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.

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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

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$BIIB

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$WAG

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$WFM

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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 08

Trend Following Podcast

Michael Covel was kind enough to invite me back on his excellent podcast for another conversation. When I first appeared in July 2013 it was episode 144. He’s now closing in on 300 episodes, an incredible achievement.

When I look at the list of guests he’s interviewed I see so many that are giants in the industry and have been an inspiration and a significant influence on me, so I’m truly honored to be in such company.

In a light-hearted exchange we talked about fear of public speaking, ego and bias in trading, the influence of Jerry Parker, the role of social media, and my recent transition to a RIA.

Trend Following Radio – Episode 299

 

 

 

Dec 06

Weekend Review and Watchlist

A data-heavy week provided plenty of material for commentators to update their narratives and forecasts for 2015, but as ever the real takeaway was ‘what did price do?’ The NASDAQ, which in recent weeks has been strongest of all, eased back slightly, while the Dow and S&P rose for a seventh straight week to finish at fresh all time highs.

It was also interesting to see the performance of markets worldwide. I showed a chart of the $DAX a few weeks ago as it was being cited as an area of concern. Look at it now. Three weeks later and it’s back at all time highs.

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Also notable was the continued strength in Japan, back at new highs and still outperforming the US on a relative basis over the last month. Most impressive of all however was China +18% over 2 weeks and +40% on the year.

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I won’t pretend to know the implications of such movements. Maybe US stocks come under pressure if they’re no longer seen as the only game in town, or maybe the continued stimulus from the world’s central banks as the Fed eases off, further underpins markets for longer than anyone still expects, the US included. Price will let you know.

For those who maintain a significant home bias, the US market still looks like a very strong trend to me, and as we make new highs I’m still reading and hearing more stories about new concerns than I am anything approaching complacency or euphoria, so it’s hard for me to believe we don’t have more upside to come.

One of the features of the rally in equities this year has been how often the leadership has rotated from one sector to another. Consumer stocks have perhaps been consistently strong throughout, but along the way healthcare has been right there with it, and utilities and others have also one by one had their day in the sun. The message is that whatever weakness the internal breadth appears to show, ringing alarm bells for so many commentators, the overall market somehow finds another swell of eager troops and manages to eke out another high. Take into account the incredible weakness in energy and it’s even more impressive it hasn’t had a greater impact.

This can be quite the double-edged sword however. Although it’s easier to find those leaders in such a market environment, sometimes no sooner have you positioned yourself than a new group of names appears to be moving better. It’s like the dreaded challenge of joining the line of people that moves most quickly, seeing you’ve chosen incorrectly, and switching to the better one only to see your original choice prove to be correct. I’m convinced something close to that phenomenon is why so many hedge funds and portfolio managers have apparently managed to make only minor gains this year as the S&P looks likely to post a double-digit gain.

Although I’ve experienced some chop myself I’ve perhaps been fortunate my timeframe has for the most part been long enough to have me stay with the initial choice that eventually wins through, having never quite invalidated as seemingly more attractive alternatives came and went.

This week while healthcare was again very strong, the move that was the head-turner was financials.

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Making new highs in itself might not seem like a big deal these days, but it’s the number of names within the sector that made breakout moves that caught my eye. Depending on your timeframe these are all either actionable entries right now or watchlist material going forward:-

$C

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$GS

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$MS

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$CME

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

 

 

 

 

 

Nov 29

Weekend Review and Watchlist

Despite a holiday-shortened week we still had one exit and two new entries, but the biggest story of the week unfolded while stocks were closed for Thanksgiving, as oil prices plunged in the futures markets and its follow through on Friday was felt heavily across the energy sector as the stockmarket re-opened for its half-day session.

How much it affected you and your portfolio again brings us back to the question of what ‘the market’ is to you and how relevant it is in your process. Just look at the two current extremes in the sector price action of Consumer Staples and Energy which continue to go in opposite directions:-

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When you look at charts like that you hopefully see the redundancy in asking “What did the market do today?”

If you want to own the market, you can, and you’ll get it all, all the bad, all the good. Or you can concentrate on leading stocks, ones making all time highs, 52-wk highs, outperforming on an absolute and relative basis.

What did the market do? Who cares. What did my stocks do?

That disparity showed itself markedly this week with the S&P 500 rangebound and unchanged on the week while many of our names continued to make fresh highs allowing us to trail stops higher on over half of them.

$DPS continued its extraordinary run. It’s now up for 17 of the last 21 sessions. Our next trailing stop level is presenting itself around the $69 mark but we’re not quite ready to move there just yet.

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$BRK.B – Again there’s not much new to say on this. Slow and steady wins the race. Our stop moves to $140.56.

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$COST – perhaps our most direct beneficiary of the strength in consumer staples, in fact, on a relative basis it has continued to outperform the sector for four months now. This week our trailing stop moved up to $133.37.

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$ANAC – I mentioned last week this still represents a good risk/reward trade and it didn’t disappoint with a big follow through this week. That swing low around $30 can likely act as a good stop level in due course.

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Our watchlist is clearly still dominated by consumer names, and the only other discernible trend I can see is the number of technology names present is starting to increase. Some industrials, healthcare and financials gave back ground without invalidating their longer-term trends. Materials and energy remain weak. Here’s just a sample:-

$WAL

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$BIDU

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$CTSH

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$GPRO

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Full analysis and commentary on all current signals as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist, are now available via subscription on Marketfy.

 

 

 

 

 

Nov 25

Zen Investing Podcast

I’ve listened to many of Joel Nelson’s interviews on his Zen Investing Podcast with portfolio managers, traders and authors who have greatly influenced me in my career, so I was delighted to be a guest myself. We talked about trend following on stocks, process-oriented vs outcome oriented goals, unintended consequences and more:-

Joel Nelson – Zen Investing Podcast – November 2014.

Follow @Zen_Investing on Twitter.

 

 

 

Nov 21

Weekend Review and Watchlist

Earlier this week I sarcastically noted it was very generous of Mr. Market to give everyone a chance to get positioned for the correction that the latest batch of goldfish with their six-second memory were forecasting.

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Instead, I ventured, a range as narrow and tight as we had seen was more likely to produce a resumption of the trend that preceded it, rather than a full blown reversal. Sure enough, by the end of the week we had a pickup in volatility with several wider range days, only with an upward bias, finishing the week with an all time high close on the S&P and Dow. The correction roadmap is now looking more like the road to riches.

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Oh there’ll be another one, there always is, and you have to manage risk like your biggest drawdown is always ahead of you, but there’s no need to engage in guesswork anticipating when it might happen or fight the trend that’s underway. Better to go with what’s working and be prepared to step aside when price confirms it’s over.

It’s incredible that a 10% correction from here, something we haven’t seen for over 3 years, now just gets us back to the lows of only 5 weeks ago. That’s how fast this move has been. It was like a stress-test for your strategy.

There were no new signals for our portfolio names this week but the numerous moves to fresh highs gave plenty of opportunity to trail stops higher. Here are a few highlights:-

I’m going to show $HD in two charts to really give it some context. Here’s a 2-year weekly and a 6-month daily. This is an incredibly strong trend, especially when you consider how easily it overcame the credit card breach news after the huge August breakout. Look how the stock consolidated and stretched higher again. We saw a microcosm of that move on the daily chart this week following its poorly received earnings report only for the stock to stage a strong reversal from near its 50-day and finish the week unchanged back near its highs. Our stop now moves to $93.34, just below the most recent breakout at what would also be a 5-week low near the 50-day MA.

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This most recent 4-week stretch by $NKE is really impressive. I love these kind of stair-stepping moves, the definitive ‘higher highs and higher lows’ of an uptrend, but it’s more than that, it’s the efficiency of the trend with relatively narrow range days resulting in slow and steady gains. People might make more out of Friday’s candle than is warranted just because it reversed off its highs, but this remains a very strong trend. Don’t fight it.

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$SBH is developing into a really healthy trend now with an impressive follow through this week after the brief consolidation of the post-earnings advance. The big news though is seen by look at a much longer-term weekly chart. This was the highest weekly close this year, and the all time high from July 2013 is now tantalizingly near.

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Needless to say with the market at all time highs and sectors like Industrials, Materials, and Energy leading the way on Friday, the mix of names on the watchlist is perhaps the broadest its been in a while. Consumer names clearly still dominate, but it’s also interesting to see names from sectors that haven’t featured as heavily recently.

$INTC

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$TSO

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$AA

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Full analysis and commentary on all current signals as well as additional trade ideas and a comprehensive watchlist are now available via subscription. Click here for details.

 

 

 

 

 

Nov 15

Weekend Review and Watchlist

This week, rather than showing the S&P, which again finished at new highs, I’m going to show a weekly chart of the DAX. I shared this chart several times as a talking point prior to that big break of support in October, as it looked as if Europe could lead the US to the downside. As we know, the US market has since recovered far more strongly, racing back to new highs, while the DAX and most of Europe has lagged badly. In fact, that is still one ugly chart. The DAX has failed to convincingly retake its 10-week MA, which remains below its 40-wk, as it has for a couple of months now, not to mention the sequence of lower highs and lower lows that remain in place.

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Why do I mention all this?

Because as fascinating as it all is, it doesn’t matter until it does. I’m happy to share what others are seeing and talking about because it helps give you context, but if like me you are only trading US stocks, then analyzing US stocks is all you should be concentrating on when it comes to assessing your risk. I have learnt this the hard way. Once you start trying to assign causality and use it as part of your investment rationale, you are on the journalistic slippery slope of having to justify each day’s price movement within the narrative you’ve weaved for yourself.

There will always be something to worry about somewhere in the world, and some chart for someone to point to and say ‘just you wait, you’ll see’. Maybe we will. But if we waited until everything was perfect in the world we may never be invested at all, or by the time all our ducks were in a row we’d then be told we’ve already missed the opportunity, the easy money has been made.

My usual riposte to the litany of ‘yes but what if’ responses towards my approach is “It’s called risk. Manage it”.

In this regard, having a highly concentrated portfolio helps immensely. During that October pullback my number of positions was reduced from around fifteen to just eight with around 35% in cash. Note that cash isn’t a ‘weighting’, it’s just what isn’t being used because of the lack of opportunities. It didn’t get to 35% by ‘raising cash’, it got there by following what price action dictated and managing risk. As stops were hit on existing positions we got out. If new opportunities arose we took them. If they didn’t the cash would sit there, and possibly grow further, until they did.

As it turned out, those opportunities came pretty quickly and as the market traced out another ‘V’ we took the new entry signals that triggered until we were fully invested again. Clearly, this is much easier to do with a portfolio comprising of less than 20 names, than for a mutual fund manager with potentially hundreds of names. For them, taking a market view and raising cash indiscriminately may make sense. For us, we are looking at each stock on its own merits and we manage them accordingly.

The downside is the temporary gap it creates in performance. By exposure being reduced on the way down, and increased on the way up, after a 7-9% market slump and swift recovery your portfolio will likely be lagging by around 2%. That’s the price you pay for managing risk. You aim to capture most of the upside and avoid the worst of any downturn. This is where the big difference occurs vs ‘Buy and Hold’. This most recent correction wasn’t big enough to make protecting from further downside appear worthwhile, but we absolutely know it is longer-term.

With ‘Buy and Hold’ in order to capture 100% of the upside you must be prepared to endure 100% of the downside. Maximum gain = maximum pain. You want that 7% annual average return for doing nothing? You have to stand there on the ropes taking an absolute beating for as long as it lasts, and as the behavior gap shows, most can’t take it and throw in the towel. Or you can simply step aside until the market has punched itself out and then you come out fighting to claim the victory. Sometimes it’s over quickly and your prudent management can subsequently be viewed by some as unnecessary. Other times it may result in you ducking what could have been the knockout punch to your portfolio from which you would have never recovered.

What I’m talking about is the need to avoid negative compounding in order to create long-term absolute returns, rather than focusing on short-term relative returns. It’s what I explored in this post explaining my use of the term Alpha Capture. This is the business I’ve chosen. I buy stocks in uptrends and manage risk.

This week was a relatively quiet one with no new entry or exit signals, but the continued gains did allow us to trail some stops higher, and add to winning positions or reduce risk where necessary.

$DPS moved modest higher this week, consolidating recent gains in a tight range.

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$HD came tantalizingly close to the hundred roll but didn’t quite make it. This still looks rock solid.

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$BRK.B started the week strongly in reaction to Friday night’s earnings and digested those gains thereafter.

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$NKE is another very strong looking weekly chart as it continues to stair-step higher.

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$ED finished lower on reasonable volume, closing below its 20EMA as utilities along with other defensive sectors such as healthcare and consumer staples showed some weakness. There’s no shortage of opportunities out there with the market at all time highs so we won’t hesitate to exit this for a small gain if it triggers next week.

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$CNSL – This is one of those charts where you could argue we’re in no-man’s land or it’s rangebound, but in actual fact it makes for a very clear assessment of risk/reward. The stop is multi-faceted; a previous breakout level, the most recent swing low and support, the 50-day MA, and if taken out it would put in place a sequence of lower highs and lower lows. It makes it more ‘obvious’, and granted there is always a danger obvious stops become the target of false breaks, but to be honest in this market with so many setups and strongly trending names I don’t need to waste time playing games and second-guessing what may or may not happen or the intentions of other players. Bottom line is the uptrend remains intact, and as soon as that changes we won’t hesitate to bail.

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$SBH had a rollercoaster week, initially following through on the previous week’s decline before moving strongly higher midweek ahead of its earnings announcement. Thursday’s initial post-earnings reaction saw the stock open -4% only for it to subsequently trace out a huge 8% reversal on strong volume to finish at 9-month highs with a near 4% net gain on the day. That move was enough for our stop to move up to the previous breakout level that had triggered our initial entry, and now coincides with Thursday’s lows and the 50-day MA.

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Other names include $ALXN, $COST, $QLYS, $ANAC, $CAG, $LM.

 

In terms of our watchlist the selloff in defensive sectors towards the end of the week made its mark with many utilities and healthcare names making way for more technology stocks, as well as what I would call the traditional growth and momentum names you might expect to see in IBD’s top 50. Here are a handful worthy of note:-

$VRX

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$AMT

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$BITA

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$CSCO

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$CMG

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Nov 08

Weekend Review and Watchlist

It’s incredible that the most recent correction already seems like a distant memory with the S&P tacking on a further 0.7% this week, an impressive follow through to the previous week’s 2.7% advance. But this is what bull markets do. They go up on good news, they go up on bad news, they go up on no news.

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That latest ‘V’ sure is something to behold. What the market lost in 19 days, it made back in just 12. This week, after a brief pause it extended that run further to finish at all time highs, 1% above the so-called 9/18 Alibaba top.

This is not how it’s supposed to work. As the market shows signs of trouble the good and virtuous portfolio manager is supposed to be able to take profits and cut his losses as the pullback intensifies. Then as the market staggers to its feet and slowly recovers our star PM gets to pick up the best bargains with ease. No such luck.

If you exercised good discipline your efforts were rewarded with a face-ripping rally that gave you absolutely no chance to get back in on your terms, and made any prudent measures you took look like an overreaction.

On a closing basis we’ve climbed over 9% in 17 days. Our star PM is likely now lagging the index severely, and if like him you’re playing the institutional managers relative return game, there’s less than 2 months of the year left and the performance chase is on.

This week was a fairly uneventful one in terms of signals. We ended the previous week exiting $CCI which made only a modest recovery attempt in our absence, and our only new signal this week was an entry in $LM, having been rangebound for 5 months. Last week it moved to fresh highs as it reported earnings, and this week was the big breakout and follow-through on high volume we’d been hoping to see.

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Let’s turn to some of our existing names.

$DPS moved modestly higher, recovering from what would typically be perceived as a nasty looking bearish engulfing candle midweek. $DPS is still a fair distance from its MA’s and our stop.

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$BRK.B reported after the close on Friday, and although I haven’t seen a read on the numbers yet, I have to tell you I’m really not too worried about it. $BRK.B put in a strong showing this week which triggered an additional entry point or opportunity to add, with our stop moving up to the 10/10 weekly close of $136.76.

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$COST – what a beast this is. The numbers might not be big, but that’s some fine price action right there on the weekly chart. On the daily chart $COST has risen for 14 of the last 16 sessions. For now our stop is still a safe distance down near the breakout level.

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$QLYS continued its big run on huge volume, boosted this week by a favorable earnings report and following on from its moonshot breakout the previous week. Our stop now moves to the breakout level. We’ve been giving this plenty of room since taking the initial entry the day the market made its low, a testament to why we treat each stock on its own merits and still take entry signals during corrections, as it now becomes our biggest open winner.

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$CAG isn’t necessarily the prettiest trend, even more so on the longer-term weekly chart, but it’s risen for 6 straight weeks now, and slowly but surely in spite of the swings this market has put us through, is getting the job done.

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Other names that remain open are $HD, $NKE, $ALXN, $ED, $CNSL, $ANAC, $SBH.

 

The continued advance in the market has finally started to increase the breadth of names we’re seeing on our watchlist. Although many of the strongest consumer sectors along with healthcare and utilities continue to feature heavily, it’s been interesting to see some new names from technology, chemicals, and homebuilders. Only energy remains completely off our radar. Here are some names of interest:-

$PHM

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$RTN

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$ASH

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$JAZZ

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$GPRO

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$SNCR

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$PKG

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$AZO

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