Best of Breed Investing

Trading Armageddon

As most are aware the DOW is now down ~1100 pts from the year to date high in April and both the DOW and SPX are trading slightly below their 200 day moving averages now. Failure to break above the 200 DMA in the major indexes this coming week will be an ominous sign for the bulls and world stock markets in general near term with possible heavy declines leading into the next earnings season.

If the 50 DMA lines cross below the 200 DMA’s that’s the infamous Death Cross signal that has typically led to major market declines. We all know companies have reported stellar earnings but the stock market is a forward looking mechanism trying to predict where things will be 6 or so months down the road.

The ~10% correction was instigated by fears over Greece’s credit solvency and further inflamed as the situation appears to be spreading to Spain, Portugal, and today even France issued a warning about their triple A credit rating. A double dip recession warning was also issued by China today which is the main country holding world markets together.

Couple all of this with military fears in Korea and the Middle East and I don’t see a bullish outcome going forward into summer.

There is a chance of more relief rally upside barring any more ultra negative world news this week AND a much better than expected US employment report this coming Friday. I’ve been cautioning folks to take profits on rallies, go short, go to cash, or put your money in bonds since late April at DOW 11,000.

If we do see more upside it looks like SPX 1150 is major upper resistance and I’ll be shorting any rallies below that level for some time to come. The VIX (Volatility Index) is showing a pattern of higher lows and higher highs congruent with fear in the options markets and traders buying protection against further downside.

Regular readers here and on the Best of Breed Investing discussion forum know I’ve been an advocate of using ultrashort ETF’s as a hedge since late last year and recently many of these short positions rallied up 20-40%. I’ve taken some profit but remain heavily hedged as my position for Trading Armageddon (and I don’t mean that in the biblical sense). The Best of Breed stocks I prefer did great in the historic rally from March 2009 and recently I sold all positions in AAPL, GS, and most of US Steel. All were at 150-250% profit in the original shares.

Hoping world governments will be able to pull out of the growing debt crisis by printing more money and putting the US deeper into debt isn’t a viable investment plan.

Members of Best of Breed investing are kept up to date via messenger or discussion board on which trades I’m placing and my overall bias for daily/weekly market conditions.

The rest of this article is available to premium members only.
Login or Become a member

Stock Market Best Leading Indicator

In the never ending quest to stay on top of Stock Market inflection points either at the top or bottom of a major movement, I’ve spent years reading and learning about MACD signals, Elliott Wave Theory, RSI signals, Market Breadth, Yield Curves, etc… and spend many hours weekly reading up on the latest articles. We did see DOW 11,250 as a top so far with one retest up to DOW 11,200 before the downturn last Friday.

The one thing that has bothered me all this time is most Technical Indicators are not leading indicators and you never know the inflection point has occurred till “after the fact”. Over the last few month I’ve kept a primary focus on watching the Financial sector with the thesis that the overall market cannot rally without strength in banking!

In addition to the Best of Breed stocks I watch, I keep a close watch on XLF, UYG, FAS and their counterpart short positions SKF, FAZ. GS. Financial sector stocks C, BAC, JPM, MS, WFC are all on my financial watch list as well.

When the Goldman Sachs news first broke and the stock plummeted (along with almost every sector in the US stock market) on April 16th I noticed Financials led the way and gave me a good signal to sell or go short BEFORE the general market turned. After a relief rally which didn’t produce a higher high the same thing happened on April 27th followed by another relief rally on April 29th which tested DOW 11,200 for the 2nd time. This may have been the interim top before a pullback or correction but so far the lows are forming support which hasn’t broken slightly above SPX 1180. The lower highs shown on the DOW and SPX PnF charts certainly don’t forebode more upside going into next week.

The key equities which has been signaling the turn in Financials and subsequent drop in Tech, Energy, Materials, Commodities has been the ultrashort Financial ETF’s, SKF and FAZ. They have turned positive (all are still barely off MAJOR lows formed by this historic rally) signaling a downturn in the Financial sector while my other Best of Breed stocks and bull ETF’s were still positive several times this year. Each time has resulted in the general market pulling back. I’ll continue using Financial bulls and bears as leading indicators until divergence from these patterns is seen.

XLF has been a great investment the last year and after topping out last week it looks like it could test the gap down to 15.5 this coming week. On a major correction it could test as low as 14 easily without breaking the uptrend pattern. Long Term the Financial sector is one of my favorite investments but we could see more downside if the Goldman Sachs case brings forth criminal charges and lawsuits. The moves (both good and bad) in the XLF have been been amplified in UYG and FAS but the XLF is a good tracking tool. Catching any of these at interim lows has been quite profitable.

When it’s all said and done the US and World stock markets can only move sideways or down when the Financial/Banking sector is flat to down. There have been rallies without the Financial sector participating but they have been short lived.

Next week anything could happen and I’m sure we’ll see some relief rallies along the way. The key metrics I’ll be watching are the Financial Sector, Volume, Advance to Decline ratios, and SPX 1180 as 1st support level. A break below SPX 1180 could take it down to the 1150-1160 area easily. SPX 1150ish is the 2nd major support level and the market could see a significant bounce upwards at that level. If that breaks we could see a 10% correction from DOW 11,200 down to DOW 10,050. DOW 10,000 is a huge support level and it would take major geo-political events to break down lower.

Here’s how I’m setup going forward into May-

The rest of this article is available to premium members only.
Login or Become a member

The Stock Market Rally that never ends?

As “Buy the Dip” regardless of the news is still occurring and we saw the market end last week on fresh YTD highs it seems nothing can stop this rally. There have been some major volatility swings as evidenced by the SPX bouncing off of 1194 to end at 1217 and the VIX is signaling a contrarian top. The best plays the last several weeks have been to either buy the dips each day or short the highs and sell immediately at the next days lows.

AAPL has been on an absolute rampage rally on the heels of earnings and future growth prospects. US Steel (X) seems to be basing out for a move up but could also dip toward 50 and long term this is one of my favorite stocks. I strongly recommend buying X on any major pullbacks. GS also appears to be consolidating after the fear based pullback, it may go lower but long term Financials are probably my favorite sector.

When these 3 Best of Breed stocks fail to hold support and the Financial sector falters there will be a pullback. The severity will be limited UNLESS geo-political events escalate on any number of fronts. EU credit concerns, China real estate bubbles, Middle East tensions, and the even more unpredictable volcanoes and earthquakes are all potential catalysts.

If you look at my previous blog you’ll see the SPX and DOW charts and notice how both bounced up almost exactly above the previous lows (column of 0’s on PnF charts). 

The DOW broke above 11.2K and the SPX seems on track to test SPX 1230 or higher, probably this week. My call for the rally to end at 11K was wrong and though all technical indicators are showing overbought conditions, the rally still persists.

How am I preparing for what has to be a top very soon as the SPX approaches the 67% Fibonacci retracement levels from the March 2009 lows (which is SPX 1230)? Join our FREE discussion board and share or learn with a group of great experienced investors.

The rest of this article is available to premium members only.
Login or Become a member

Buy or Flee, Is more Bloodshed due on Wall St?

Spent some time this weekend reading various financial sites and expert opinions to gain some insight into last Friday’s “Blood in the Streets” action. Of the 4 watch lists I have, NONE had a single gainer across almost every sector last Friday. No news to those who watched the bloodshed unfold on the heels of the GS fraud charges. The Elliott Wave guys are convinced we just finished a Wave 5 move and a real correction is going to occur. More than a few experts think we’ll see a drop to SPX 1150 and maybe even 1130 or lower.

Some folks like Cramer say to wait for the mid-morning dip on Monday and buy the companies that just reported BTE earnings, BAC, JPM, INTC, CSX, etc…. I was very tempted to buy some GOOG and ISRG right before the close Friday but the PnF charts show the probability of a little more downside. The Ag’s MOS, MON, POT have also looked tempting as well as Steel but again all appear to be going down with the market and will probably hit lower entry points. These are all Best of Breed stocks I have traded in the past and usually outperform their peers. Not sure we’ll be able to say that about GS going forward and I sold all shares Friday at >100% profit as most were bought over a year ago. Also sold some X (US Steel) for 245% profit last week.

Here’s the latest major PnF charts, if these don’t find support at the bottom of the last column of X’s on the right side of the charts expect to see a pullback or correction. The SPX support levels were posted in a previous blog but SPX 1150 is probably the most important level for continued upside.

The major indexes broke below my 1st line of support big time but rebounded above it before the close on Friday. The big question will be how overseas markets and investors react come Monday morning? Will we see a relief rally or will investors decide it’s close enough to May to sell and go away?  I’m now 41% cash and I’ll put some stops on my shorts JUST IN CASE this was a brief pullback before we test SPX 1230 which is the 67% Fibonacci retracement point from the lows of last year. I’ll also have stops on my remaining Bull positions in case the investment herd panics this week! The market needs a correction badly and GS may have been the catalyst to finally give some downside longer than a day or two.

I’m sure there will be Dead Cat Bounce/Relief Rallies along the way, the key is to watch for a higher high or lack thereof. That signals the direction change for an intermediate move. If more Financial firms are implicated or any of a number of geo-political events occur we could get the 10-20% correction many pro’s have calling for.

Be safe, hedge your portfolio or go to cash! There will always be another great time to buy Best of Breed Stocks and/or Bull ETF’s. I’ve been writing for weeks that all the technical indicators were showing it’s time for a pullback, we’ll find out in the next few days. Right now it’s looking like having some Ultrashort ETF’s may be prudent.

Join our Free Discussion Board and get the opinions of some experienced investors or share your own. I like a lot of sectors going forward, Tech, Energy, Materials, Financials but right now I’m very skeptical of more upside!

When will the S&P500 hit 1200?

The markets are still defying gravity and it seems the best strategy has been to sell shorts on the dips (or buy bulls). This is what I did last week which resulted in the big gains on Monday and Tuesday. GS rallied up to 180 and until Financials collapse this rally seems to be intact.

If the markets digest this Greek bailout news well it could mean a short term rise in the Euro/drop in the Dollar which means stocks will probably go up. Earnings reports may trump the dollar affecting market performance the next 2 weeks. The futures markets are up tonight and I believe we’ll see SPX 1200 this week, maybe a tad higher, and then a probable pullback on profit taking!

With the DOW hitting the 11,000 level briefly before the close last Friday and solid momentum in the Financial sector and Best of Breed stocks the stage is set for a little more upside IF earnings reports and forward looking forecasts are BTE (better than expected) starting this week. There is a good chance of seeing a little more upside in the next 2 weeks BUT there is a stronger statistical probability of seeing a 10-20% correction in the coming months.

The SPX support levels for a pullback or correction (which I posted in the previous blog) still stand with SPX 1180 as my 1st major support level NOW.

Here’s the PnF version of the current DOW and SPX charts. I adjusted the box size to show the last bounce off the most recent lows, classic higher lows and higher highs patterns still in place-

If you haven’t done so already please join our FREE discussion forum to read and share ideas on trading/investing with a group of very experienced investors. How am I positioned going into this week’s trading?

The rest of this article is available to premium members only.
Login or Become a member

The biggest rally in History, what next?

We’ve now seen SPX 1180 twice recently and it’s currently upper resistance with many pro’s predicting we’ll see SPX 1200-1250 sooner rather than later. The market continues to look extremely overbought but SPX 1165-1170 has held support on every dip in the action lately. Reviewed all charts for the DOW, SPX, BDI, US dollar, etc… and it’s interesting to note the 50 and 150 DMA’s have held support during the lows over 1 year. Specifically in February both the DOW and SPX bounced up almost exactly off the 150 DMA. The RSI and MACD signals continue to tread in severe overbought territory. The US dollar has turned down a tad but could easily bounce up off the 50 DMA and signal another downside reversal in Gold and Commodities. I view the major Indexes 50 DMA as support on a pullback and the 150 DMA as major support for a correction (like Feb!).

DOW 10,800 is now lower support with DOW 11K very close and a probable target on the next rally leg. The 150 DMA is down around 10.2K with the 50 DMA at 10.4K.

Futures markets moved up slightly on Friday’s Employment report but the numbers were less than consensus estimates though showing a steady improvement. The big question tomorrow morning will be whether this causes a Sell the News Event? Earnings season kicks off on April 12th and experts seem to be in consensus that SPX 1150 is major support on any small pullback near term. A break below that level could bring on major selling and a probable move down to the 50 DMA! I’m concerned that a slew of better than expected earnings reports could ignite another pullback like last January. Best to stay nimble as contrarian moves and/or hedging your portfolio may be the best strategy.

Emerging markets had extreme buying volume last week and are now showing technical oversold conditions as well. This sector had been lagging the US markets and I believe the theory espoused by pro’s that EM will be a safe sector when the US markets pullback or correct is a BUNCH OF HOGWASH. World markets will follow the US down on any correction and if the Dollar keeps rallying Gold won’t be a safe haven either.

Now that we’re at YTD highs again let’s look at what worked going up and what will probably rally on a correction. Simply click on the- 1 wk, 4 wk, 13 wk, 1 yr symbols and then click again to look at the top to bottom performers or vice versa for each column. http://moneycentral.msn.com/investor/partsub/funds/etfperformancetracker.aspx?s=52w

If you look at the percent gains you will see that 2X and 3X ETF’s far outperformed most stocks over the last year. There are however many Best of Breed stocks that did beat leveraged ETF’s, ISRG, BIDU, AAPL, US Steel, GS, etc.. Considering the volatility of individual stocks the sector leveraged ETF’s are a good way to diversify and are a better long term investment vehicle than most think. You just have to be able to ride out volatility and hopefully add on the lows, typically 50 and 150 DMA’s.

As employment continues to improve the specter of higher interest rates down the road is hanging over the market and any changes are bound to cause short term dips until the market digests the news (which always happens eventually).

Pro’s are saying April is the highest inflow month for mutual funds which should continue to see increases as we approach April 15th. This could lift all boats so to speak but extreme caution is warranted going into the May/June timeframe.

After such a historic rally I’m really concerned the market is setting up for a major correction. A 10-20% correction would actually be a good thing as long as support holds at critical levels and I’ll be hedging my portfolio to preclude major losses and possibly even achieve some gains shorting certain sectors. Join our Free Discussion Forum to get insights from myself and many very experienced investors. Here’s my near term plan-

The rest of this article is available to premium members only.
Login or Become a member

Fear and Loathing on Capital Hill or How I learned to love stock market volatility!

Last week was of course historic with the passage of the new Healthcare Reform Act which contrary to many experts did not cause a stock market correction (excluding a 100 pt drop for about 2 minutes early last Monday). If fact the stock markets rallied all the way to DOW 10,980 as an intraday high and the SPX briefly touched 1180 before pulling back.

On Thursday the markets were rocked up and down 100 pts on news the Greece bailout wasn’t appetizing to the EU financial guru Pichet who later that same night decided he liked the plan. 

The US Dollar index peaked close to 83 before pulling back slightly and it’s up/down movement (primarily influenced by worries in Europe) had a great deal of effect on Gold, Commodities, and stocks in general. Interestingly enough the US stock markets are occasionally starting to rally slightly when the dollar goes up and could disconnect from the Dollar Effect if US growth continues to be evident.

Friday the markets rallied up on news of a Greek bailout only to falter again on worries over a S.Korean military ship sinking with loss of life. By the close on Friday the Korean situation was announced to be a probable accident and the DOW recovered 1/2 the daily losses to close the week at 10,850 with the SPX holding support at 1166.

I use Financials and a handful of Best of Breed stocks as my main indicators along with RSI, MACD, Volume, Breadth, and Bull to Bear sentiment. What are these indicators showing for the immediate future?

The rest of this article is available to premium members only.
Login or Become a member

Ringing the Bell, when to take Profits!

Most of us have wondered when will this historic rally be over and when should we Ring the Bell and take serious profit or head completely to the sidelines. The old adage of Sell in May and go away works over long periods of time but hasn’t worked too well the last couple of years.

Some folks I highly respect make it a point to follow the 30:30 rule regarding when to take profits out of the stock market. When an equity position is up 30%, take 30% off the shares off the table. Last year I bought leveraged ETF’s and Best of Breed Stocks that gained 100-400% during this historic rally and I took a great deal of profit along the way. Now I’m down to 7 bull positions and ready to trim them further on a minutes notice but I still have a small handful of BoB stocks that are up well over 100%. My short hedge is now set up and ready to be increased when this market does roll over and finally give us a 10-20% or greater correction.

We’re seeing historic volatility and stock market rallies, historic changes in our Government, and a lot of general confusion as to the direction and what is best for our country now. The Vote today on Healthcare Reform could cause a massive stock market correction or just a little 2-5% pullback. No one knows what will happen but with the RSI signals at peak levels along with bullish to bearish sentiment and 90% of the SPX over the 50 day moving average IN MY OPINION the stock market is begging for a average to above average correction downwards.

Until we see some high volume selling across every sector of the stock market this rally could continue but I highly suspect last Friday was a great time to start going short and take some profits off the table.

Personally I watch the Financial sector the closest and it started rolling over last Thursday with almost every Best of Breed stock and bullish ETF down even when the DOW peaked above 10,800 early Friday morning. The SPX came close to 1170 before pulling back slightly as well.

Members of Best of Breed Investing have access to my latest Trading Plan with a early morning update tomorrow. We also share trading info in real time via MSN Live and I send email updates during the trading day as well. The BOBI discussion board has a general FREE area where general outlooks are shared and a Members Only area where I post daily results, trading plans, future outlooks. To access any of the Members Only info join Best of Breed Investing today, the first month is FREE.

Be careful with your investments, the market is fast approaching an inflection point with probable relief rallies along the way. The key is to watch for a formation of LOWER highs which is confirmation of a trend change.

Blessings to all!

DOW 10.7K, new 18 month highs!

Very pleased to see the market continue to melt up after I changed my bias a bit to the bullish side last week. When I saw the SPX clearly hold a higher high on the short term PnF charts I was very positive we’d see DOW 10.7K and quite surprised to see it push to a new 18 month high today. The following are excerpts from the Best of Breed Investing Discussion forum FREE area so those new can get a glimpse of what I write daily. The actual trades are shared in the members only area, via MSN Live, and by email.

Keep in mind RSI signals are showing extreme overbought conditions right now, caution is warranted for bulls, patience is needed for bears.

Looking like more upside is probable in the next 48 hrs unless Financials roll over. Apparently this sector was downgraded today and barely burped. Watch Financials and Real Estate. The VIX (volatility index) went below 17 for the first time in quite awhile.

There is also a lot of buzz about Fund Managers chasing the trend which will cause a continued melt-up going into the employment report early April. This report is supposed to be much BTE but I wouldn’t be surprised to see it cause a SELL the NEWS event if we continue rallying till then.

If Congress approves the healthcare bill over the weekend (as news is now rumoring) then all bets are off. The market might shake it off and keep rallying for awhile but this isn’t the time to dive into this bull market IMHO.

Ready to shift gears on a moment’s notice either way now. The Member’s area has my specific trades and positioning.

10,767 was the intraday (new 18 month) high, very close to my call of 10.8K back in January.

How am I trading this and positioning for the next days and weeks?

The rest of this article is available to premium members only.
Login or Become a member

When will Fear overcome Greed again?

Last week was pretty impressive considering overall low volume on the stock market and the daily gains/losses were more in line with historical averages than the gigantic rollercoaster moves we’ve seen so far this year. With the SPX now sitting right on a double top at 1150 the next question is will the DOW re-test the 10,720 level?

Here’s a nice PnF chart of the SPX showing the entire rally from last year!

Here’s the DOW rapidly approaching a double top formation.

Looking at the charts of various Best of Breed stocks, Ultra bull and bear ETF’s, and various other equities would lead one to believe a 10% or greater correction is forthcoming. Experts are extremely confused at this point as to whether the low volume buying and selling was due to overbought conditions or the market is taking a breather to move higher. The Volatility Index is approaching historical lows again meaning less fear is present in the options markets.

Next week will be critical on many levels starting with Monday when we’ll see if mutual fund managers hit the bait or run for the hills. Tuesday’s Fed meeting minutes release will also be very critical and rumor is the employment report due the 1st week of April could be much better than expected.

CNBC had a report that Best of Breed stocks were not being bought last week and the rally was driven by less quality equities like AIG, C, etc….  Not sure how they came to this conclusion as I track about 20 BoB stocks like AAPL, GS, GOOG, BIDU, ISRG, V, RIMM, RIG, POT, MON, MOS, X, etc.. and most were positive on the upswings last week, not just the low quality names. What’s a trader or long term investor supposed to do when the experts are confused?

The rest of this article is available to premium members only.
Login or Become a member