Jul 19

Weekend Review and Watchlist

The market appeared to put the issues of Greece and China behind it this week, as earnings took center stage and the S&P climbed 2.4% to finish just 0.2% below its all time high close of May 21st.

Markets can correct through time as well as price, and it’s looking increasingly like this most recent pullback may be an example of that, with two months of choppy action potentially being resolved to the upside, following the second shallowest decline in history when testing the 200-day.

At this stage I’m not sure what’s more remarkable, the fact that with all the negative news stories that have been thrown at this market it didn’t even register a 5% decline, or that having observed that and being on the cusp of fresh highs, so many market commentators and participants remain unimpressed.

This chart from Ryan Detrick demonstrates perfectly just how entrenched this cautiousness has become. The 8-week MA of AAII Bulls has been this low only twice in the last 20 years – at the 2003 and 2009 lows.

There are a couple of things to note here. First, this is an 8-week moving average so it may not accurately reflect sentiment at this precise moment. Second, notice I am saying cautiousness, not bearishness. There’s an important distinction to make here. It’s not that “everyone is bearish”, it’s that so few are bullish. There’s a subtle difference.

It seems to me there are two overriding themes that are dominating the thoughts of such market participants:

1. This bull market is historically long in the tooth and at some point will end.

2. At some point in the future interest rates will rise.

I can’t argue with either of those statements. Both are true. But neither are helpful.

Price alone will tell me when the bull market is over. Until it does, I’ll continue to take the opportunities it gives me.

If you’re always looking for any reason to not like a market rally, you’ll probably find it. Whether it’s breadth, low volume, sentiment, seasonal trends, earnings, or economic concerns, there’s always something you can hang your hat on. But recognize that’s what many are doing. Making the data fit a pre-existing narrative to justify staying out of a bull market. This week it seems the fly in the ointment was breadth. While the S&P closes in on new highs, the equalweight $RSP is lagging.


This was also demonstrated by the Russell relative to the S&P:-


But that’s about it.

Rather than make what’s not working a reason to stay out of what is, I prefer to find the leaders and follow them.

The big winner this week was the NASDAQ, climbing to all time highs, boosted by biotech and Google’s post-earnings breakout.


Turning to the S&P Sector SPDRs, I have Consumer Discretionary ($XLY), Healthcare ($XLV), and Financial ($XLF) as the top three.


They’re followed by Consumer Staples ($XLP), and Technology ($XLK).

After that comes Utilities ($XLU), Industrials ($XLI), Materials ($XLB), and Energy ($XLE), which hit the lowest levels since 2012.

The Alpha Capture portfolio enjoyed another strong week, climbing +3.0% vs +2.4% for the S&P 500.

That takes it to +15.1% YTD vs +3.3% for the S&P.

We trailed a few stops higher and added to a couple of names, but had no new entry or exit signals. This week was a good example of when there’s nothing to do but let our winners run and manage risk. That’s exactly what we did. We haven’t had an exit signal since the end of June. We took our losses early, got new entry signals as others were still getting exits, and have since benefited significantly from the ensuing rally.

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

Despite the concerns over breadth expressed by some, I am still finding plenty of valid setups. We’ve had a fully allocated portfolio with 11 names since early July, and currently have an additional 12 active trade ideas.

With the market on the verge of all time highs we are in a target-rich environment, so much so, that I believe you can afford to be even more particular than usual about setups and entries.

It’s pretty easy to find something at all time highs. In such conditions, when looking for the next opportunity, there is absolutely no reason why you should be considering entering anything with a sub-optimal setup. You can afford to demand more from the trend and take only the strongest signals.

Here’s a handful of names that may potentially offer such an opportunity:-












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













Jul 11

Weekend Review and Watchlist

There’s already been so much said and written about this week’s market action, that this week I’m going to concentrate on providing some context to help navigate this environment and emphasize where I believe your focus should be.

The S&P finished the week unchanged, breaking its 200-day MA and later recovering, and remains just 2.5% below its all time high. Here it is via the $SPY, still looking a little sloppy and heavy, with some short-term damage.


Putting that in context longer-term, below is the updated S&P 500 ‘Correction Roadmap‘ I keep on my blog.


Whatever transpires from here, my guess is that many months or years from now, by looking at price alone you won’t be able to pinpoint when the Greek referendum took place, or when the China stockmarket bubble burst.

This is because the magnitude of price movement often doesn’t match the noise and sentiment that accompanied it. So far, the events of the last few weeks have been made to feel much more momentous than price is suggesting.

And let me take this opportunity to address a point on the whole ‘news is noise’ and ‘Greece doesn’t matter’ thing, as people have cited recent events as proof that Greece clearly does matter, and that others were wrong to be so dismissive of its relevance. To say this, is to completely misunderstand the concept of what is observable information, and what is actionable information.

It is only the price reaction to news that matters, not the news itself. The news isn’t actionable. The price reaction is.

That is what I mean when I say ‘news is noise’ and that there is no need for you to decipher news headlines or interpret stories in order to trade successfully. Don’t get sucked into the daily game of assigning causality to every twist and turn. You can’t have any discernible edge trading on news.

You don’t need to justify or understand why something moved. Once you attempt to do so, you will find yourself not taking a clear entry signal because some negative news item hasn’t yet been resolved in your mind, or not taking an exit signal because the stock price clearly hasn’t seen or understood the positive headline you saw, or taken into account the research note you read.

In periods of volatility, the market can become ‘headline-driven’, with each breaking announcement on whatever story is dominating the headlines being responsible for each plunge and rally from one day to the next.

We get a positive headline, the market rallies. We get a negative headline, the market falls. We get another positive headline, the market rallies. Hmm, I think I see a pattern. I really need to be on top of this story. But then something changes. Now there’s a headline that’s the opposite of the one that we rallied on, but the market doesn’t fall. ‘Hang on a minute. If that was why we rallied two hundred points yesterday then how can we not be falling today? It doesn’t make sense.’ This is a very dangerous cycle to get drawn into. Now you are keeping score of what the market owes you, based on where it should be, based on what it did before, based on wherever you first started counting. Feeling dizzy yet?

There’s no need to be. There’s a simple solution. Don’t make the headlines your guide, let price be your guide.

Look back over these last two weeks at all that’s happened and your understanding of it, and ask yourself; Did having knowledge of those events in anyway enhance your decision-making process? Any more than had you not known about the finer details and only had price to go on?

I distanced myself from the noise a little more this week than I normally do, and was less active on social media as a result. When you use end-of-day signals, often there genuinely is nothing to do. But the patience it requires can get severely tested when it’s a particularly fast and volatile market. I’ve found staying too close to the action can do more harm than good.

It’s a distraction that can all too easily have you tempted to override a signal, thinking that such important events justify making an exception to those rules you crafted. Where in fact, those rules were created precisely for these type of environments and events, to prevent you making an emotional decision, and to help get you through to the other side, financially intact, and mentally stronger. Do it once or twice, and you’ll be able to do it again and again.

Let’s briefly look at the strongest sectors before turning to our portfolio.

I have Consumer Discretionary ($XLY) at the top, followed by Healthcare ($XLV) which benefited from strength in Biotech ($IBB).


Then it’s the surprise package this week, Consumer Staples ($XLP).


The only other sector above its 200-day is Financials ($XLF), many of which report earnings next week.


Our Alpha Capture portfolio enjoyed a reasonable bounce this week, climbing 1.2% vs an unchanged S&P 500.

That takes it back to +11.7% YTD, vs +0.9% for the S&P.

We had already exited our weakest names at the end of June, and haven’t had another exit signal since. Our cash level got to over 50%, but over the last two weeks has slowly been put to work with each new entry signal, and this week saw the completion of that process with three more entries to leave us fully invested by Wednesday morning.

With no room left in the portfolio but plenty of additional signals, we had a further six names put up as trade ideas.

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

Despite a volatile week with the S&P finishing unchanged, there was a vast improvement in the number and quality of setups. Consumer discretionary names still dominate, but there was also an increase in the number of healthcare names, and notable strength in consumer staples. Sub-sectors such as homebuilders and insurance are also improving.

We’re back up to 30 names on our watchlist this week, here’s a sampling of 12 of them:-
























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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