Excuses, Excuses

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MARKET WRAP UP 01/06/11

In front of a much-anticipated jobs report tomorrow, today’s price action was overall relatively tame, as the S&P 500 finished down 0.21% to 1273. While many of the large cap technology stocks once again performed admirably, there was distinct weakness in the commodity and retail areas, namely in the silver and rare earth miners. That type of contrasting action reinforces my working thesis that we are seeing a rotation of capital by the big money.

Regardless of what the actual jobs number is tomorrow, I will be watching closely to see if the hedgies and large fund managers use it as an excuse to continue to redeploy capital as they see fit. Just as we have seen the market buy stocks in the face of poor economic data, we could just as easily see a much-improved employment report as an excuse–not a catalyst as many macroeconomic traders claim–to further take profits in retail and commodities and move to other areas of the market.

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MARKET WRAP UP 01/05/11

After another morning move lower, the bulls pulled off an impressive comeback to close the S&P 500 at multi-year highs, up 0.50% to 1276. In keeping with the rotation theme that I discussed yesterday, we saw the commodity sector lag, while financials and large cap leaders in the technology-dominated Nasdaq thrived. Moreover, the underlying action in terms of individual breakouts holding was more impressive than what we had seen earlier this week.

With the National Football League playoffs kicking off this weekend, now would be a good time to discuss the power of home-field advantage. In football, playing a big game on your home field can have a material effect on the outcome of the game. As an example, you have your own fans vastly in the majority in the stands, screaming their heads off in your favor. The fans are the proverbial “mob,” displaying everything you would expect to see with mass psychology at work. When they scream loudly to try to disrupt the opposing team when they have the football and are on offense, the roar of the crowd will only grow louder each time the opposing team fouls up. The fans’ success reinforces itself. It is only when the opposing team scores several touchdowns to put the game out of reach does the crowd truly quiet down, as making noise no longer has the effect it once had.

Applied to the stock market, the bulls undoubtedly have had the home-field advantage since last September. In order for the bears to quiet the bulls, they will need to disrupt the “buy on every dip” mentality. Thus, topping is often referred to as being a process. Since we know that buying the dip has been a strategy that the market has handsomely rewarded for over four months now, it logically follows that those who have been successful following this strategy will not give up so easily. Instead, they will need to be disappointed several times—much like the hometown fans in the football stadium–before they give up and quiet down.

Accordingly, as a rally matures, rather than immediately leave equities we see capital rotate from sector to sector before it eventually leaves the market for a correction. The timing of this process is extremely difficult to forecast and is, indeed, often much more damaging to a jaded veteran trader’s portfolio than picking a bottom during a downtrend. Hence, the best strategy remains one of carefully riding along the pockets of momentum that remain, closely following where the big money is flowing.

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MARKET WRAP UP 01/04/11

The new year has certainly brought back some intraday volatility that we have not seen in a while. Early in today’s session, it looked like we were on the brink of a much steeper pullback, with commodities leading the way down after a series of nasty reversals from yesterday’s breakouts. However, the bulls were able to get their act together to muster a late day push to finish the S&P 500 down 0.13% to 1270. While commodities and many small cap stocks were weak, some of the larger cap names attracted capital, namely $AAPL $AMZN $DIS $GE and $PFE. Whether we see a further rotation out of the commodities as well as the higher beta names and into larger, more value oriented issues will be a key “tell” going forward. Adding to the case for a rotation into safety was the “hanging man” candlestick printed on the S&P 500 today.

In Japanese candlestick terminology, there is no difference in appearance between a bullish hammer and a bearish hanging man. Both candles feature a long shadow with the real body at the top of the candle, and basically no upper shadow. After a steep downtrend, we call them “hammers,” to illustrate the possibility of the bulls hammering out a bottom and reversing trend. After an uptrend, however, we call it a “hanging man,” to denote the idea that perhaps the bulls are losing the momentum and leaving it hanging out to dry. Either way, we are going to need to see some follow-through to the downside before we can call any type of major reversal here.

Moreover, despite the ugly red candles printed on the daily charts of the leading indices and sectors, we have not seen yesterday’s multiple breakout points breached yet. Thus, like it or not, we are going to need to be as agile as ever and ready to change our market posture at a moment’s notice.

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MARKET WRAP UP 01/03/11

Stocks came flying out of the gate to start 2011, as the S&P 500 screamed to 1276 within the first few hours of trading, before some late day profit-taking closed the key index up 1.13% to 1271. Clearly, the lethargic action to close out December was nowhere to be found today. While some market players seem eager to call a top and are nervous about “chasing,” there are, indeed, many stocks that are breaking out of healthy technical bases and are far from extended. We have about a week before another earnings season officially kicks off, so perhaps we will see a run up until then. Either way, the trend remains higher, while fighting it has been–and continues to be–a losing strategy.

Internally, the financials continue to impress as they emerge as one of the new leaders of this market. Instead of seeing a deep market correction when it is time for the senior indices to take a rest, another possibility may be a sector rotation, with money coming out of the retail/consumer discretionary space and into financials. Moreover, the transportation and small cap stocks–two excellent leading indicators for the broad market–are sporting bullish charts that have only now started to clear their respective consolidation patterns. No uptrend lasts forever, but this one has illustrated its staying power time and time again. Indeed, it has earned my respect and should have yours as well.

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(Value Investing Legend Walter Schloss Digesting Some Tasty Applesauce)

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I don’t talk much about long-term investing, but I do manage longer-term investments (holding period of at least 12-18 months) for members of my family. I look for great, reliable firms that usually pay a handsome dividend. Regarding stop losses, I have price levels in mind where I am willing to admit my thesis is wrong, but they vary greatly and are much wider than in names I trade (a topic for another post–not within the scope of this post for discussion).

I also believe that you would be remiss not to conduct some form of technical analysis before allocating capital into any position. Shunning price action because you are a fundamentalist and/or you think “the market is stupid,” is akin to going to college to study creative writing and refusing to study and flunking your required Chemistry class because you say, “I’m not a scientist.” In other words, it is pure ignorance. A little bit of due diligence looking for a relatively healthy chart–even for a value investment–will go a long way. As an example, consider that PG went from $75 down to $43 during the 2008-2009 bear market. Thus, blindly buying and holding, even quality firms, is textbook laziness.

As a bull market matures, there will be inevitable rotations. Eventually, the large cap, “safe” stocks see inflows just as the market starts to realize that perhaps CMG won’t be overtaking XOM‘s market capitalization anytime soon. That process could take anywhere from a few months to a few years. Regardless, it will happen; Hence, the phrase “long-term investment.” Below, you will see five investing ideas of firms that are defensive in nature. I believe all five are in good shape technically, and will still be conducting business at least five decades from now. If you are looking for entry points for your long-term portfolios, I hope these ideas help.

(Disclosure: I have bought all five of these issues listed below for members of my family)

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“There Will Be Head Fakes”

-chessNwine 12/31/10

Accordingly, please use caution headed into the next several weeks. There is nothing wrong with taking a wait-and-see approach to start the year.

HAPPY NEW YEAR