From the Trading Desk

Big Wave Trading Portfolio Update And Top Current Holdings

The Big Wave Trading Model returned to a BUY signal across the board, following the resolve of the Fiscal Cliff. The gap up was powerful and very strong. The strength was broad, volume was well above average, and breakouts were everywhere. On top of that, the price action on Thursday and Friday has been tight and many stocks that did not breakout on Wednesday broke out on Thursday and Friday.

While we were only 25% long, holding about 74% cash, the positions we were long did very well and we are happy with those positions. However, being under-invested before a big move is always disappointing. The good news is that plenty of stocks are building very sound to excellent bases and if this rally has legs we should continue to see leading stocks breakout over the next few weeks.

The important line in the sand to watch is the gap higher. We want to see the gap hold here. If stocks pullback we will be more than happy as that will allow more and more bases to be built in leading stocks. Subsequent rallies would make excellent areas to add to our current positions.

Despite the bullish price action, it still is not an easy market for trend following stock pickers that make EOD decisions. The gap up and down nature of the market makes it difficult to get good fills and the previous fake moves of 2011 and 2012 still haunt the market today. The best remedy for this is to either be a slave to your computer screen from 930am EST to 400pm EST or to set buy stops at key pivot points in stocks that you want to get long. These stops ensure you get long as soon as the stock breaks out. In today’s market if you don’t get a breakout right when it breaks out you run the risk of missing the move as they are coming in one day more often than they ever have in my short 15+ years of investing.

It will be key for stocks this week to hold the gap higher. If the gap higher fails that more than likely means that we can expect more chop. However, I would not expect this to happen. Too many leading stocks are breaking out and some leading stocks have gone straight up off the recent November lows. This is a sign of a healthy uptrend. While we would rather have seen this explosive move off the November lows to give us the best entries in individual stocks, it is what it is.

The Shanghai Composite was your leading index and clue that something was afoot. Its powerful start came on December 5th and its extremely powerful follow-through on December 14th. If you take a look at that index, that is exactly what you want to see. It is a near mirror image of the start of the March 2003 bull market. These two charts (the 2003 Nasdaq bottom and 2012 Shanghai Composite) bottoms should be studied voraciously as that is what perfect stock market bottoms after a long downtrend look like. Simply beautiful.

Aloha and have a wonderful and profitable week!

Top Current Holdings – Percent Return – Date of Purchase

NTE long – 113% – 8/17/12
CSU long – 58% – 9/4/12
VRNM short – 57% – 4/10/12
CAMP long – 54% – 4/26/12
HEES long – 43% – 9/4/12
POWR long – 31% – 12/11/12
ASTM short – 28% – 7/17/12

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