Oct 03

Weekend Review and Watchlist


Equity markets experienced another volatile week with the major indices undergoing a partial retest of the August lows, culminating in the biggest intraday swing in 4 years to finish the week higher.

The S&P now sits 8.4% off its highs having reached -12.4% on a closing basis in late August. It looked all set to test those levels as the week got underway, with a broad sell-off that saw biotech again leading the decline, before it steadied to post four straight days of gains, the first such instance since the halcyon days of July when all time highs looked inevitable.

Much will be made of the high-volume rally into the weekend (shown above via $SPY) and the candle formation it leaves in place – traditionally seen as a bullish indicator – but we’ve been here before.

If we turn to a weekly chart we can see that ‘hammer’ formation on this week’s bar. We heard much the same chatter after the rally from the lows in August. Back then, a huge reversal higher resulted in a small gain on the week, the ‘flash-crash’ trades of that Monday’s open were quickly written-off as an aberration and higher prices were readily anticipated. We’re still waiting.

As much as I personally like to use candle charts to help eyeball the volatility and context of that bar’s range, I’m a little wary of giving any weight to those kind of patterns or formations on a longer timeframe. It’s my belief candle formations may be useful on a very short-term basis, perhaps as a supporting tool for an entry signal for example, but that’s a topic for another day.

My reason for bringing it up here is I often like to cast an eye over a simple line chart for additional context, and the $SPY chart below demonstrates why. Friday’s move was certainly powerful, but look at the weekly line chart below compared to the candle chart above and it looks like we’ve wasted an awful lot of fuel going nowhere for a month.

That’s the kind of price action that saps energy and confidence, and can result in obvious stops at the edge of the range that have the potential to trigger short-squeezes and air-pocket moves lower. In short, not a healthy market environment. And that huge candle from the end of August? It barely registers on the line chart, it’s a tiny blip higher, and it’s a level we haven’t held since.

Although this week could be seen as a successful defense of the August lows for the S&P, that wasn’t the case everywhere. The Russell 2000 ($RUT) extended its losing streak this week to eight sessions to reach fresh lows.


The extent of that weakness can also be seen here relative to the $SPX:-


It was a similar story for biotech, shown here via $IBB, which hit 11-month lows and even managed to test the intraday ‘flash-crash’ levels of August 24th.


Finally, looking beyond the US, although they won’t have been able to fully factor in Friday’s late afternoon surge, Japan, Germany, and China all closed at fresh weekly lows.


Alpha Capture Portfolio

We started the week taking exit signals from the previous Friday that left us with just two names and over 90% in cash. Later in the week we had one further exit to leave us with a single portfolio name. We also have three trade ideas that remain active.

Our portfolio edged -0.6% on the week vs +1.0% for the S&P.

That takes it to -2.3% YTD vs -5.2% for the S&P.

Clearly, with so much in cash, although we’ve seen little change in our absolute performance over the last five weeks, in relative terms it becomes much more accentuated day to day. Friday’s session also demonstrated that with little or no exposure to stocks you can still find yourself exposed to the fear of missing out!

As we saw in the charts earlier however, despite Friday’s reversal and the higher close on the week, this remains a highly volatile environment with very few strongly-trending stocks for us to consider. A lot more time may be needed for truly constructive price action to emerge. Until then we remain protected from further downside, and ready to act when conditions improve and opportunities that meet our criteria start to arise.



Sector Overview

Consumer Discretionary ($XLY) remains the strongest of the S&P sector SPDRs, reclaiming ground above its still-rising 200-day MA.

I believe this sector can play a major role in determining what’s next for this market. It’s been remarkably resilient on a relative basis and is now finely poised, above its 200-day with a higher low in place, but also with resistance at lower highs to overcome.

It’s possible as last-man standing it somehow continues to lead the recovery and drags this market higher, or leadership emerges elsewhere, but we’ve already seen some cracks starting to appear in some major consumer names, and if that were to become more widespread I think it could trigger a new wave of selling significant enough to take the overall market to new lows.

Energy ($XLE) had a good week, moving above its 20EMA and leaving a higher low in place. Obviously there is a long long way to go, and that is one solid downtrend, but eventually this sector will recover, and this week’s action was another attempt at a start.


Technology ($XLK) also reclaimed its 20EMA, led in part by strength in Semiconductors, shown here via $SMH.



As mentioned previously our watchlist continues to be dominated by consumer names, but within that there’s a noticeable tilt towards staples, with a few food and tobacco names showing strongly. Business services and payments also look good. Beyond that, a couple of technology names have emerged but there’s nothing from healthcare, energy or materials for our timeframe.

Here’s a sample of 8 from the full list of 22 names:-




























Sep 25

Weekend Review and Watchlist


The most notable feature of this week for me was the complete reversal in the few areas that had previously been performing so well, in particular biotech and small caps.

Here’s the chart of $IBB relative to $SPY I’ve been showing recently, which this time last week looked on the verge of making new highs, followed by the $RUT relative to the $SPX.

Now, you can argue that Hillary Clinton’s comments on price gouging are irrelevant as she may not even become President, and even if she did it would still need to go through Congress etc etc. I may even agree with that. But you would be making a serious error if you make that the basis of whether you choose to take any action or not.

Once you get into assigning causality too precisely you start trying to justify price moves based on the latest developments in your chosen backstory and how it relates to your rationale. What if she walked back those comments and yet prices kept going down? Are you going to get frustrated at the market not doing what it should? Afterall, you deemed that it went down on ‘No‘ so it should now go back up on ‘Yes‘, surely?

The story is exactly that, a story, but price is reality. It’s not the news that counts, it’s the reaction to the news, and that reaction is very real when it hits your account, regardless of whether you think it’s justified or not.

As this graphic from Ryan Detrick shows, the biotech winning streak of ten quarters will end next week.

When it’s over, it’s over. When trends reverse, you can either acknowledge it and get out of the way, or you can try to be a hero. Which will you choose?

Turning to the the overall market, the S&P 500 still looks precarious on a weekly chart, well below its long-term moving averages.

Many continue to draw attention to the similarities to the pullback in 2011, and as I’ve said before, while I’m not a fan of using analogies to predict day to day movement, with the caveat of recency bias, I think it can be useful to observe the price action of periods of similar volatility.

Much like an earthquake may have several aftershocks, it can take weeks and months for these type of market environments to play out and the full effects of the initial downturn in August to become known. As we’ve already seen, previously strong areas of the market are now starting to catch up to the downside in dramatic fashion, perhaps leaving only consumer discretionary as the last man standing.

All we can say for sure is there will be continued volatility, false breaks, reversals, backing and filling, and whatever else you want to label ‘business as usual’ before we can put a name to whatever this is. Oh, and by the time you get the ‘all clear’ you’ll be told ‘the easy money has been made’.

I don’t know how and when it all ends, but I know I’ll still be here to play whatever emerges on the other side, just by being prepared and keeping risk under control to stay in the game.

As Larry Hite said: “If you don’t bet, you can’t win. If you lose all your chips, you can’t bet.”


Alpha Capture Portfolio

Our portfolio has been treading water for several weeks now with around 80% in cash and just a handful of names remaining, but even with that level of protection it still suffered a big decline this week -2.2% vs -1.4% for the S&P.

It’s now -1.7% YTD vs -6.2% for the S&P.

That weakness was a testament to the size of the moves that unfolded in the few areas that had remained strong until now. We hadn’t had an exit for a month, but by Friday had four signals to leave us with just two names and over 90% in cash.



Sector Overview

As has been the case for several weeks now, Consumer Discretionary ($XLY) remains the strongest of the S&P sector SPDRs, despite breaking back below its 200-day MA.

Next is Consumer Staples ($XLP) and Technology ($XLK), but it’s not that they’re attractive, they’re just less ugly than the others.

The big move on the week however was the decline in Biotech, which sent Healthcare ($XLV) reeling to its lowest close in 11 months.



Many of the healthcare-related names that made it onto last week’s list have made themselves scarce this week, and what remains is dominated by consumer sectors.

Here’s a sample of 8 from the full list of 22 names:-





























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