May 12

Risk

Risk is the possibility of loss.

There really isn’t any need to make it more complicated than that.

Sorry you wasted a napkin.

 

 

 

 

 

 

 

 

 

 

May 03

Weekend Review and Watchlist

What a week. Before we get into the numerous changes that took place in the portfolio and trade ideas, let me go through a few observations. The first is the fact it feels like we’ve just been through a particularly difficult week, and yet here’s the S&P just 0.4% off last week’s all time high like nothing happened.

The reason is simple. The stocks that have led for so long, and contributed so much to our outperformance up to this point, now appear to have run their course, and over the last week or so have triggered one exit after another. Couple that with emerging strength in previously lagging sectors like materials and energy, where we still have little or no exposure, and you can chalk this week up to the passive investing crowd.

Let’s face it, for the longest time now, if you just didn’t have exposure to energy names you really had no excuse not to be outperforming the index, and consumer discretionary and healthcare stocks have been great leaders, but sooner or later those trends come to an end, and the transition can throw up periods where by the end of the week your portfolio looks nothing like it did at the start. It’s the story of the last two weeks for me now, slowly at first, then all at once.

But it wasn’t just sector rotation. It’s also clear that for whatever reason, this has been a fairly volatile earnings season. Anecdotally, the most double-digit percentage reactions to earnings I can recall for quite a while. If you happened to be on the wrong side of any of them, and I was, you were served with a timely reminder of the importance of position sizing.

As I’ve said before, there is absolutely nothing wrong with holding a position through earnings, provided your timeframe and position size supersede the volatility generated from it. Do you think institutions or investors like Buffett exit all their holdings for earnings and then put them back on again afterwards? Why not? Timeframe. My timeframe is much shorter than theirs, but if I have a strong trend I can still be holding something for a year or more. That’s four earnings reports. So what should you do? You make your position size big enough to still make a difference, but small enough to tolerate an adverse reaction, whether it’s an earnings report or any other event, scheduled or not. It’s called risk. Manage it.

Within this week’s crosscurrents, the sector that stole the headlines was biotech, shown here via $IBB, with a 5.4% decline on the week, slicing through its 50-day moving average and previous support.

It’s easy for the media and pundits to highlight the biotech sector, it’s been red hot, and it gives everyone the chance to talk about it being a bubble, just like everything else that’s gone up a lot supposedly is, but I think this week’s move in the market was much more nuanced than that.

The real story for me was in small caps in general, shown here via a weekly chart of $RUT, with a decline that took back the previous six weeks all at once.

 

When you look at the Russell relative to the S&P, the move this week is even more pronounced.

 

It’s also interesting that despite the fact the S&P 500 is less than half a percent off its all time high, none of the nine S&P Sector SPDRs are at new highs this week. Perhaps a further example of the rotation taking place, as with all time highs so close you might expect to see a clear leader.

The one that now appears best placed in my view is Technology ($XLK), closely followed by Materials ($XLB).

 

Our Marketfy portfolio had its most active week ever, with the aforementioned rotation and volatility producing seven exits and three new entries. The stops took their toll, with the portfolio registering a 3.6% decline on the week versus 0.4% for the S&P. YTD however, our Marketfy portfolio is still ahead +9.1% vs +2.4% for the S&P.

Among the exits early in the week were our three oldest positions; $DPS, $HD, and $ANAC, which have been held for significant gains since original entries in July, August, and October respectively, but when it’s over, it’s over. And yes, every single one of those lines on the chart was a trailing stop. That’s how you do it. Good exit signals don’t just get you out, they keep you in until it’s time to get out.

 

For the first time this week I can thankfully say we have no new exit signals. We’re down to nine names, with 33% cash, and have new entry signals ready for Monday.

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

We also had seven exits from our trade ideas this week, and moved one over to the portfolio, leaving us with four names. Let’s take a look at some of those exits, as some of them emphasize some important concepts and facets of our process.

$CLX had a marginal break of its stop, but was acting heavy prior to that, and after our exit continued to fall the rest of the week.

 

$BA was already below its 50-day, so even a marginal new low was enough to trigger our exit, and it fell further after that.

 

$TWTR – It happens. Stocks can slide through your stop, and you diligently wait for the close. Then you have to exit at the next day’s open and it’s set to open lower again. You hate to feel like you’re exiting in the hole and are tempted to wait. Don’t be. As painful as it is when these things happen, hopefully you are seeing this is why position size is so crucial. It’s what minimizes the impact of these events. For example, if you risk 0.5% of a portfolio on a position with a stop 10% away, then even if it gaps straight through that and is now down 20%, the impact to the portfolio is still just 1.0%. It still hurts, but it’s an impact you can tolerate and recover from. Rather than being an ‘event’, it then becomes just another trade.

 

$HAR – An example of why we wait for the close to confirm a signal, sometimes they make it all the way back, sometimes they don’t and we exit at the next days open. $HAR plunged lower on Thursday, but by the close had made a huge recovery. It was still well below our stop and triggered an exit for Friday’s open at $130.59, which ended being one of the best prices of a volatile two days, and not that much of a disaster relative to Thursday’s lows and the original $136.50 stop. Again, I know these moves can be hard to experience, but the position size is what makes them tolerable. You have to size in the knowledge your stop is never the most you can lose, it’s just a trigger that tells you to get out.

 

Our watchlist is reflecting the underlying sector changes we’ve seen in the market this week, with technology now the largest component, but as strong as materials and energy have been recently, I still can’t get anything that warrants being on here just yet. This is perhaps a good reminder that if a move is genuine and strong enough, especially for something that fell so far for so long, you will have plenty of time to get on board if and when it’s confirmed the downtrend is over. You don’t need to be first. The ‘buy high, sell higher’ concept is alien to most people, but once you understand how and why it works, you realize you can afford to miss the first 10-20% of a new uptrend and get on board later when the risk is actually lower. Energy isn’t there yet for me, but here’s a sample of what we do have:-

$VMC

 

$AET

 

$CDK

 

$CRM

 

$MSFT

 

$QLYS

 

$SWKS

 

$ULTA

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

 

 

 

 

 

 

 

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