Nov 01

Weekend Review and Watchlist

Another market pullback over, another vicious V-shaped reversal in place, returning us to all time highs.

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This one clocked in at -7.4% on a closing basis. I have no doubt the next batch of top-callers are moving from make-up to the green room as we speak. For those that tried to call it this time around, some will have learnt their lesson, but most won’t, because some people simply never learn, and that’s what makes it better in the long run for those of us with a systematic process who don’t listen to them and have learnt the hard way prediction doesn’t pay. The media may not make these clowns accountable, but the market always will.

Let’s turn to how our names performed.

It was a great week for our longs, the major exception being $CCI which triggered an exit for a 6% loss at Friday’s close, after a volatile post-earnings sell-off that saw it break below its MA’s and previous support.

Otherwise, there were no other exits or new entry signals, but the further advance in many of our names did provide an opportunity to move stops higher to their next level of support or trend invalidation.

One thing I did notice on Friday was how many of our names underperformed in that move unlike the rest of the week. What was a great day for the market by reaching all time highs wasn’t reflected in the p&l for the first time in a while. The reason for that was Friday’s move was clearly led by the Energy and Materials sectors climbing 2%, and with financials also putting in a good performance, all sectors in which we have no exposure. It will be interesting to monitor this going forward, if it was just a one-day wonder for heavily beaten-down areas of the market, or some form of longer-term rotation as former leaders rest while the market continues to move higher with fresh legs.

 

$DPS, our largest and oldest holding, continues to act very well, rising for five of the last eight days on increased volume. Our stop now moves to the 10/17 close, alongside the long-term trend line and just below the 50-day.

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On a relative basis $BRK.B has been rather slow to recover and still remains below its September highs, but switching to the weekly you can see there’s nothing to worry about here. We’re still giving this plenty of room and should we see new highs next week it may give us a chance to trail the stop to that previous low weekly close.

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$NKE followed-through to fresh all time highs, allowing our stop to move up to the 10/14 close near the 50-day.

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The numbers may not be big, but $COST put in a solid performance this week, moving to a new all time high close every day this week, having risen for 10 of the last 11 sessions. The 2-year weekly chart is just as impressive.

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Utilities remain one of the strongest sectors this year and $ED has continued to trend higher since taking our entry after its range breakout in early October. We’ve now moved our stop up towards that level.

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$QLYS is an interesting name that many people won’t be familiar with. This entry came a few weeks ago as it made new highs while the broader market was correcting, and is typical of the kind of entry you can get during corrections. They might not be at all time highs, or 52-wk highs, but instead 50-day or 10-week highs or whatever your timeframe allows. This is how we got one of our biggest winners last year in $QIHU, during a correction.

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If you use a market index as a proxy for entering a position you will always miss these, names that lead during market selloffs and then continue even stronger when the market itself resumes higher. With $QLYS, despite the fact it initially looked like a failed breakout, it never pulled back further than the 20EMA, and it’s clear the volume continues to increase on advances, most notably this week. The significance of this week’s move is even more apparent when looking at the 2-year weekly chart, blasting clear of Jan/Feb 2014 levels to all time highs.

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Other names not shown include $HD, $ALXN, $CNSL, $ANAC, $CAG, $SBH.

 

In terms of a watchlist, there were plenty of names beforehand (contrary to what many people thought), but now with this week’s move to all time highs there are literally hundreds of them. The vast majority of the names I was already watching remain worthy contenders, some are setting up, some are alternatives to names I already own, some I feel I’ve missed but I simply don’t have room. You just can’t own them all.

Here are some I’m watching:-

$LM

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$TRV

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$RTN

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$JAZZ

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$BIDU

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$GPC

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Oct 26

Stocktoberfest 2014 – New Trends, New Friends

This weekend I’m on my way to Stocktoberfest, the annual event hosted by StockTwits’ Howard Lindzon. I love the intersection it represents of new trends, innovation, and markets, and I’m looking forward to it immensely, not only for the chance to meet and network with friends old and new, but also in anticipation of what new ideas I will learn about that will be part of my life going forward.

Take last year for example.

Before the event had begun, I took advantage of an offer to try out Uber on my way from the airport. That was a publicity masterstroke. By the time I was intently listening to Howard’s interview of Uber’s head of global operations Ryan Graves, I was already converted and have been an avid user and advocate for the service ever since.

I was also inspired by Retrofit’s Jeff Hyman’s presentation on the future of weight loss and signed up immediately. Exactly one year later I’m happy to report I’m a good 15lbs lighter, most of which was lost in the first 3 months, but more importantly, has since been kept off. That’s because it wasn’t necessarily about losing weight, it was about changing behavior and having the tools to monitor it. Diets don’t work, Retrofit does.

What this year’s Uber or Retrofit will be for me I don’t yet know, but I’m here to learn and I know from looking at the extraordinary line-up of speakers and array of subjects they will be covering, I won’t be disappointed.

Stocktoberfest 2014 Schedule

 

 

 

Oct 24

Weekend Review and Watchlist

In last week’s review I stated:-

“Is that it? I have no idea. Certainly a correction of around 7% would fit very neatly into the typical range of corrections, and it would look very similar to the last test of the 200-day MA two years ago.

The 200-day hasn’t started to roll over just yet, but it will likely start to make its first marginal prints lower in the next few days. At this point the bears would love nothing more than to see a test of that break that subsequently fails, and then a resumption lower, that if it occurred would likely lead to a very fast move down to around 1815……

…But I am getting way ahead of myself. That is purely subjective opinion and just one potential scenario. We could just as easily continue on up in the now traditional ‘V’ shaped pattern that has so often followed these moves.”

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What a week it turned out to be.

The S&P ran higher on Monday, then gapped straight up through the 200-day and ran again Tuesday. After a brief pause midweek it was ready go again and finished the week just shy of the 50-day with a gain of 4.1%.

Two things to note here:

First, I’d mentioned anecdotally how in the public’s mind the moves in the market last week were seen as being a reaction to concerns over Ebola. I think we can safely put that notion to bed now. With the news breaking Thursday night of a NY doctor testing positive, the futures slumped over 10 points but by the close we’d put in another solid move higher. We never did see the “Stocks rally as NY doctor tests positive for Ebola” headline that would have made a mockery of it all, but that’s what happened and to be honest – New Yorkers look away now – given how there is a huge bias in market reporting for something to only be considered important once it effects NY (Full disclosure – we Brits are just as guilty of the same in London) that was pretty impressive to see the market rally.

Second, last week I had teased that for those that preferred their 200-day MA’s to be declining to consider the move a downtrend, it was likely to print its first downticks any day. It never happened. The rally was so quick and strong, after barely going flat the 200-day has started to tick higher again.

What does it all mean? That this now just looks like another 5-10% pullback with a vicious V-shaped reversal, you know like all those other ones, only this included the first break of a still-rising 200-day in two years. That’s what.

If you’re waiting for the market to make new highs before you get the all-clear, you’re still waiting. As I invest in individual stocks rather than the market, I’m happy instead to take my cue from individual stocks, and there were plenty of names giving entry triggers. Early in the week I took entries in $ANAC, $CAG, $CCI, and $SBH.

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By the end of the week the watchlist was looking like something from 2013, dozens of big names back at their highs. The market isn’t at new highs, and may instead chop around here for a while, (let’s face it we now have a 10%-range sandbox for it to play in) so the top-callers’ 15 minutes might not be over just yet, but for anyone who just looks at individual names there’s plenty to keep you busy. Manage your risk, set your position size to sleep-friendly levels, and be ready to change at a moments notice if the price action demands it. No view necessary.

Let’s go through some of our other existing holdings:-

$DPS moved fearlessly towards new highs into its earnings announcement and came out the other side gapping to fresh all time highs. In space no-one can hear your resistance levels. These kind of moves are where I like to give it some room, and time, to settle down again before moving up our stop, which for now remains at the confluence of the previous swing low, long-term trendline, and the 50-day MA.

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$HD finished the week at all time highs. We’re currently using the $87.85 level as our stop but that will likely move up to the $90.24 level on a weekly close basis in the next week or so.

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$NKE put in another solid week to close at all time highs (are you noticing a theme yet?) The stop is currently at the second breakout level but that could soon move up to the recent daily low close from last week.

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$ALXN had come so close to triggering a stop less than 2 weeks ago, but this week it continued to move higher into earnings and then gapped and ran to all time highs on the better-than-expected report. Friday it put in a nice follow-through too. This isn’t a big position as it had a wide initial stop, but once it consolidates it might give an opportunity to trail the stop higher and increase the size on the next resumption.

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Additional positions include $BRK.B, $COST, $ED, $QLYS, $CNSL.

 

In terms of stocks to watch, although the number of names with attractive setups increased dramatically, the sectors where they’re coming from didn’t change anywhere near as much. To be fair, there are signs of life in financials with names like $ALL and $TRV showing very strongly, and among industrials some transports and defense names look strong, but materials and energy are still nowhere to be found, and the list continues to be dominated by healthcare, utilities, technology, and the full gamut of consumer sectors. Here are 10 names of interest:-

$TRV

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$UNP

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$DTE

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$BCR

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$GILD

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$AAPL

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$GPC

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$SONC

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$ROST

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$LB

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Oct 18

Weekend Review and Watchlist

I met with several non-financial people this week, and it was interesting that the market became a subject of conversation, as it was more than the usual chit-chat because they know I’m involved in it, they actually wanted to ask about it, so it appears the market has become volatile enough that it has their attention.

What was even more intriguing however, was they associated it entirely with Ebola, and in the way that you might mention elements of the economy when talking about the market, they twinned the market and Ebola as if each twist and turn in the market was a reflection of the Ebola story.

Now to be fair, you can hardly blame them, because that is not dissimilar to how the media has portrayed it recently. The media will say they’re in an impossible situation as they can’t be seen to not be reporting on it, but if they do they get accused of scaremongering. It’s a fine line to walk for sure, but they’re clearly failing at it.

Sadly the truth is it’s inevitable that when people see panic over Ebola, and they also see stock market declines make the headlines, they immediately assign causality and link the two.

It’s also perhaps telling to see the suggestive symmetry that exists, that this move in the market is somehow seen as a panic commensurate with the panic surrounding Ebola. Which one do they see as a bigger more immediate threat I wonder? There are always risks in our lives, but clearly some much-needed perspective is in order.

I can’t help you out with the medical stuff, but I can certainly show you where we stand market-wise.

Here’s the updated Correction Roadmap for the S&P 500:-

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As of Wednesday’s close the correction was 7.43% off the high close of 9/18. We put in a modest bounce on Thursday, and then had a huge rally Friday, although we did finish off the highs.

Is that it? I have no idea. Certainly a correction of around 7% would fit very neatly into the typical range of corrections, and it would look very similar to the last test of the 200-day MA two years ago.

The 200-day hasn’t started to roll over just yet, but it will likely start to make its first marginal prints lower in the next few days. At this point the bears would love nothing more than to see a test of that break that subsequently fails, and then a resumption lower, that if it occurred would likely lead to a very fast move down to around 1815.

This is because any new long rentals of the last few days are likely using the midweek lows as their stop, and any breach of those levels could lead to an air-pocket type of move as those that never sold on the initial decline join them in using it as their signal to bail.

But I am getting way ahead of myself. That is purely subjective opinion and just one potential scenario. We could just as easily continue on up in the now traditional ‘V’ shaped pattern that has so often followed these moves.

I had gone over a week without any exits, but his week’s volatility was enough to trigger five additional stops leaving just the strongest holdings and 30-40% cash. However there were also three new entries as some individual names continued to shine and show absolute strength despite the broad decline in the market.

Let’s look at some exits first:-

$TSLA had triggered an exit signal last Friday for Monday’s open, which ended up being the high print of the day leaving only a modest loss, and it never got close to recovering those levels the rest of the week.

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$MSFT had also triggered an exit signal last Friday for Monday’s open having breached a trailing stop level.

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$AAPL had been consolidating for over 5 weeks, and with the rest of the market falling as it continued to hold up relatively well the base of that consolidation became an all too obvious support level, a break of which took us out, and I suspect many others. It’s since recovered and may continue to do so, but this is a good example of the discipline required when trend following stocks. Sometimes you need to get out at what could be the low for a move. You just don’t know. We had a similar thing occur in $MSFT (see above chart) earlier in the year, but were able to re-enter when it recovered to fresh highs. Whether $AAPL will do the same or not remains to be seen.

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The new entries were in $ED which had an impressive high-volume breakout and follow-through beyond our entry, $QLYS which has since retreated but which we’ve given a lot of room, and $CNSL with a high-volume breakout.

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Let’s now turn to a few of our open positions:-

$BRK.B – Nothing to see here. Although it’s a second close marginally below its 10-wk, $BRK.B actually finished higher this week. On the daily chart it’s nestled between its 20 and 50-day MA’s, a safe distance from our stop.

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$NKE was unchanged on the week, and is one of the few remaining names still above its rising MA’s.

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$COST got hit hard this week, pulling back to the 10-week MA in a test of its breakout level, but it remains in between its 20 and 50-day MA’s and a relatively safe distance from our stop.

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In terms of new opportunities there’s still a reasonable number of names on the watchlist. Utilities, which had dominated in the last couple of weeks have now pulled back, but healthcare, consumer goods, and consumer staples still have a strong showing. Within those areas, specific sectors like business services and specialty retail, such as beauty products feature prominently.

AMN Healthcare Svcs ($AHS)

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Advance Auto Parts ($AAP)

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Booz Allen ($BAH)

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Sally Beauty ($SBH)

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Oct 16

It’s Not 2007, It’s 2014

 

 

 

 

Oct 13

Could You Kill That Loss In Cold Blood?

(This is an updated version of a post originally published in March 2013.)

Sometimes, when you’re developing a trading system and you’re looking back through the trades it took, you come to a ‘market event’ type of move, one where we might gap lower, or skid relentlessly, a flash crash, or an actual big-boy crash. One could argue with the S&P 500 closing below its 200-day for the first time in two years we could potentially be entering such a period now, one that presents you with signals and opportunities in a fast market.

Whatever it is, we nonchalantly assume, yes, we would have taken that signal. Maybe you would, but as much as it’s necessary to lay down rules and guidelines in trading, if they’re in any way ambiguous or unrealistic, you risk leaving room for error, lack of discipline, or departing from your process just when you need it most.

I’m always flattered when a young trader will ask me for advice or be keen to show me their trading system, which they demonstrate to me via this absolutely perfect equity curve, as smooth as you can imagine. It’s obvious it’s been optimized and it will include trades they supposedly would have taken in the 1987 crash or in the fall of 2008.

In reality, not only might they not have taken the trade, but even if they did they may not have been able to execute it given the market conditions that existed. You just can’t recreate that stuff in a backtest. You also can’t recreate the fear, the panic, or the emotion, so you can’t know for sure you would act on a signal until you actually have to.

When I try to tell them that, it reminds me of a scene from one of my favorite movies “The Bridge On The River Kwai” where Jack Hawkins tries to recruit a young soldier but doubts his ability to execute under pressure. Here it is:-

jackhawkins

 

These gentlemen are thinking of taking you for a little hike into the jungle.

– Yes, sir.

You were an accountant in Montreal?

– Yes, sir. Not really an accountant, sir. That is, I didn’t have my charter.

Exactly what did you do then?

joyce

 

– Sir, I just checked columns and columns of figures which three or four people had checked before me… and then other people checked them after I had checked them.

 

colgreen

 

Sounds a frightful bore.

– Sir, it was a frightful bore.

How did you wind up here?

– Sir, I came over to London to enlist and about two years later, I volunteered for this work.

shears

 

You volunteered?

– Yes, sir. You see, the regular army–

Go ahead. You can be frank.

– Sir, the regular army sort of reminded me of my job in civilian life. They don’t expect you to think.

colgreen

 

Think about this. (Holds up knife with huge blade)

Are you quite sure you’d be able to use it in cold blood?

– I know how to use it, sir.

That’s not what I meant. Could you use it in cold blood?

Could you kill without hesitation?

 

joyce

– That’s a question I’ve often asked myself, sir. It’s worried me quite a bit.

What was the answer?

– I don’t honestly know, sir. I’ve tried to imagine myself–

– I suppose I find it hard to kid myself that killing isn’t a crime.

jackhawkins

 

It’s an old army problem. I think that’s all. Thank you, Joyce.

– Am I to go with the team, sir?

We’ll let you know. (Joyce leaves the room)

Now you see what I mean?

shears

 

 

At least he was honest about it, sir.

None of us ever knows the answer to that question until the moment arises.

 

 

 

 

bridge_on_the_river_kwai_2

 

 

 

 

Fortunately for Joyce, Capt. Shears did know the answer and took great pleasure in executing his duty when the moment arrived…

 

 

 

 

Could YOU take that signal when the futures are limit down, when your stop is breached, when all seems lost?

Could you kill that loss in cold blood?

 

 

 

 

Oct 11

Why ‘Alpha Capture’?

Alpha Capture is the name given to the method by which hedge funds extract value from sell-side research and broker trade ideas by tracking and measuring their performance both in absolute terms and relative to their peers.

It was first developed by hedge fund Marshall Wace in London and has subsequently been used by numerous other well-known hedge funds and third-party platform providers. As a sales-trader to Marshall Wace in 2003 shortly after its introduction, and as someone who welcomes transparency, accountability and meritocracy in the world of trading and markets, it was something I thrived at and have carried elements of it forward in my work to this day.

In his book ‘Absolute Returns‘, Alexander Ineichen quotes Ian Wace:

This business has nothing to do with positive compounding; it has to do with avoiding negative compounding… The P&L is the only moderator of hubris. You are not given money to lose it.” *

This concept of avoiding negative compounding is something that has always resonated with me.

I feel it is commensurate with the basic tenets of trend following; letting winners run, cutting losses, not attempting to pick tops or bottoms, and in the case of stocks, not trying to beat the market through relative returns, but rather trying to capture most of an uptrend, avoid most of a downtrend, and in doing so coming out ahead of the market.

Ineichen echoes this in his footnote:

* “needless to say, neither are long-only managers hired to lose money. However, the absolute return focus puts more weight on preserving wealth in difficult market conditions… Managing volatility and avoiding losses subsequently results in superior long-term absolute as well as risk-adjusted performance.”

That’s what Alpha Capture means to me and why I chose it as the name for my blog.

 

 

Oct 11

Weekend Review and Watchlist

A fairly uneventful week. Just kidding. Although in some respects it wasn’t the week for me some might imagine. The previous week was much more eventful in terms of signals with five exits. This week, despite the volatility, it was looking as if I was going to go the whole week without any exits, and instead just have two entries, but the stock specific rout that took place in Friday’s session was enough to trigger two more trailing stops by the close.

As surprising as it might be to get entry signals in a week like this, you only need to look at the relative sector performance to understand why. I went through my process in this regard in this post, highlighting the strength that’s been shown in consumer staples this week.

One name that presented itself for an entry was $COST, following better than expected earnings that propelled the stock to new highs on increased volume. In spite of a huge market decline Thursday, it manage to consolidate its gains tightly, and went on to close at an all time high Friday, again on increased volume.

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Of existing holdings that remain, $AAPL, $DPS, $HD, $BRK.B, and $NKE still appear relatively unscathed.

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One thing that is clear and only gets reinforced during periods of volatility like this, is you absolutely have to take your exit signals when they come. There can be no second guessing. Some recent exits have been great examples of this. Look at this exit from the previous week in $JCP:-

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Was it frustrating to see a winner turn into a loser? Sure. But until it breached my stop and invalidated the trend for my timeframe I wouldn’t have been able to know for sure I was wrong. Once I am, I get out, no questions asked. Look at it now. And yes, it was also extremely frustrating to see it rally 10% in my face after I exited. But a stop is a stop. When faced with an exit signal I often have people ask “It’s oversold though, shouldn’t I wait for a bounce?” They’ll point to what happened here as validation for that, assuming they would have got out before it turned again.

Well, let’s look at $ATVI and $IPG, two more recent exits:-

$ATVI was the most oversold it had been in 8 months when the exit came. No bounce, and in free-fall since.

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$IPG was also oversold, an activist play, supposedly a potential takeover target, so plenty of reasons to keep you in. Except price. Again, no bounce. In fact that exit at the open was the high print of the day and ever since.

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Going forward, in terms of watchlist names it’s certainly true the numbers are fewer and it’s fair to say they are becoming more highly concentrated. Utilities and Consumer Goods/Staples were clear standouts this week.

I’ll leave you with four names that offer potentially good risk/reward setups depending on your timeframe and risk tolerance; $ED, $PEP, $ROST, and $TJX:-

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