year base reversal in the making, which would be extremely bullish for potentially years to come. But this has not triggered and the shorter timeframe is signalling a lower probability setup going forward. There should be strong support around the $14.30 level and if this will have any chance of fulfilling the base reversal, this level will need to hold and stabilize shares.  

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Now, back to the normal weekend recap. I was very surprised to see the Federal Reserve "taper" their stimulus program. I was even more surprised that the announcement was met with a surge in the market averages. First I expected no action from the Fed this month, and if they did reduce purchases I fully expected the market to trade significantly lower on the news. This just shows how "thinking" and "predicting" is a really terrible investment strategy. Even if we correctly predict the news, we still cannot predict how the market will react to that news. Which leads us to feel even more confident in following what PRICE says and not what some economist or analyst says will be the reaction.

I couldn't have been more wrong with my assessment of what would transpire should the Fed taper their stimulus, yet I profited fully on the outcome because I don't trade what I "think", I trade what I see. This is a fantastic lesson for all, including myself. 

Here's a look at the SP500 and this weeks' breakout to new all-time highs

After trading sideways for the better part of the last month markets took a definite turn for the positive, surging to new all-time highs on very strong volume. While the market has churned recently, it never traded below the prior resistance level and old highs. The SP500 has managed to hold that short term support and is now lifting off of it with force. The 20 WMA is beginning to play some catch up and once it catches up a bit more, that short term support will have more significance sharing it with the 20 WMA. Lot's to like going forward!

We saw big moves in many of our holdings this week also, lets look at the best performers.

DDD

3D continues to rip. At the slightest inkling of weakness, traders rush in to buy every little dip. With the exception of that large outside week we saw 5 weeks ago, the price action is simply stellar. Relative Strength is continuing to rise, as is volume on this advance. The only real issue we have is that since price has run basically straight up, we have no well defined support levels to adjust our stops. The best thing to do with a winner like this is to simply hold on for the ride. Once we see a cooling in the price we will be able to use that consolidation as our new support base and stop location. As of now I think it's best to be very positive with any consolidation above the "outside week" low at about $70. The 20 WMA is beginning to rise sharply and should catch up as price moderates a bit.

I mentioned last week how when the market is weak you really want to focus on those stocks that performed well during the broad market weakness. I highlighted DDD's performance last week and you can see what happens to those relative winners once the market turns positive...those stocks continue to lead with even more outperformance.


HAIN

HAIN continues to act well. It seems to be continuing its pattern of "consolidate and pop"; it will chop sideways for several weeks and then it will pop to new highs. We seem to be in a new "pop" phase with the very strong move we saw this week, finishing at new all-time weekly closing highs. With this week's surge we can move our stops up to the low of the consolidation range and prior resistance near $79.50. This stop coincides with the 20 WMA, prior swing low and 1-year uptrend support. A clean break through that level would be enough to take profits and wait for better price action.
 
CMI

Cummins finally looks like its ready to resume its uptrend after holding strong support and rallying this week.. CMI also made a new weekly closing high and looks like a winner going forward. Our stop remains just below the support level at $128. The risk/reward here looks amazing! New positions can be added on this week's signal.

WFC

Wells followed the Financial sector higher this week and finished at new all time highs. The move out of the recent correction looks to be sustainable and I think this has upside written all over it. New positions can be added here as well with stops below $42.75 or a little looser stop at the low near $41.70 depending on how aggressive you want to be.

ENB

While Enbridge's chart is far from as pretty as the others above, it is notable how well it has acted since testing the lows of our support. We saw a nice accumulation bar in volume this week (buy volume exceeds the previous bar's buy volume). In fact this is the third time price has tested the $40 level and seen a surge in buy volume. This is certainly a secondary indicator but it does show definite interest in shares at that price level, which is a good thing for us. This will continue to be our stop going forward, now we want to see the prior closing high at $43.76 taken out.

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The rest of our holdings saw modest gains in general but didn't set any new highs. With the overall positive price action this week following the Fed's trimming of stimulus, we have to expect that the market wants higher prices going forward. The Fed has said they will remain accomodative for the foreseeable future and that the economy is gaining traction. The market seemed to like what it heard this week and people are beginning to come around to the idea of a higher stock market and improving economy. Individual investors are gaining confidence and we could see this continue for much longer than most people think is reasonable. Sentiment can be a very powerful thing and when its starts gaining momentum, it can do great things for equity prices.

But we will continue to do what we do and that is follow price and ignore noise. It has worked well for us and we will continue to invest in the direction of the dominant trends.

Entering Short Gold

I'm going to throw some new stuff at you here, something I haven't done in a while is enter a short position. Do understand that my signals work for both up and down trends. You simply buy and go long uptrends and short downtrends. We haven't had too many downtrends in the groups we have followed this year, but i have recently decided that within our ETF tracking, we do follow Gold and Bonds and we should include them as asset classes for investment going forward.

That preface aside, this is just a really simple and clean downtrend. It looks just as nice as some of the strong stock uptrends we have seen this year. This one just happens to be flipped over.

 Here is the longer term downtrend. We can see that price is steadily declining underneath an also declining 20 WMA. I've been watching this for a while closely and today's action signaled an entry.

  We have some pretty bearish price action on the zoomed in Daily view. While price attempted to break to the upside last week it was unable to sustain anything and has since gapped back lower and today extended below the consolidation. Volume was also really high today adding more confidence to the move.

When the long term charts are showing the trend, and the short term views confirm the break, that is what we like to see. Multiple time-frame setups lead to higher probability trades.

We will use the $126 level as our stop and will enter at tomorrow's open.

Even If You Knew, Would it Matter?

I am often asked what I would do if the Jobs numbers come in weak, or if the Fed decides to reduce their stimulus, or what if that company doesn't hit their earnings targets? People wonder if I would sell my stocks. You would be amazed at how difficult it is to explain to someone that it really doesn't matter. Doesn't matter?! How can it not matter if the Fed reduces its stimulus activity?

This is what I try to explain: It's not the number itself that is important, all that matters is how the market handles/interprets the number. The Jobs number could be weak and the market could rally because it means the Fed would continue to ease. The Fed could reduce (taper) its stimulus and the market could sell off. The Fed could reduce (taper) its stimulus and the market could rally.

It's not the news that is important (the "why" rarely matters), it is the reaction by the market to the news that matters (the "what" is most important). So if they told you at the open this morning that the Fed was going to reduce their bond purchases by $10B per month at 11:00am, what would you do with your holdings? If you are like most reasonable people you would decide to sell at least some of your stocks to protect yourself...The Fed is going to take its foot off the gas a bit, so the market likely will too. It should correct and I will protect my profits from a strong year. That's what You, Me, and most anyone else would do. And its smart, we've had nice gains this year and why take a chance giving back those hard gained profits when the market will sell off into the disappointing stimulus announcement?

...and we would have been 100% correct...

At 11:00am the Fed announced the taper, the SP500 was at 1,780. At 11:01am the SP500 was at 1,768. That's a 12 point drop in a matter of seconds! It looks like a lot of people wish they would have known the outcome ahead of time, like us. They could have gotten out of the way more quickly too.

We would have been spot on, for 1 whole minute...

At 11:05am the SP500 was at 1,794 and never looked back, closing at a new all-time closing high.

Wait! What?! What just happened to logic and our plan?! Oops, I guess the market doesn't give a shit about your plans. Go complain to the guy who bought your shares this morning and is now riding off into the sunset.

You see, its not the number or the news that matters. All that matters is what the market says matters. Far to often people are caught up in the "why" and the "what" takes them to the cleaners. I know many people think they can anticipate the news and predict the future. But really, no one can.

You still want to guess that Jobs number or the next Taper amount? Let me ask you this, even if you were right, would it matter?