Aug 07

Exit Long NASDAQ

Exit Long NASDAQ ($NQ_F) 6/26 +$855.00 per contract

The NASDAQ finally triggered its exit signal for a small profit, a week after the S&P did the same. It looks to have fallen even further overnight so it could be an interesting end to the week tomorrow.

AlphaCapture

There’s no question this is not the uniform sell-off or correction people are making it out to be. I highlighted earlier tonight on twitter it’s extraordinary to see so many traditional momentum names like $FB, $NFLX, $TSLA, $PCLN, $GILD, $CMG, $UA, all doing incredibly well in this environment. Some are even making new highs. If you took one look at the indices without knowing what these names had done and I asked you to guess how much they were off their highs you’d be guessing double digit percentages, of that I’m sure.

Although it’s perfectly possible a further decline in the broader market can eventually make its mark on them, it still suggests to me there is an element of rotation in this move, and it’s only by continuing to pick stocks on their individual merit rather than having a moratorium on new positions based on what an index has done, that you can identify the strongest areas of the market where you should be concentrating your resources.

That was the case previously in January when the market last had a pullback of this magnitude, only then it was a severe sell-off in momentum names while safe dividend-paying blue chips outperformed. Now it’s the opposite. Most of the exit signals we’ve had so far have been in so-called defensive sectors. The higher growth momentum-type names are still giving entry signals, in fact there were two more this week which I’ll detail at a later date.

Elsewhere, on the futures signals the only ones remaining are Live Cattle, which is now very close to its trailing stop, and Long 30yr which is still defying everyone’s expectations with no ‘rising-rate environment’ in sight. I’ve slowly been winding this part of the blog down, not showing new signals and just taking exits. Despite my best efforts with disclaimers, the inclusion of futures here creates potential issues for what I am pursuing business-wise. Some of you may already have noted the more muted commentary in this area for most of the year. All will become apparent eventually (and it’s all good!), so I hope you can understand I have to make that my priority.

Long 30yr ($ZB_F) 2/3 +$8,468.75 per contract

Long Live Cattle ($LE_F) 3/28 +$3,660.00 per contract

 

 

Aug 05

An Introduction To Trend Following On Stocks

In the 18 months I’ve been active on social media I’ve had an opportunity to engage with many portfolio managers, some of whom choose to share their insights and vast experience of managing client portfolios.

I’m always particularly interested to learn from anyone who has been in the business longer than they might care to remember! Think about what markets have done over the last 20 years and what you could potentially learn from someone who not only survived and thrived, but successfully brought their clients through it too. They didn’t just get lucky. It means they know how to manage risk.

One such manager is Helyn Bolanis, CEO and Chief Investment Officer at Parlan Financial.

Helyn very kindly invited me to write a guest post on Parlan Financial’s wealth management blog, and I was happy to oblige, with a look at how trend following can be implemented on stocks, and provide a solid alternative to ‘buy and hold’. You can read the post here:-

An Introduction To Trend Following On Stocks

You can follow Helyn and Parlan Financial on Twitter:- @helynbolanis @parlanfinancial

 

 

Aug 04

Some Observations

Last week was the biggest weekly decline in the market for over two years.

Sentiment seems to have shifted extremely quickly, perhaps understandably given the speed of the move, and how long it’s been anticipated after such a lengthy advance. This is classic ‘stairs up, elevator down’ price action. Whether the bears press and make their advantage tell is still as yet unknown. As always price will let you know.

This is where having a process, and more importantly having the discipline to execute it, is paramount. I often say that your stop should always be where you can accept or know you are wrong. One of the reasons for this was demonstrated in last week’s price action.

Before you enter a position you need to have determined where your rationale is invalidated so you can then size your position. You do it calmly and rationally. But when that stop looms days or sometimes weeks and months later, the circumstances under which you have to take it will likely be very different. Like last week.

I don’t typically analyze the market short-term that much, but late last week I was amused to see a signal from a long-forgotten system I devised many years ago to catch short-term oversold conditions. This was when I was experimenting with system dynamics, ie the trade-off between systems that have high win rates but the average loss is way bigger than the average win (and eventually one of those losses wipes them out), or the exact opposite, low strike rate, big avg win vs avg loss, which is what I do now.

This system “Steamroller” is absurdly simple (but you know I love that). When the 5-period RSI goes below 25 it buys the next bar open, it exits on a profit of 0.75% or a loss of 3.0%. That’s it. Its win rate is usually around 90% like all good newsletter vendors without AUM, except that it’s rare to get a signal. When you overlay it on the $SPY it currently has a 21 win streak and flashed a buy signal late last week (it’s almost out with another win too).

AlphaCapture

Make of it what you will. Again, I do not trade this stuff, but I think it just underlines the significance of last week’s move. We need to acknowledge it and remain disciplined taking the exits as they are presented to us. Those same exit signals triggered by rules you devised to protect your capital and tell you to exit when you might be inclined to do otherwise. Remember?

Even if the Steamroller bags another win, so far this looks like a pretty weak bounce.

AlphaCapture

I’m wading into subjectivity here but I view Thursday’s decline as such that the longer it takes to recover the lost ground the less likely it becomes. That is, the technical condition can deteriorate further without any further decline in price. This is how markets correct through time as well as price. We can easily have an attempt at a bounce but as time goes on the MA’s cross over and previous support becomes a resistance level where bears become emboldened and press shorts.

Basically, we’re in no-man’s land where battle lines are drawn and actionable triggers in either direction are determined. For trend followers this is what we do constantly, but for those without such a systematic approach lines in the sand get drawn above or below which major decisions are made.

Even though this environment alerts us to manage risk and honor stops, don’t also rule out the possibility that new opportunities emerge within it. We saw this earlier in the year when there were still names making new highs as other areas of the market took pause. So far, this decline looks broader in nature but interestingly there are some traditional momentum names shaping up well, hardly the action you’d expect in a lasting correction.

Over a week ago before the decline got underway I had additional long signals in $AAPL, $DPS, $HPQ, $LMT, $NOC, $QIHU, and $IPG. I also had an entry in $ARRS which has already been exited after taking a post-earnings hit. It happens. Not very often, but it happens.

Stay disciplined, manage risk, and have a plan for whatever may transpire.

 

 

Aug 01

Exit Long $WFC

One more exit signal tonight, bringing us up to 8 for the week, and if you’re keeping score at home so far they’ve been for -0.5%, -1.9%, +2.7%, +2.9%, -1.3%, +2.8%, +5.0%.

$WFC is another one with a small profit that closed through its trailing stop today. You may recall we had already seen it close below its 50-day MA two weeks ago only to recover as it had done previously, but it wasn’t able to withstand getting caught up in this week’s market decline, gapping below that previous low this morning and failing to sustain any subsequent attempts at recovery. It also coincides with a 20/50 MA cross, and marks the third consecutive weekly close below its 10-week MA. That’s enough for us to step aside.

Long $WFC 5/23 +0.9%

AlphaCapture

 

 

 

Jul 31

Exit Long $SRE, $UNP, $PPG

We’re staying another night in Stop City having received three more exit signals. It’s more of the same really, all trailing stops for small wins and losses. That was a huge one day move in the market, but as big as it was, in the context of the length and magnitude of trends we typically play, it’s of little consequence so far. We don’t need to have a view on what happened or why, we just go with the evidence price gives us. Many trends remain intact and we’ll stay with them for as long as that’s the case, but for our timeframe we have to bid farewell to these three:-

Long $SRE 3/17 +5.2% (incl 3/25 div $0.66, 6/27 div $0.66)

AlphaCapture

 

Long $UNP 4/22 +2.9% (incl 6/9 split 2:1, 6/12 div $0.455)

AlphaCapture

 

Long $PPG 5/30 -1.3%

AlphaCapture

 

 

 

Jul 31

Exit Long S&P

Exit Long S&P ($ES_F) 5/13 +$2,000.00 per contract

Well that was interesting. I had been concerned that our most recent trailing stop level was one of those ‘obvious’ ones, a combination of the most recent swing low and the 50-day MA that can result in a marginal break that reverses on you after you exit, but even if that still proves to be the case, it’s hard to think of a more emphatic move than what we saw today. The S&P sliced through the level in question and just kept going. It’s halved our profit on the position in one fell swoop, but a profit it still is. We’ll now step aside and watch what develops from here.

AlphaCapture

After the exit in the Yen yesterday, and the S&P tonight, that just leaves:-

Long 30yr ($ZB_F) 2/3 +$5,781.25 per contract

Long Live Cattle ($LE_F) 3/28 +$5,290.00 per contract

Long NASDAQ ($NQ_F) 6/26 +$1,690.00 per contract

 

 

 

Jul 30

Exit Long $CMS

It’s not for me to speculate the reasons behind any market move or whether anything is justified or not, but  I find it interesting that those that do, have glossed over the fact in the recent weakness ‘defensive’ names have acted anything but defensively. In fact, they’ve been leading to the downside. Of course, those with a bearish narrative will jump on any weakness as a confirmation of their view, but it’s noticeable to me the exits posted on here recently have mostly been in names defensive in nature, coinciding with the weakness seen in consumer staples, utilities and transports. And yet, just today in another weak session we saw a momentum name like $GILD make new highs, something conveniently ignored by the bears. They seem to have overlooked the possibility that what we’re really witnessing is simply a case of further market rotation rather than the beginning of the much-anticipated correction.

Either way, we will let price decide. For now, we have another exit, with a trailing stop hit on $CMS for a small profit. Even adjusting for the dividend which I know some of you like to do, this has still done enough to warrant us leaving the scene. We still have a long in $SRE on the books which doesn’t look far behind.

Long $CMS 3/17 +3.8% (incl 4/30 div $0.27, 7/30 div $0.27)

AlphaCapture

 

 

 

 

Jul 30

Exit Long Yen

Exit Long Yen ($6J_F) 5/21 -$1,850.00 per contract

It’s been two months since we had an exit signal on the futures portfolio, usually an indication there are some strong trends underway, and while that’s the case elsewhere with equities, bonds, and live cattle, it wasn’t the case here in the Yen at all. It didn’t do much of anything for the longest time, and after looking like it was about to resume higher it slid back in the last week culminating in a steep move through our stop today to trigger an exit for a loss of $1,850 per contract.

AlphaCapture

That leaves:-

Long 30yr ($ZB_F) 2/3 +$6,000.00 per contract

Long Live Cattle ($LE_F) 3/28 +$6,530.00 per contract

Long S&P ($ES_F) 5/13 +$3,887.50 per contract

Long NASDAQ ($NQ_F) 6/26 +$3,090.00 per contract

 

 

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