INTELLIGENTVALUE: ACTION ALERT |
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January 6, 2009
what is the market telling us about where its headed?
It's always prudent to be foremost concerned about locking in profits, especially when the market is trading in oversold conditions. As Warren Buffett said (I paraphrase), "The first rule of investing is to not lose money. The second rule of investing is to see rule number one."
With that said, what does our proven, proactive system of stock and ETFs selection saying about the stock market? The system we are currently using to select stocks to been almost scary accurate, so it behooves us to listen to its signals. I showed some of the charts associated with our stock-selection system in yesterday's Action Alert.
To make a long description of the system short, we essentially are buying solid, undervalued stocks and ETFs as they rise from dips. The trades in our Aggressive Portfolio typically last for 2-3 weeks. The same approach applies to our Market Trends portfolio, except that it only trades in and out of one of two leveraged ETFs (SSO or SDS) based on the S&P 500.
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| Our Aggressive Portfolio has produced a return of 740% in just 3.7 years. |
My article yesterday pointed out that the indices that have been leading the market higher (such as the Nasdaq Composite) - as well as individual companies that make up those indices - are showing technical patterns are much closer to declining from highs than they are rising from dips.
With 50% of our Aggressive Portfolio in cash since we sold four stocks at a nice profit last week, we have been looking for new equities that are receiving buy signals to fill out the portfolio. We found those positions today. But the market is telling us a surprising story as we reviewed the most recent stocks which met our system's requirements from a technical perspective. The market is rotating from more aggressive trades that are a play on an economic recovery and into more stocks that are typically considered a safety play. (More below in the "Our Portfolios" section.)
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| Our Market Trends portfolio has produced a return of almost 10% % in the 30 trading days the market has been open since its launch. |
Our Market Trends portfolio, which we launched at the start of November, has already generated a return of almost 10%. This portfolio is designed to produce very steady monthly returns using one of two ETFs (SSO or SDS) based on the trends of the S&P 500 index.
So far, the portfolio has produced a return of about 10%, which puts it on track for our goal of 50%-75% annually. The portfolio typically only trades 2-3 times per month, with buy/sell signals sent out the evening before a change.
Trades can be entered with your online broker at anytime after you receive the Alert with execution scheduled at the market open the next day. This is a very simple system, perfect for anyone who wants a just a handful of easy-to-implement trades per year. This approach provides for strong diversification (based on the S&P 500) and emormous liquidity (avg. 10-20 million trades per day for the two ETFs).
TECHNOLOGY STOCKS SHOWING WEAKNESS
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The week before New Years and since the start of 2010, technology stocks (shown above by the technology spider, XLF) have shown weakness compared the the broad market (S&P 500). The weakness is shown in the ratio of the XLF to the S&P 500 (bottom chart). |
Since the start of the New Year, the technology sector, the darling of the market in 2009, has been weak. In my article yesterday I showed that the Nasdaq 100 ($COMPQ), the leading major U.S. index in 2009, appears to have topped out in overbought territory.
Today's market action didn't prove or disprove that thesis, as the Nasdaq index lost 7.62 or -0.33%. But the leading constituents of the index, i.e., Amazon, Apple, Dell, etc., are having significant trouble. These stocks are telling us that they may be running out of 'fuel.'
Two bellwether technology stocks that we purchased in mid-December, i.e. Apple (AAPL) and Hewlett-Packard (HPQ), were sold a week ago at a nice profit. We purchased them in early-December as they were rising from dips and sold them as they reached a top. Since we sold them, one has gone down further and the other has gone sideways. Apple dropped 1.6% today and Hewlett-Packard dropped almost 1%. When I run a scan for companies that are rising from dips, there is a glaring lack of technology-based equities.
That doesn't mean that technology won't come back as a leader in 2010, but the market is rotating out of these stocks as their prices have become stretched from their fundamentals and their moving averages. It actually may not be very long Recently, metal and other commodity stocks have taken up the flag and has been running with it. Our stock/ETF selection system pointed out these values in late December and we've scored positive gains.
THE ELEPHANT IN THE ROOM
Since the strong rally on Monday, the employment report scheduled to be released this Friday at 8:30 AM has paralyzed traders. The market indices have been flat-lining and we can probably expect the same tomorrow. But inside the indices, there is some dramatic action taking place.
What's working? Our positions in our Aggressive Portfolio include the current industry winners. Our position in the DB Commodities ETF (DBC) as well as Freeport McMoran (FCX) have gained 4% and 5% respectively in just one week (about 300% annualized). Our position in EEM, the iShares emerging markets ETF, has also gained about 4% in just a week. We'll raise our stops as specified below to lock in profits.
Wall Street is severely divided about the jobs report coming this Friday. Analysts are forecasting anywhere from 85,000 jobs gained to 50,000 jobs lost and there is about the same number of analysts predicting a rise as those who are predicting a decline.
In addition to that morass of empty guidance, there is no conviction in the market indices because traders don't know how to interpret the coming data. If the report is too weak, it will mean the economic recovery is floundering. If it's too strong, investors will worry about the Federal Reserve taking away the 'punch bowl' of low interest rates soon. Although that's unlikely, the fear will be there. Combined with the Fed's confirmed cessation of their quantitative easing program in March, it could raise the fear level on Wall Street.
My screening this afternoon revealed that the stocks that are climbing from an oversold condition include a sizable number of recession and safety-oriented equities such as Family Dollar Stores (FDO), which gained 12.48% today. Gold-related stocks, which excel as the dollar declines (representing a lack of confidence in America) and fear inceases, also performed strongly today.
Several pharmacueticals also met our system's requirements and we picked the top performer. To round out the portfolio, we are also adding a high-return utility company as well as another, smaller mining company that is chasing its larger brethren. Details below...
OUR PORTFOLIOS
With much of the market trading in overbought conditions, it appears that the ebb and flow of traders is about to turn towards safety. We can observe, interpret, and time this ebb and flow, which currently appears to be cycling in periods of about one-month (two weeks up/two weeks down). Long term, we continue to be bullish. Short term, the market is telling us that it could be rotating towards safety.
We'll put that information to work by adding the stocks specified below to our Aggressive Portfolio. These picks include positions in gold, healthcare, utilites, and mining. The mining stock is not really a safety trade, but it the company is playing catch-up with its larger brethren and shows a wonderful chart rising from its 50-day moving Average.
We will also take a small profit in CNI, which isn't producing the kind of profits we look for in our Aggressive Portfolio. And we'll raise our stops again on our positions in Freeport McMoran (FCX), the DB Commodities ETF (DBC), and the iShares Emerging Markets ETF (EEM).
The very strong performace of these positions on Wednesday behoove us to lock in profits. When they begin to top out, we will sell them outright. For those who use options, another approach (which is beyond the scope of this newsletter) would be to place puts on the positions. Our Market Trends portfolio will remain status quo with a fairly tight stop.
Sincerely,
Christopher Michaels
MoneySuccess, Inc.