Risk On Rotation

We had no changes to our Large Cap Portfolio this week. For an exercise, see if you can notice the broad market change by examining our current holdings' behavior this week:

Offensive Groups (Consumer, Materials, Industrials) 

DIS

SBUX

TWX

IP

PPG

BA

HON

Defensive Groups (Utilities, Bonds, Healthcare)

PCG

TLT

UNH

BMY

Can you identify what happened this week? It appears clear to me that the defensive groups experienced relative weakness and pullbacks, while the offensive groups acted strongly.

I also notice how the offensive groups are either just emerging from or are in the later stages of consolidation bases. Contrast that with the defensive names that are well extended from any previous support bases.

We could be seeing a rotation underway from the defensive names to the more risky and economically sensitive names. Continued rotation has been the story of this bull market and this could be the next chapter.

The defining characteristic of this week's market was the selling of interest rate sensitive and defensive investments . Friday's positive Jobs Report paved the way for a movement away from safety assets and back toward more economically sensitive groups.

 The leaders of the past couple years took a beating this week lead by Utilities, Treasury Bonds and Health Care. While Consumer stocks are looking quite strong and could provide fuel for another wave to this bull market. 

Speaking of fuel, Energy saw a strong bounce as oil's relentless skid got some relief this week. But don't make anything more of it than what it is. The oil bounce was simply a pause in a severely downtrending market. Many are trying to call a bottom here (as they have been for a couple months now) but that is a sucker's game where you will just end up throwing money down a hole. You don't have to be the first one in to make money. The much higher probability is just to remain patient and wait for a new uptrend to begin to establish itself. One week's reprieve doesn't change a multi month crash. Just be patient.

The move that was most notable to me this week was the Utility sector pulling back after last week's reversal candle. It is still a short term signal, so no long term action is necessary. It appears the group is seeing some overdue profit taking. When a stock or sector has been trending as strongly as Utilities have, you will see exaggerated selling as those looking for a quick trade don't want lose their profits. But those with the intention of trading the long term trend must be willing to give back modest initial gains to stick with the secular bull market in the making.

Always try to keep one week's action in perspective. Here are the Monthly charts of two Utility stocks I own:

 While this week's action was heavy, the longer-term view is very bullish. In both cases these stocks are emerging from massive base consolidations (PCG 15 years, AEP 20 years) where the stock price went essentially nowhere for more than a decade. By my indications this group is still looking to move significantly higher over time and is one of the most positive looking Sectors for multi-year strength.

I posted about a year ago that Utilities had bases breaking out all over the place. We can see that this group is just getting started:

You can basically throw a dart at any name in this group and find a stock breaking to multi-year highs after multiple years, sometimes decades of base building. As they say "the bigger the base, the higher the move in space". Hard to beat bases like the Utilities have formed over the years.

Follow me on Stocktwits for updated charts and notes throughout the week @RelativePerformer.

Back to Support. Where To Next?

After receiving the first Long entry of 2015 from my SP500 Trend Model last week, the market immediately rolled over and triggered a failed signal. The Trend Model is now in a "Cash" position.  

To compound that false signal were the trend invalidations that occurred in 4 of our Large-Cap Portfolio holdings. 

We will be taking exits in GS, HAIN, BRKB, and NKE. With the exception of GS, these holdings have been longer term winners for the Portfolio. Their weakening trends suggest leadership changes in the market and the signal should be taken as a warning. 

EXITS

GS

GS finally broke our stop after coming within cents two weeks ago. Last week's bounce attempt failed and we will take our small loss.

Longer term the base formation is still intact. This will be one to watch if the Financials can regain their footing.

HAIN

HAIN has experienced a sell the news reaction to their 2-1 stock split. While it is oversold on the short-term, the intermediate trend has come under pressure. Price closed at a new 12-week low and RS vs the SP500 has begun to roll over.

Despite the recent skid we still have a 15% gain in the position, it is time to protect those profits.

Longer term the uptrend is still well intact, should price firm up we will likely look to re enter the trade.

BRKB (Daily chart)

NKE (Daily chart)

Both of these setups require looking at the Daily bars to see the support failure and stop trigger. NKE and BRKB made new 50-day closing lows and broke down from an orderly consolidation pattern.

Take extra care when a bullish continuation pattern fails to move in the expected direction. After the rallies in 2014, the recent price action had the look of a steady and bullish consolidation. The expectation was for the stocks to break higher resuming the uptrend. However in both cases the pattern broke to the downside and trapped many bullish positions.

This is how resistance gets formed. Those trapped buyers will look to exit their holdings into any strength and create downside pressure on the shares.

Similar to HAIN we have strong gains in these holdings and now is the time to realize those gains.



With those four exits we now hold 11 positions going forward. Let's take a look at how they are faring: 

WEAKENING

TWX

I still like the stop location for TWX. While it has been a disappointing trade so far, its not dead just yet. The situation is weakening, but the trend is still intact. 

 DIS 

I was hoping to move the stop on DIS up to the $91 level, but Friday's close snuffed it out as a strong enough support. If price can hold right here and make a new high we can move the stop to this week's close. Until then we want to continue to use our initial stop and give DIS the benefit of the doubt. 

On that note, They will be announcing earnings Tuesday after the market. So we may have our answer either way by the end of next week; either we get a new breakout, or earnings disappoint and out stop is violated. Regardless of the added volatility due to earnings, we have our plan and the uptrend is still intact. 

HON

HON has seen its breakout to new highs last week engulfed by this week's decline. That isn't a particularly great sign for the strength of the stock, but our initial stop is in a great position. 

STRONG

TLT

TLT continues to confound the masses who insist on a "rising interest rate environment". Don't let yourself get caught up in the punditry and noise surrounding this. Follow the trend and be patient.

This is the Weekly RS going back to the 2009 peak. Since that high TLT has mostly underperformed the SP500. That 6 year streak of underperformance is under pressure currently. Despite how "far" TLT has risen and how "low" interest rates are, the implication of this chart is that the outperformance in Bonds vs Stocks could just be getting started. 

Be mindful of this chart as a rally in this ratio suggests trouble for stocks. 

SBUX (Monthly bars)

SBUX on the Monthly view is breaking out to all time highs. After a 17-month sideways correction this is ready to resume higher.

This is a monster stock making new record highs and we are holding above $79. I'm very bullish SBUX here longer term. 

BA (Monthly bars)

I wanted to show the closing January monthly bar for Boeing also. This week's positive reaction to earnings caused a huge surge in the stock. As you can see above, BA has never closed a month higher than it closed last Friday. 

I think this has tons of upside potential so lets just get out of its way and let it work. Stops at $120.

PCG

Maybe this is the week that starts the correction. The candle formation from this week is called a "Shooting Star". The implications are for a short-term bearish shift. Honestly I can't wait for a correction here. The sooner we can get a higher low to trail a stop up to the better.  

PCG pays over a 3% dividend. If interest rates remain low, as TLT is suggesting, investors will be coming into a strong payer like PCG on any weakness. 

 UNH 

UNH posted a nasty week and basically took back all its gains from the prior earnings breakout. With our stop still more than 10% away, I hope we get a decent pullback here so I can add to this long term winner. 

BMY

BMY has seen its recent breakout extension sold, but it is still well above support and our stops. I would expect more sideways action over the short term, but likely nothing too drastic. 

The nice thing about having to wait for a stock like BMY to consolidate is that you get to pick up that 2.5% dividend yield. I feel very confident with this stock here. 

PPG

PPG is just hanging out. There is no reason to get antsy with this one. The RS is fantastic as the stock is still 5% above its 20 WMA. Lets give it some room and see what it can do.

IP

IP is just trying to wait out this market. Since the large base breakout a few months ago, price has quite bullishly held in a tight range above that breakout level. Above the breakout at $49.90 this one is fine. 

International Paper also sports a 3% dividend yield, another one we can afford be more patient with. 

As you can see most of our remaining holdings are making or at new highs. As long as that is the case, their trends are valid and we will maintain those positions. The few that are getting close to invalidation will need to be watched very closely going forward. 

With this week's changes our portfolio sits with a 50% cash position. This is our most defensive posture since the October shakeout. Maybe this time will be the same and we quickly regain market highs. Maybe it won't and we head lower; we will just have to see. 

Because we never know what will happen next, it's most important to stick to your process and avoid emotional trading. Stick with your winners, eliminate your losers, build up cash reserves, and watch for the new stocks emerging from the correction. 

Should the market regain its trend, here are a few names that are atop my watchlist:

AMZN

AAPL 

UNP 

BIIB

A few concerns I have: 

1. The underlying trend is weakening. Big stocks are breaking down hard (MSFT, INTC, IBM), along with the entire Financial and Energy space. This is a drag on the overall market. 

2. The market failed to rally from good news: Massive stimulus from the ECB, positive news from the fed regarding interest rates, no bounce at all in market averages after AAPL earnings.
So Its selling good news and really selling bad news: weak GDP, poor Durable Goods, poor earnings guidance, etc. 

A couple good things I see: 

1. Leaders are still being rewarded. Strong earnings beats are being bought, not sold: BA, AAPL, SBUX, BIIB, AMZN 

2. The SP500 is holding above key polarity support 1980-2000. As long as this level is intact, the market maintains a positive trend bias. 

I use simple trend filters to attempt to identify the strength of the market and by all indications from those filters and price, this market is weakening. My research suggests that a dramatic run back to the highs is going to be difficult to sustain. So with all likelihood that's exactly what will happen : ) 

However I'm always keeping an open mind, and will be ready to adjust my thinking should it be proven otherwise. 

If you would like to keep up with our holdings and watchlists during the week please follow me on Stocktwits @RelativePerformer. 

The Green Light?

Due to the firming price action this week we received a new entry in Boeing (BA) as it managed to create a marginal new swing high. We also received an exit for UPS (UPS) as the stock gapped lower by 11% in Friday's trading session. My proprietary Trend Signal also received a new bullish Buy signal and suggests a positive shift for stocks. 

Something interesting about receiving signals during a choppy environment is that your emotional response wants to wait "to see" if the move is really valid, even though the System suggests getting aggressively long. I always like it when my system signals entries when my and other's feelings suggest remaining cautious and indecisive. Your backtest didn't dwell on whether it is a choppy, uncertain market. It takes all signals and disregards any emotions at the time.

 The emotional aspect of investing is always interesting, especially when a successful system signals moves that your brain doesn't want to take. Our brains however have proven to be inferior when making financial decisions, especially financial decisions involving unknown risk. It is for this reason that I try to always follow the system, and not my emotions. 

If you need a fundamental reason to buy, look no further than the ECB's massive stimulus program It unleashed on Thursday. The European Central Bank will purchase 1.3 trillion Euros worth of European government bonds over the next 2 years and that should prop up global markets.

Another important takeaway with a trend trading approach is that the entry signal is the least important aspect of the trade. Its far more important to size your position according to your predetermined risk tolerance, and most importantly placing effective stops that not only protect against outsized losses but also keep you in a trade long enough to ride the trend to completion. 

Actually taking the "initial signal" is the most inconsequential aspect to successful investing. So regardless of whether its a clear buy signal or a muddled one, the most important thing is to have a robust EXIT strategy that manages risk and keeps you properly positioned.

Now that we know our system likes the market here, lets take a look at the notable moves in our Portfolio this week:

Exiting UPS  

UPS opened Friday with the dreaded "pre-announcement", stating they anticipate a more challenging future environment than was originally expected. Maybe they do, maybe they don't. All I need to know is that price decisively broke my stop level and moved back into the prior range. This rejection from highs created a failed breakout and with so many other winning stocks setting up, we can look elsewhere. 

Do note that I don't consider this one dead just yet. Similar to prior breakout-shakeouts in this bull market, this may stabilize and retrigger at some point in the near future. It is certainly one to keep on the watchlist, but as for risk management we will cut our losses quickly as this has taken a sudden and unexpected turn for the worst. 

Entering Boeing (BA)

While price just poked above the prior weekly swing high at 134.36, the Relative Strength is showing a clear breakout and outperformance during the recent turbulent conditions. The MACD has also found support at the zero line and is headed back higher. 

A clean break of the $120 range lows would act to invalidate our trend resumption rationale and would cause me to exit the position. 

To gain a little more perspective on the longer term, lets look at the Monthly chart too:

Since the torrid run BA made in 2013, the stock spent all of 2014 digesting that surge. The recent correction has been orderly and tight. This also has allowed the 20 MMA to catch-up and price has bounced right off that trailing support. 

I feel the risk/reward is very much tipped in the favor of the bulls here and with the weekly breakout signal, it appears now is the time to get involved. 

SBUX

SBUX blasted off to new highs this week after reporting record profits for Q4. It appears this is ready to run again and a move similar to what occurred in 2013 is not out of the question. We will keep our stop below the breakout consolidation and let this baby work. 

HON

HON had a very nice breakout to all-time highs this week on a strong Q4 earnings report. Nobody was talking about this today, but I always think its worth noting when a stock is up 3% on a down day for the market. Continue to ride this winner. 

UNH

UNH continues to shine and despite the great run it has had over the past year +, the stock rallied 10% this week on a strong earnings report. With the new breakout it is time to slide our stops up to the 95.75 level. I would expect some consolidation and profit taking soon, but there is not much in the price action to support such an opinion. Right now we just need to stay out of the way and let it build some kind of support base. 

As usual we continue to run winning positions and cut losing ones. We will take new signals as they trigger and manage risk as our top priority. Good luck with your positions next week!

If you want to track our holdings during market hours be sure to follow me on Stocktwits @RelativePerformer. I will be posting updates and charts on any notable activity throughout the trading week. 

Portfolio Review: Managing the Correction

For this weekend's review I would like to share how I deal with a corrective market. I will note that anytime in the past 2 years that I have blogged about a "correction" or mentioned caution, it has almost exactly marked the low in prices before they ripped back to new highs. So keep that in mind :)

But if this time is different....

I try to treat all corrections the same. The most important thing is to stick to the strategy as that will allow me to make the most correct decisions when stress is at its highest. Taking losses in the market hurts. No matter who you are, it doesn't feel good to be proven wrong and worse yet you had to pay money to find that out. This fear of loss can create a lot of mixed emotions and incorrect decisions.  If you are investing money in the market, it will happen often. Your positions will be in the red a lot. So if this is going to be a common and recurring event we better have a way to move through it as easily as possible. This is how I attempt to manage corrections in the market.

The four things I try to be mindful of during corrections are:

1. Manage my current holdings
2. Raise cash to reduce overall market exposure
3. Build a watchlist of stocks behaving well
4. Have Patience 

The most important thing to do during a market correction is to manage your current holdings. Everything else comes secondary to this. You cannot allow an acceptable loss to become a large loss. To do this you need to focus on your predetermined stops and execute your strategy.

Exiting Bank of America (BAC)

Along with the rest of the Financials, BAC rolled over hard this week and violated my stop level. The stock has been beaten the last 2 weeks, so a bounce may be likely. But we don't wait around for hopeful outcomes. Our stop was triggered, we take our loss and move on.


The next part of managing your holdings is to identify which positions are behaving weakly and nearing their stop levels.

HAIN

GS

Also we especially want to pay attention to the positions that are showing strength and bucking the overall weakness. These have the best chance to be leaders when the market turns for the better.
Traits I look for here are stocks continuing to set new highs and those holding above a key breakout level. Fortunately most of our holdings are fitting into this category and acting like leading stocks.

PCG

PPG

UNH

DIS

TLT

BMY

IP

BRKB

SBUX

UPS

The last part about position management is to note which stocks are trading with the general market and performing inline. Watch these because they could turn for the better or worse.

HON

NKE

TWX

Okay so we know where we stand with our holdings should further weakness occur. Now we need to be vigilant for when we need to execute exits for those weakening positions. As the market takes out our weakest holdings, our cash position will rise therefore reducing our overall market exposure.

Reducing risk is the name of the game for surviving corrections. Selling weak positions and raising cash is a very effective strategy for risk management and works much better than attempting to time the lows in a downtrend. Continually buying in the hope that you will pick the bottom will eat up your account through overtrading. Overtrading during poor market environments is one of the major issues that traders have.

4 out of 5 stocks trade in the direction of the general market. I don't try to fight that wave and prefer to be more aggressive during favorable times. Some will disagree with me when it comes to using the overall market as a filter for my individual positions. Many believe that you can pick market winners in all environments. This may be true but I prefer to swim with the current and not against it. Investing is hard enough, let alone ignoring the gravitational pull of the indexes on your holdings.

By using a simple trend filter on the overall market can help keep you only adding risk during favorable trends and protects you from increasing exposure during a downtrending environment. Successful investing is not a sprint, you don't have to always be aggressively in the market. I choose to remain patient and keep my risk exposure aligned with the dominant market trend.

This week's closing trend signal suggests we are still in an uptrending market despite the recent volatility. The corrective period we have seen should still be viewed in the context of a larger uptrend that remains intact.

SP500 weekly

In addition to what my holdings are doing during a correction in the market, I like to know which stocks on the watchlist are acting the best also. Taking note of the strongest performing stocks will prove helpful once the correction ends as they will likely begin to lead higher on the next advance. A few names that are of particular interest to me currently are:

BIIB

INTC

BA

PFE

The central binding theme to this process is PATIENCE. You must be able to exercise patience when you approach the market and managing risk. You must have patience to continue to let your existing positions run and you must have patience to simply observe a downtrend without lunging at every wiggle in the market. Build a list of the stocks performing the best and wait for the market to regain its health.

When the correction finally ends your portfolio should only be left with the strongest stocks in the market. These survivors are the ones that eventually become the big winners. By eliminating the weakest stocks and raising cash you can then position toward other stocks on your watchlist that are displaying exceptional performance.

Your portfolio should become stronger and stronger with the corrections that come and go. It is for that reason I have learned that corrections in the market are to be embraced, not feared. What is there to fear about eliminating the weak and acquiring the strong?