Jan 30

Weekend Review and Watchlist

Overview

The S&P 500 surged 2.5% Friday to finish with a 1.75% gain on the week. That marked its second-straight weekly advance, something it last managed in early December when it was less than 2% from its all time high.

Prior to Friday’s rip-and-run it had mostly traded in a 40-point range for the week, with both the high and low made on Wednesday either side of the Fed announcement.

It recovered ground Thursday, but the real fireworks came at the end of week following the BoJ’s surprise move to negative interest rates, with the market breaking out of its 5-day range and reclaiming its 20-day EMA.

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As always, how you interpret the current state of the market will very much depend on your timeframe.

The high-volume advance was deemed a follow-through day by IBD which will now classify the market as being in a uptrend, while Tom McClellan highlighted the move was swift enough to have taken the McClellan Oscillator (a market breadth indicator) from zero to overbought in just two days.


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Turning to the longer-term weekly chart on the S&P, it’s true we’ve seen rallies from similar circumstances turn into relentless 6-7 week advances, but so far this move appears less powerful, coming from an arguably more extreme oversold condition.

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As strong as the advance off the lows may feel after two weeks, in reality it’s done little so far to repair the damage of the last two months. That’s seen even more vividly in the weekly charts below of the Transports ($DJT) and Russell 2000 ($RUT) which have led this overall decline for some time now.

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Sector Rankings

If I were playing a relative returns game, or hedging any longs with a short $SPY position, I would probably have an entire portfolio of utilities and consumer staples right now, because they are by far the stand-out sectors, and the only ones currently up on the year.

Utilities ($XLU)

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Consumer Staples ($XLP)

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With regard to taking new signals in the current market, and specifically on utilities, there are many good-looking charts in the sector but it’s unlikely I’d take one as an entry. Ordinarily in a strong and broad market advance I would treat them no differently to any other stock, but when they’re one of the few sectors advancing in what is essentially a bear market, I’ve found them to be more problematic.

Their volatility increases, stop placement is often difficult, and it can result in an unfavorable risk/reward. Could they conceivably rally a further 10-20% to make that risk worthwhile? Possibly. But in most instances, I’ve found those early gains eventually fade without immediately invalidating the trend while in the meantime other sectors start to improve triggering more favorable buy signals on names you then don’t have room to accommodate because your cash is gone and your account looks like an income fund.

And if the market were instead to resume a much larger downtrend, what then? They just go down by less? I don’t want that and I won’t take an entry for the sake of it just to have something to say or be seen to be doing something. If those are the only things triggering entries, I’d rather keep the cash.

One of our edges is we don’t have to be invested at all times. We aren’t limited to how much cash we can have like an institutional manager, so we don’t need to hide out in safe things that pay dividends, have low beta, and will go down by less in a down market until the coast is clear.

Buying a utility stock in this kind of market environment is like ordering dessert at a Chinese restaurant. I’ve learnt not to do it. It may resemble something you think will be good, but as soon as you take a bite it’s a disappointment, and your regret is only magnified when on your way home you pass a nearby Italian.

Moving on. None of the other XL’s are much to look at. Technology ($XLK) is next best, Consumer Discretionary ($XLY), Industrials ($XLI), and Energy ($XLE) all bounced to their respective 20 EMA’s but are all still in clear downtrends, Healthcare ($XLV) is in the ICU, and Financials ($XLF) and Materials ($XLB) look like death.

Technology ($XLK)

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Consumer Discretionary ($XLY)

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Industrials ($XLI)

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Energy ($XLE)

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Healthcare ($XLV)

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Financials ($XLF)

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Basic Materials ($XLB)

AlphaCapture

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Alpha Capture Portfolio

Our portfolio remains 100% in cash and -4.5% YTD vs -5.1% for the S&P.

CLICK HERE TO GAIN ACCESS TO COMMENTARY ON CURRENT POSITIONS, NEW ENTRY/EXIT SIGNALS, ADDITIONAL TRADE IDEAS, AND OUR COMPLETE WATCHLIST.

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Watchlist

With the rally of the last two weeks our watchlist has slowly started to expand and this week boasts a maximum 30 names. Nearly half of those are from the triumvirate that has dominated the list up to now – utilities, food/bevs/tobacco, consumer staples – but there are also some consumer discretionary and tech names making a return too. Here’s a sample of 8:-

$CMS

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$XEL

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$KMB

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$SJM

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$TSN

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$FB

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$ROST

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$DLTR

CLICK HERE TO GAIN ACCESS TO COMMENTARY ON CURRENT POSITIONS, NEW ENTRY/EXIT SIGNALS, ADDITIONAL TRADE IDEAS, AND OUR COMPLETE WATCHLIST.

 

 

 

 

 

 

Jan 22

Weekend Review and Watchlist

Overview

How you interpret what happened this week will depend on your timeframe and to what extent you’re still exposed to the market. That’s actually always the case, but in times of increased volatility those facets will take on greater importance in shaping your experience and interpretation of events, as your emotions and those of other market participants and commentators become accentuated. Here’s my take:-

The S&P made a lower low, but recovered to close higher on the week.

That lower close on Wednesday meant the current correction hit -12.7% on a closing basis and is now over 8 months in duration, easily the longest since the 2009 lows, and the third largest in magnitude behind the -19.4% bear in 2011 and -16.0% in 2010.

Although the bounce on the week appeared modest, the takeaway for many was the huge rally off Wednesday’s intraday lows, which were consolidated on Thursday before a gap higher and follow-through Friday left a huge ‘hammer’ bullish reversal candle in place, a pattern often cited at major lows.

It’s understandable how such a pattern can develop from short-term oversold conditions, but whether it has any predictive power and over what timeframe is highly debatable. As is the case with most technical patterns, they are best used as a means to assess current probabilities and risk parameters, they are not predictive of anything. Nothing is.

Regardless of the merits of such a signal, to my mind it’s just as conceivable we could rally to test the underside of the MA’s broken 4 weeks ago, just above 2,000, as it is that we fluctuate in a wide enough range to shake out bulls and bears alike over the next 4-6 weeks before resuming lower.

How you interpret it and play it will be determined by your own timeframe. There’s that word again, timeframe. It doesn’t matter what you label this, a correction, a bear market, a mere flesh wound, the important thing is you have a plan and you stick to it.

As I stated in my Helter Skelter post earlier today, I’ve always been at odds with the well-worn idea that traders love volatility. I’ll take a slow steady trend over a thrill-ride any day. This is a difficult trading environment, and unless you are very certain of your own field of operations, meaning your methodology, risk tolerance and timeframe, you could get frustrated listening to anyone claiming to be calling every turn as each no-brainer opportunity presents itself, and be enticed into trying to do the same.

I’m only good at what I do. There’s a lot I don’t know, and a lot of things I don’t do well, so in this environment I don’t get to play. I get to watch the rest of you having fun. Except it doesn’t look like much fun trying to catch knives.

 

For me, the market is back in no-man’s land where it could rally a further hundred S&P points and still only produce a handful of entry setups, and not before they’ve already risen some distance from where they currently reside, making stop placement difficult.

The majority of the names that remain on my watchlist are from traditionally defensive sectors, and even they look vulnerable. The overriding sense I get, similar to previous swift declines, is that time more than anything is needed to heal the wounds inflicted in the last few weeks. A swift reversal higher, as rapid as the decline that preceded it, would arguably only make the environment even more precarious and difficult to navigate.

Further examples of that dilemma can be seen in the other major indices with the Transports ($DJTA) and Russell ($RUT) posting modest rises after huge multi-week declines.

As I stated last week and will repeat here, yes we’re oversold, and yes we could bounce, but the damage done is so severe it will take more than just days or weeks to establish a new uptrend. Even if Wednesday did indeed mark the low it could be months before we can confidently state that.

 

Sector Rankings

Not a lot has changed in ranking the XL’s (S&P Sector SPDRs). The bounce was enough to see Utilities ($XLU) and Consumer Staples ($XLP) reclaim their 200-day MA’s, but nothing else even made it back to its 20 EMA.

Utilities ($XLU)

 

Consumer Staples ($XLP)

 

Technology ($XLK)

 

Consumer Discretionary ($XLY)

 

Healthcare ($XLV)

 

Industrials ($XLI)

 

Financials ($XLF)

 

Basic Materials ($XLB)

 

Energy ($XLE)

 

Alpha Capture Portfolio

Our portfolio remains 100% in cash and YTD is -4.5% vs -6.7% for the S&P.

CLICK HERE TO SUBSCRIBE AND GAIN ACCESS TO COMMENTARY ON CURRENT POSITIONS, NEW ENTRY/EXIT SIGNALS, ADDITIONAL TRADE IDEAS, AND OUR COMPLETE WATCHLIST.

 

Stocks To Watch

Our watchlist still looks like an income portfolio with lots of boring safe dependable dividend-paying companies. Of course, there’s absolutely nothing wrong with that, every stock on its merits, but it’s interesting that in previous market declines to these levels we’ve always managed to find pockets in various sectors doing well as others receded, suggesting a form of sector rotation was underway, where as now it’s clear the selling has been wholesale and indiscriminate across the board, resulting in a flight to safety that manifests itself through the kind of names that screen for us now.

Here’s a sample of 5 names:-

$ED

 

$SO

 

$CLX

 

$CPB

 

$STZ

CLICK HERE TO SUBSCRIBE AND GAIN ACCESS TO COMMENTARY ON CURRENT POSITIONS, NEW ENTRY/EXIT SIGNALS, ADDITIONAL TRADE IDEAS, AND OUR COMPLETE WATCHLIST.

 

 

 

 

 

 

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