The hardest part of the trading game is sticking to a strategy.  Short term-ism is pervasive is our culture and more so in finance.  Therefore, I’ve provided a quick reminder of what is working below:

First and most importantly, Netflix – the chart below has my original forecast along with the various maneuvering I’ve done:

 

NFLX target = anywhere in the $60’s.  Refer to the previous posts here and here.

Next up is the Visa vs. American Express pair.  Refer to the original post here.

This pair has worked out well and we haven’t been stopped out of either leg of it, which I hope continues.  Either way however, this is a great trade setup in order to pivot with the market either up or down.  I really like the short on AXP here:

 

Regarding commodities – which I have beaten to death – literally (shorting) and figuratively, I believe value investors are putting money to work in these sectors to begin 2016 (especially oil & gas).  This should have the effect of holding them up relative to the underlying commodities. I therefore favor shorting the commodities over the equities right now.

However, keep in mind the currency trigger levels I pointed out here.  If/when those break it’ll be time to get long commodities again – as inflation perhaps finally wakes from it’s slumber.

Currencies are volatile these days (huge understatement).  I’m beginning to believe that Crude Oil is the dog wagging the proverbial US Dollar tail – and not the other way around.  The FX flows due to the crude trade are simply massive.  For example, since Q3 2014 the Saudi Arabian Monetary Agency’s reserves in foreign securities have declined by $71 billion! Reference

These could be are the capital flows causing the US Dollar to rally.

Good luck out there.  I’ll have another trade setup later this week, but for now “Stick to the Plan”.

 

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American Express Co. (AXP) and Visa Inc. (V) are two companies that do very similar things, yet they are on two very different trajectories.  I’ll keep it simple here, and provide you with a potential setup for the intermediate term.

I write about it a lot – because it really is all that matters – after Fed Day (Dec. 16), equities are either going to break out, or break down.  There will be some whipsaws at first but by mid January I think the market will have settled on a direction.  We have been consolidating all year, and equities are either poised for a move higher, or building a top for a subsequent move lower.  No one knows which way it’s going to break, but we will soon find out.  Small investors like me (and I’m assuming you, the reader, as well) have three options on how to deal with this binary setup:

1. Keep your portfolio mostly intact, cross your fingers and see how your current positioning and bias plays out.
2. Go to mostly cash and jump in once the narrative becomes clear and prices confirm which way is correct.
3. Develop a structured setup for the event, one where you’ll be mostly hedged (albeit with potential alpha), but one in which you can quickly pivot in order to catch the direction.

Obviously, I’m going to describe a structured setup using American Express and Visa.

So Here’s the Trade:

Go Long Visa (V) and Short American Express (AXP)

Use the same amount of capital for each leg of this paired trade.  Both sides display plenty of upside (or downside re AXP).  Over the intermediate term, V should continue to outperform AXP regardless of what the Fed does and how the market reacts, so this paired trade would work without the big binary event on the horizon, see below:

While Visa continues the long term trend upwards toward $100, American Express has put in a solid looking head and shoulders topping pattern:

 

What makes this a fascinating setup for me is that if you incorporate stop loss levels into each leg of the trade, you will in effect automatically pivot with the market.  For example, on the long V leg, use a stop of $74.50; don’t stay in the trade below that level.  For the short AXP leg, use a stop of $73.50; don’t stay in the trade above that level.

If/when the overall market breaks out, you may be stopped out of the AXP short position but you can continue to ride the trend in Visa up with the market (most likely outperforming it).

Conversely, if/when the overall market breaks down, you may be stopped out of the V long position, but you will probably outperform the market on the downside in the AXP short.

Additionally, there is a small chance that both sides of this trade continue to work (avoiding stop levels), regardless of the overall market direction.

 

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Now that I’ve provided my short strategy, and disclosed that my bias at the moment is to be net short, it’s probably time to share my long strategy.  Here’s where I like utilizing a “system”; some type of algorithmic approach that doesn’t share any bias or emotional baggage which limits us mere humans in so many of our endeavors.

My system is simply an agglomeration of numerous technical metrics using a weighted point system for each.  I’d like to add fundamental metrics to it one day, but what the hell – I’ve been busy.  The system ranks each sector and stock in the S&P 100, and uses intermarket analysis to compare each sector and stock to each other sector and stock within the index.  It’s proprietary and one day I’ll publish my website and make truckloads of money similar to Le Fly.

Until then, here’s the sector rankings:

1. Information Technology
2. Consumer Discretionary
3. Financials
4. Telecommunications
5. Industrials
6. Materials
7. Consumer Staples
8. Energy
9. Health Care
10. Utilities

Nothing surprising there, but what I like to do is then evaluate the top ranked companies in each of the top 5 ranked sectors:

1. Information Technology: MSFT, GOOG, FB, ACN
2.  Consumer Discretionary: AMZN, HD, DIS
3.  Financials: V, BK, JPM
4.  Telecommunications: None
5.  Industrials: GE, RTN, LMT, BA

Now I try to fit the current market “narrative” into what makes sense for the above sectors and companies to continue to outperform.  That being said, Financials and Industrials stick out.  The current narrative is that the Fed is going to raise rates; that will continue to provide a lift for the Financials.  Industrials are an easy choice given the power and political might of the military industrial complex, and the war escalations in light of recent events.

Check out the long term chart for Visa (V):

 

 

Visa looks destined for $100.  That’s a good one for the long term portfolio in my opinion.

In regards to Industrials, each of the companies listed above have done well, but I favor Boeing’s (BA) chart, see below:

 

Here’s the Trade:

If equities close above the recent highs of approx. 2067 (SPX), my short bias is probably wrong.  I will then trim the short positions that aren’t working, and go long Visa and Boeing to hedge my overall portfolio for a probable melt-up into either Fed Day (Dec. 16), or the end of the year.

As I type this post, we are at 2066 and change (SPX), I will employ this strategy if we close with any strength today.

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