Another tough lesson learned

When buying beaten down sectors, you may want to stay away from stocks that are have been on a rebound and are on the second leg up. Often times these stocks will issue more shares to pay down debt, or if an MLP will cut dividends, possibly more than once, which i learned today with SDLP, i lost over 20% on that one. If you insist on getting in, get in with half a position at least until after the first dividend cut or share sale. Even then, still use caution.

In this case, SDLP flashed me some warning signs. After breaking out of a channel above the 50 and 200 day, SDLP gave pocket pivot type volume on an up day, however the up day had a big wick that pushed closing price below the 10dma. This already had me on edge. The next day was a relatively big down day on 1.5x volume. that briefly dipped below the 20 and closed above. I even made an alarm to check if i wanted to sell it. Of course, closing above the 20 dma, i told myself, i could just sell on a violation on the 20, not expecting catastrophe the next day. Next time this type of evidence and feeling happens, i will reduce by at least half and be safe about it.

I am currently in chesapeake, seadrill, freeport, and southwestern. All of which have now issued a share dilution event in the last few months. I will watch with caution for spikes in down volume and reduce as necessary.

Research Note 7/22/16: Another tech bubble type run?

I was comparing our current market to the nasdaq run of the 90s and i’m seeing many similarities in the trajectory. From the depths of a market crash both markets trended up quickly, about doubling in 2-3 years time. Then after a year of consolidation, broke out on a higher trajectory for the next 2-3 years before consolidating again. This brings us to 2016 and post a year-long 2015 consolidation. We have since broken out to near highs on the nasdaq and soxx and new highs on SPX. The 90’s run at this point (around 97) breaks out on an even higher trajectory for the next two years, before going onto its final bubble run when everyone and their mother was an “expert” on stocks.

Could this happen again? A few things come to mind that could allow this thesis to follow thru:

  1. Biotech: just like internet stocks took off in the 90s, biotech has the ability to do the same. Novel and unheard of medical treatments are on the way and major advances in this field could propel stocks upward.
  2. Cloud and IoT adoption: Same way biotechs can change the worlds landscape, so can these two things.
  3. Growth in the global economy: For the majority of this market run, the global economy has been growing at only a 2-3% pace. If that pace speeds to 4-5% watch out. Commodity stocks would gain as would the general markets.
  4. Coordinated central bank action: we all know what this could lead to

7/14/16 update

Ok, I learned today that the Empire state manufacturing survey is actually important. It’s a survey of over 100 manufacturing CEOs and their report of activity in their company as well as next 6 month projection for manufacturing activity in new York. It seems that when this survey scores consistently above 3-4, the market is in rally mode, such as in 2013 and 2014. I will be watching.

The market has been quite strong recently, many times when you think it should reverse and pull back, it just doesn’t. including when the BOE didn’t’ lower rates today. However, I’m not a big buyer of traditional IBD growth stocks at this point. Indexes are touching major major resistance points that come from the early parts of the bull market and while I definitely think it’s possible to break above them, it will most likely require a decent pullback or at least a decently long consolidation period before breaking out. I’ll stick to being more patient until stocks either consolidate to their MAs in constructive action, then PP upward with good volume and good representation by the leaders.

However, other classes such as commodity stocks, namely steel, coal, and natural gas (and possibly precious metals) I am more excited about. Many of these have been super constructive in their accumulation patterns while pullbacks have been on light volume. They have been powerful movers recently.

I am now long SDRL, CHK, SWN and tentatively BET; and am waiting for pullbacks for YRD, EBIX, FCX, TCK

New tight trading Strategy

I may start buying my old momentum names on or near the 50 Dma touches, esp if it’s the first time. I’ll keep the stop super tight – few ticks under the line.

Update: leading stocks like MXL and NEFF have bounced strongly off major moving band areas to the tune of 8%+. Start buying big on these touches with tighter stops, especially if the market closes strongly (Friday)

I also plan to sell any violation of the 10 Dma after a move. Do this until the market feels comfortable enough to hold with less strict sell rules.

Potential in precious metals

With the rising Yen as a backdrop as well as potential global recession after the brexit decision, gold and other precious metals may benefit.

Coordinated central bank action could prevent this as efforts boost markets.

Yen and gold are highly correlated, but can this decouple if Japan starts to devalue? Or will money flow into stocks/bonds instead of gold and yen?

Markets July 1

Markets have recovered strongly from the brexit. Nasdaq spent the last three sessions rising about 1.5% a day on rising volume each day, which is very rare. At the same time soxx volume has been drying up as well as IBB. We are heading into the 4th of July holiday so the trading is prob a little distorted. I will wait for trend confirmation next week as big supply zones are overhead and a pullback looks to be in store.

Also pullbacks look to be in store for oil and precious metals as well. Perhaps a bigger one for metals than oil. Nat gas also looks very extended but it may just run like gold did early this year. Basic materials have also been performing well since the brexit Shock so I will be watching for confirmation and a pullback in the coming days for entry.

I will be spending time this weekend reading a little bit about canslim stock screening and finding new candidates to enter in case the market turns up and confirms. 

Update: markets close with big gains and string finish for gold and basic materials. SXCP up 13%