Jan 24

Weekend Review and Watchlist

Despite a late sell-off on Friday, the market put in a pretty solid bounce this week, reclaiming ground above its MA’s for a 1.5% gain. I’ve joked about wanting a letter other than a ‘V’, and I guess you should be careful what you wish for because it sure looks like we just traced out a ‘W’…

Seriously though, if you just look at price and try to shut out noise like I do, you really had your work cut out for you this week with commentary dominated by the WEF at Davos, the State Of The Union speech, the ECB, and God help us – the build-up to the Greek elections.

It’s hard to think of a collection of less-actionable world events than that.

It’s not that some of them aren’t capable of moving markets, it’s that you can’t possibly obtain any discernible edge from them. It’s not the news, it’s the reaction to the news that will tell you all you need to know, and that will manifest itself through price. Follow that, and manage the risk it entails, and you will reap far more than you will from any subjective interpretation of the latest news headlines.

Many of the trends I touched upon last week remain in place, especially those beyond US markets.

The DAX in particular staged a spectacular follow-through to the previous week’s breakout to all time highs.

That strength is even more pronounced shown relative to the S&P 500:-

 

Last week I also highlighted the continued long-term strength in China.

The following Monday the Shanghai Composite slumped 8%. Some financial websites masquerading as business journalism that need page views to drive ad revenues even called it a ‘crash’, or said that China stocks were ‘obliterated’. Except they weren’t, and instead of being removed from the face of the earth they staged the greatest comeback since Lazarus and by the end of the week were back at new highs. Not bad, having ‘crashed’ and been ‘obliterated’ just four days earlier.

Turning back to US markets and our own Marketfy portfolio, we had no changes this week but we did have the opportunity to trail many of our stops higher with several names reaching new highs.

The prevalent theme for me has been the strength in high-growth ‘momentum’ names, such as those found in IBD, and we saw that reflected in the five new trade ideas given this week. It’s clear the strength in biotech in particular is a major component, together with the resurgence in tech names.

Both healthcare and technology continue to feature heavily in our watchlist of 28 names, but it was also interesting to see some additions this week from the industrials and consumer discretionary sectors too.

Here’s a look at just 12 of those names:-

$HON

 

$RIC

 

$ILMN

 

$REGN

 

$NXPI

 

$PANW

 

$TASR

 

$CTAS

 

$LOW

 

$SBUX

 

$ULTA

 

$ABC

Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.

 

 

 

 

 

 

 

 

 

Jan 17

Weekend Review and Watchlist

Just two weeks into 2015 and we’ve already seen some dramatic price action in global markets, most notably this week with the unprecedented actions of the Swiss National Bank and the subsequent volatility it produced in currency and fixed income markets. The shock of such a move is still being absorbed, and the true implications may take longer to reveal themselves as the finer details of the consequences for investors and brokers become known. For this post I will concentrate on the price action of equities, of which there was much worthy of our attention. We’ll start with the S&P 500.

The longer-term uptrend remains intact. Coming into Friday, with the futures down heavily overnight it looked inevitable this current downturn would become the next 5% pullback but it wasn’t to be as the market ground out a solid rally with a particularly strong finish into the close.

Last week I had joked about wanting another letter other than a ‘V’, and so far a ‘W’ just might make an appearance!

Of course, it’s ridiculous to assume that markets must always adhere to some form or pattern, but I think it’s fair to say for those market participants who might label themselves tape-readers, this week seemed to bring a realization that something is different here, a change in behavior or character if you will.

Looking at the $SPY chart above, despite Friday’s rally the short-term damage of the last two weeks is clear. We’re below the 20 and 50-day which themselves have crossed and are now declining. Thursday’s lows, along with those of 1/6 and 12/16 have likely created a significant invalidation point for many, not to mention the 200-day which is still rising is also close at hand. This kind of confluence could act as the line in the sand for shorter-term or intermediate timeframes, or as a call to action for longer-term investors, where stops are placed and below which a rapid decline can materialize as exposure is reduced.

One notable area of relative strength has been in small caps.

The Russell (above) had retreated from a marginal breakout a few weeks ago, but on a relative basis (below) has been outperforming the S&P since the October lows, and now appears to be at an important juncture both on an absolute and relative basis.

 

Elsewhere in the world the story is very different. While heads were turned by the SNB move the German DAX broke out to all time highs…

…and the Shanghai Composite notched up its tenth consecutive weekly gain, continuing where it left off in 2014 as one of the best performing markets in the world.

 

Bringing it back home, let’s take a quick look at the nine S&P sectors.

For me, the best sector charts are Healthcare ($XLV), Utilities ($XLU), and Consumer Staples ($XLP).

Although utilities appear to have rallied more aggressively this week, I’ve given the top spot to healthcare as I also have my eye on Biotech via $IBB (below) which finished at an all time high daily and weekly close.

 

Elsewhere, Consumer Discretionary ($XLY) broke below its 50-day…

…while Technology rolled back over producing an MA cross.

 

Industrials ($XLI) tested their 200-day…

…as did Financials ($XLF).

 

Basic Materials ($XLB) managed to put in a higher low, but remains under pressure below its MA’s…

…and Energy ($XLE) continues to look like something that fell out of the ugly tree and hit every branch.

 

Turning to our Marketfy portfolio, we had three exits and four new entry signals this week. Of our current 13 names, three of them can be found in this weekend’s IBD 50, an acknowledgment perhaps of the previously mentioned relative strength in small cap stocks and healthcare/biotech.

That continues to show itself even more clearly in our watchlist. Of the 32 names on there currently, over a third are in healthcare/biotech, and over a third are in the IBD 50, regardless of sector.

Here’s a dozen names from the list:-

$CELG

 

$ISRG

 

$VRTX

 

$ADVS

 

$CTSH

 

$IRM

 

$PANW

 

$ABC

 

$JMBA

 

$EA

 

$NTES

 

$ULTA

Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.

 

 

 

 

 

 

Jan 10

Stocks To Watch

We had a lot of new signals this week both in the Marketfy portfolio and as additional ideas, and there are even more in this list that could justifiably be taken Monday. Although the broader market still has some work to do to recover its recent highs, the Healthcare/Biotech and Technology sectors still feature most strongly.

Regardless of sector, I’ve noticed a lot of the traditional momentum names, the high-growth companies you find in IBD, have suddenly come to life. Whether that becomes the next theme or small caps in general are the beneficiary of another rotational type of move in the market will be something to watch.

Here are a few names from the watchlist:-

$CF

 

$ACT

 

$EW

 

$VRTX

 

$VRX

 

$ZLTQ

 

$AVGO

 

$NXPI

 

$SWKS

 

$ADS

 

$ABC

 

$ALGN

 

$RMD

 

$ULTA

Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.

 

 

 

 

 

Jan 09

Managing Risk in a V-shaped Environment

2015 is only one week old and the markets have already given everyone plenty to think about. What a week!

I feel like I have two jobs. The first is to manage risk, the second is to make money.

You can do the second without the first, but not for very long, and given this game is played over four decades, not four quarters, first and foremost you need to manage risk in order to maximize your opportunity to make money.

I run a fairly concentrated portfolio of stocks with a long-only trend following strategy and I take what the market gives me, whether it’s entries or exits at any given time. I’m fortunate my methodology allows me to be nimble and take whatever signals trigger with equanimity. I can only imagine what it’s like to be tied to a narrative when price is telling you the opposite and you can’t change.

The ‘V’ shaped reversals which have now become a regular feature of the major indices have also been producing a consistent pattern in my risk management and portfolio construction. There are always nuances, but generally speaking, a pullback begins and my most vulnerable names one by one begin to trigger exits. Slowly but surely the portfolio gets reduced in size, typically fewer than 10 names remain, along with a healthy cash balance of 20-30%.

For at least the last year that’s the point when further downside has failed to materialize and the ‘V’ comes to claim victory. This past week was no exception with a handful of exits in the early part of the week before a flood of new entry signals triggered as the market began to pick up and new leaders emerged. Although the process remains the same, the circumstances under which it’s implemented can differ slightly, so it’s interesting to look at them in context by showing the most recent ‘V’s in the S&P 500 on the chart below:-

AlphaCapture

Now I don’t want to fall into that recency bias trap of showing two instances of something and drawing a conclusion for a third. It’s fair to say anyway that the ‘V’ has been around for a while now, not just the last few months. But I show these most recent ones to demonstrate the observation made by many now, that whilst it appears to be the case the selloffs from the highs are becoming successively steeper and shorter, the recoveries have been even more remarkable in their velocity.

We are used to hearing markets take the ‘stairs up, elevator down.’ Now they appear to take the elevator down and the rocketship up. In October, what the market lost in 19 days it more than made back in just 12. In December what it lost in 7 it made back in 4. This most recent decline lost just under 5% in 5 days, and going into Friday the bears could be forgiven for wishing it was another holiday shortened week, as yet another vicious ‘V’ appeared to be underway with all time highs on the horizon.

New highs may still happen and complete the pattern, in my opinion it’s more likely than not, but Friday’s weakness – coming back to retest those MA’s – may give some pause for thought.

There’s no question the longer term trend is intact. That’s a fact, confirmed by the higher highs and higher lows we see before us. Shorter-term however, the market remains finely balanced here. Sure, there are plenty of stocks making new highs, but in terms of the indices it feels like it’s becoming apparent to many that the first time this pattern doesn’t complete as it has previously, the game will have changed. That’s something to watch for.

Should we fail to reclaim all time highs those previous swing lows immediately become lines in the sand below which an intermediate trend change would be confirmed. We’re already sitting marginally below the 20 and 50-day MA’s in close proximity, and it wouldn’t take much for them to roll over from here.

The only problem? We’ve been here before, and every time it’s there for the taking the ‘V’ makes its presence felt.

What will happen? I’m one of the few that will tell you I have absolutely no idea. But I can’t wait to find out.

Right now it feels like the classic Keynesian beauty contest theory, with everyone trying to anticipate what everyone else is going to do. I know some think that’s what it’s always about, I would suggest it’s perhaps become more pronounced and noticeable than usual though because of those dominant ‘V’ patterns.

One week into 2015, my only hope for the remainder of the year is we get to trade a different letter.

Enough with the ‘V’s.

I’d settle for a ‘U’, or a ‘W’ or even an ‘M’.

 

Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.

 

Jan 03

Weekend Review and Watchlist

This will be a fairly brief review as there really isn’t much new to comment on following another holiday shortened week in the market. The dominant session was on New Year’s Eve with a reasonably strong selloff. That saw some follow through on Friday before a late rebound recovered further losses. The S&P is sitting right on its 20EMA, with its 50-day only another 1% away so we could already be seeing a quick test of recent buyers resolve.

Friday’s weakness was enough to trigger one exit signal for Monday’s open. As of now there isn’t anything I want to replace it with. There are still plenty of intact uptrends out there, but there is nothing new jumping out at me that demands it be added as a new name Monday so we’ll wait and let something show its hand.

The notable change in the watchlist this week is an increase in the number of healthcare and technology names. Business services names also remain strong. Here’s a sample of stocks to watch:-

$SWK

 

$ABT

 

$AGN

 

$VRTX

 

$AKAM

 

$AVGO

 

$NXPI

 

$ADS

 

$CBG

 

$CTAS

 

$TSS

 

$CMG

Full analysis and commentary on current signals as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is now available here.

 

 

 

 

 

 

 

 

 

Dec 27

Weekend Review and Watchlist

Two weeks ago I showed a chart of the $SPY highlighting it was the fourth time in the last year that five weeks of gains had been given back in just one week. The end result again proved to be no different with the S&P building on last week’s gains to end a holiday-shortened week with an all time high close.

AlphaCapture

That also meant this most recent pullback didn’t even register on our correction roadmap coming in just shy of the 5% measure I use on a closing basis.

AlphaCapture

Despite what may have appeared to be a quiet Christmas period for markets, there were several interesting developments this week that caught my eye. First was the swift correction that took place in biotech stocks. Second was the unusual strength in Utilities. Third, and perhaps most significant of all, was the long-awaited breakout in small caps, shown here via a 2-year weekly chart of the Russell 2000.

AlphaCapture

That’s a pretty clean breakout on a daily and weekly close basis. If this was a stock you’d be buying it, and with an invalidation point just 5-6% away that’s a great risk/reward trade. I’m not going to go too far down the path of speculating what the implications might be for the broader market bull trend now that small caps are again joining in after a year-long consolidation, but let’s just remember that new highs are bullish and leave it at that.

It’s hard not to get sucked in to all the year-end summaries and predictions for 2015. They’re always interesting to read and I find myself treading that fine line of wanting to be aware of potential trends in order to recognize them when they assert themselves, but also to avoid making predictions or anticipating trades. For my own part I will just highlight two charts I find myself watching;  China and the NASDAQ Composite.

Out of nowhere China has become the best performing major market this year and barely anyone was talking about it until a few weeks ago. Two things I know; trends persist longer than most people ever expect, and people are generally reluctant to buy anything that has just had a huge move higher. The tendency is to think ‘I’ve missed it’ or ‘I’ll wait for a pullback”. It would not surprise me if it didn’t give you that luxury and looking at the longer-term context there is still plenty of room to the upside.

AlphaCapture

In terms of all time highs for the major indices the NASDAQ has been the one holdout, yet to reclaim the dot-com bubble highs of March 2000, but it’s now less than 5% away and I’m seeing little mention of it. With the Russell breaking out this week don’t be surprised if the boost to small caps gives the NASDAQ more fuel and reclaiming all time high territory becomes a big story. It may even usher in a whole new phase for this market just as the all time highs for the Dow and S&P did in 2013.

AlphaCapture

And yes, it’s inevitable people will take the opportunity to compare this current move to when the NASDAQ was last at those levels and label it a bubble. It is absolutely nothing like it. Bubbles have many characteristics, but when you look at the classic bubbles in history whether it’s an index or a commodity, you will often see gains of 10-20% per month for many months before it’s over, not to mention the euphoria that accompanies it. Neither exist today.

But I digress. We can only trade the present, so let’s take a look at what the market is giving us.

For our portfolio there were no new entry or exit signals this week. Over half our names moved to new highs with others not far behind. Our one biotech name came close to its trailing stop but remains with us for now.

Turning to our watchlist, as you might expect with the market back at all time highs there are plenty of fresh setups out there. Although utilities remain very strong the sector with most movement in terms of fresh opportunities is technology. Amongst the consumer sectors that have been so dominant for several months now, the business services sector has a particularly strong showing. Here’s just a sample:-

$SBNY

 

$AKAM

 

$AMBA

 

$GLW

 

$ORCL

 

$ACN

 

$CBG

 

$CTAS

 

$CAR

 

$CMG

Full analysis and commentary on current signals as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is now available here.

 

 

 

 

 

 

Dec 21

Weekend Review and Watchlist

This week I’m not going to dwell too much on what happened and why (as if I know), as by now I would be amazed if you didn’t already know the adventures of oil, Russia, and the Fed, or haven’t heard at least a dozen different takes on it. Rather, I will concentrate on where it leaves us now in terms of price.

I try to do this more and more in my own work, as although I do enjoy watching the tape and joining in the banter (something instilled in me from years of working as a client and later as a broker), there are times when my internal noise to signal ratio tells me I need to put the earplugs in and come back after the close to check the score.

Many years from now an aspiring young trader will develop a trading system and backtest it to see how their strategy holds up across various timeframes and market types. When their system comes to this past week, it won’t have the benefit (or handicap depending on your point of view) of knowing what we know. It won’t have TV pundits to explain that day’s most popular narrative to help it interpret the action. It will only have price as an input to determine its actions. And it will be the purest most unbiased interpretation than anything you’ve heard this week.

I can’t hope to come close to that here, but I also won’t pretend I can tell you what Russia or the Fed will do. As much as possible I try to look at the price action like a backtest would and trade based on what it tells me.

There were a couple of things that stood out to me this week. Wednesday’s rally was clearly led by energy which made a lot of people skeptical of the market move, but I was pleasantly surprised how many of my safer defensive names held their own that day, and Thursday’s rally was much broader in nature, across the board strong moves, instantly quashing any thoughts that Wednesday’s rally was a dead-cat bounce.

By Friday, the S&P had posted its biggest weekly gain in nearly two years. The list of new highs which had slowed to a trickle midweek is now awash with names. I’ve gone through well over 100 charts at 52-week highs today, all of them S&P 500 names, and across a wide range of sectors. As always, anything can happen, but although the index itself didn’t quite make it to a new high (it’s just 0.23% away on a closing basis), this looks like one of the strongest moves we’ve seen this year, and there is a whole host of stocks with actionable signals right now.

I will leave you with just a sample:-

$HON

AlphaCapture

 

$AEE

AlphaCapture

 

$BIIB

AlphaCapture

 

$ACN

AlphaCapture

 

$GLW

AlphaCapture

 

$MKC

AlphaCapture

 

$PKG

AlphaCapture

 

$CHRW

AlphaCapture

 

$CBG

AlphaCapture

 

$CTAS

AlphaCapture

Full analysis and commentary on current signals as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is now available here.

 

 

 

 

 

 

 

Dec 14

Weekend Review and Watchlist

Stocks took the proverbial elevator down this week, undoing 5 weeks of gains in one fast move. We’ve seen the ‘stairs up, elevator down’ action plenty of times before. Looking at the weekly chart of the $SPY this is the fourth such instance in the last year. So far there’s nothing to suggest this will be any different, this is perfectly normal price action in the grander scheme of things, but truthfully there’s never any telling what the outcome will be. The only thing different so far is the narrative that’s accompanying this move.

AlphaCapture

Look at the previous instances where we had a move like this, can you remember exactly what the explanation was for each of them? Neither can I. That’s why it doesn’t matter. Do yourself a favor and ignore the macro tourists telling you to watch every tick in oil in order to navigate the stockmarket. The ‘why’ doesn’t matter.

My process during each of those previous pullbacks was exactly the same no matter how each one felt or what story was given as the explanation. Like Ed Seykota says, if you can’t measure it you can’t manage it. Don’t trade what you can’t quantify. You can’t backtest stories and feelings. Trade how your backtest would and react only to price. Also recognize you won’t always have the ideal market conditions for your strategy, but having a process to deal with unfavorable periods will ensure you survive them intact and preserve capital for when better conditions return. I can make it more complicated, but I’d have to charge you more.

This week’s action was enough to trigger a few exits and bring other existing positions very close to their trailing stops. Although there are clearly new leaders emerging, none did enough to trigger an entry, so despite a relatively modest pullback so far, we’re already seeing our overall risk and number of positions reduced rapidly.

On the watchlist the moment of glory enjoyed by financials the previous week proved to be rather short-lived, and other than a defensive rally benefiting utilities, our watchlist remains dominated by healthcare and consumer names. Here are just a few examples of current candidates for potential entry signals:-

$BBBY

AlphaCapture

 

$BIIB

AlphaCapture

 

$WAG

AlphaCapture

 

$WFM

AlphaCapture

Full analysis and commentary on current signals as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is now available here.

 

 

 

 

 

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