Monday, February 24, 2014

Not Quite In Wheel House

Today it looked like the S&P 500 was breaking out to new closing highs. But then the last hour sell programs came in only to leave us frustrated again as the SPOOs fell back down to the resistance level that it temporarily had pierced.

On top of that, just as the market was oversold less than 2 weeks ago, now it is extremely overbought. The S&P Oscillator is now plus 8.5 - the highest overbought reading in years. 

Tomorrow is another day and the market may very well follow through with a clean breakout, but this game is getting very difficult to play. There is still lots of money sloshing around out there, but the list of things that are working is becoming more narrow, more speculative and more extended. I learned a long time ago to not fight the tape, but that doesn't mean that I have to get caught up in mob psychology and eschew risk control. So I go with the flow, but control my risk by playing fast and small, while always looking for new opportunities.

I am not ashamed to say that this choppy market is not in my wheel house. I do my best when we are in up trending markets with lots of stocks in early stage breakouts. Right now we are five years into a bull run that has occurred under extraordinary circumstance. I have spoken about today's unprecedented monetary conditions and weak economy ad infinitum.  Rather than repeat, I would like to take this time to describe what I look for before I buy stocks and see how that applies today.

In general, I do my worst in indecisive choppy markets like 2014 has been. Granted that the market may be shifting to a stronger phase, but it is not there yet- not unless today's fake break out turns into the real deal. I strongly believe that a rising tide lifts all boats and the best stocks are the strongest relative strength stocks with great revenue and earnings growth or "stories."

One can find the genesis of my technical analysis thoughts in the works of William O'Neal, Marty Zweig - especially the Zweig Forecast, and Stan Weinstein. 

But I go back as far as first reading the basics of technical analysis as a college student studying Edwards and Magee plus William Jiler. After reading many books, I put my new education to the test and promptly got my ass kicked in over and over for years. I sometimes had big runs and profits. But I failed to hold onto the profits because I did not understand how to sell. Read the Market Wizards, by Jack Schweiger and you will find elements of my evolution in many of the characters. Most importantly read Reminiscences of a Stock Operator to get the idea of what Jesse Livermore went through. The same ideas apply today. The point being that I read all the books, but had to learn the hard way over a period of many years before I started to become successful. All of this deserves a more detailed exposition, which I hope to go into one day.

I believe that I can read a chart as well as anyone out there. But there is much more to trading than reading a chart. In my experience, most chart patterns do not work out and are not actionable. The typical question that reporters ask like "what does the chart tell you about AAPL here" are worthless. There simply is not an actionable answer most of the time. My job is to sift the sands and pick out the few actionable charts. One does not have to know the answer to every question. As Buffett said, one only has to wait for their pitch and essentially swing at that pitch if they know how to hit that pitch. So here is what I ideally look for:

1 - A Rising Tide. I want to see an up trending market with all indexes in gear.

2 - Favorable Fed policy.

3 - Some sort of overall market analysis that models the risk environment that we are in. The late Marty Zweig "the odds favor the bulls" was the best at this and modeled sentiment, monetary policy and the momentum of the tape in his "Zweig Forecast." Ed Hyman of ISI is the best economist with his easy to understand charts and comments. Both back tested situations that were similar to any given day's situation. No one today comes close to Zweig.

3 - Some kind of constructive Fiscal Policy like the Kennedy tax cuts, Reaganomics, Robert Rubin's great work as Treasury secretary are a few that come to mind.  Today's mess and the LBJ Vietnam War policies are not.

4 - Extremely Strong Revenue and Earnings growth, hopefully accelerating, along with a great long term story.

5 - Great relative strength as measured by someone like O'Neal.

6 - A secondary or third base on the charts that has occurred after a stock has made a great run. has digested its gains and is ready for the next leg up. This is simple supply and demand analysis within the context of a strong stock with great fundamentals or a great "story."

WDAY Example:  Here is an example of a strong growing story stock that broke out of a great secondary base a while ago. I would not chase it here, but did buy it when it broke out of the base. There are many types of bases in the Naked City, but generally they all involve a stock consolidating on lower volume after a big run. They also are accompanied by tightening Bollinger Bands and eventually take out the old highs - resistance - on much higher volume. Call WDAY a reverse head and shoulder continuation pattern or, a cup with handle or whatever you want.  The point is I want to wait for the next leg up to begin under the right circumstances before jumping on board. Sometimes I will even anticipate the breakout depending upon overall market conditions, the news and action of the stock or other issues. That is a matter of experience. 

Stocks I Own:

MONIF is close to the old highs. Will it pop through now or hit the wall and consolidate more before breaking out. I hope it does not stop and consolidate more like it did in October 2013 - circled on chart. A great long term story.

PXD Looks like it has a good chance to run to the old highs, but has some resistance around here - circled on chart - and it has this insane market to deal with. An ocean of oil and gas.

Low Priced Action:

CAK A big stock split today but testing new highs. Low priced stocks are perking up.

BLDP Another low priced stock perking up. Not great fundamentals and a herky jerky low priced trader.

KNDI China auto vending machines break out again. Great story.

XOMA The left behind biotech stock has been perking up. Another low priced stock.

In sum, my price alerts did not go off that much today. A narrow group of high priced maniacs like NFLX continued to run. As I had pointed out, the NASDAQ 100 had broken out several days ago but the other indexes lagged. Today it looked like the S&P 500 was finally in gear until the last hour sell program hit. Now the entire market is very overbought but may still continue to run. But the pickings are getting slimmer and the air is rarified. So even if the S&P 500 breaks out tomorrow, it is still a time to be nimble and cautious. 

BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.
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