Well that was a fun little mini-roller coaster ride the past week. Due to the market’s volatility this past week, our operational models switched from BUY back to NEUTRAL. 2014 and 2015 continue the theme of volatile choppy trading that is causing our models to switch more than usual. However, our models are simply used as trading guidelines and does not mean we go from 100% long to 0% neutral to 100% short per signal switch. If that were the case, this past week would have been extremely disappointing. As it is, it continues to be steady as she goes for the current uptrend off the October lows. This uptrend isn’t smooth but the trend is still clearly defined and the path of least resistance from those October lows continues to be higher.
Last week we saw a lot of traders on Twitter switch to cash following the back-to-back sell offs on Wednesday and Thursday. We noted to subscribers following Thursday’s session that while the market looked ugly on the short-term many of our current holdings either pulled back on lower volume and or were trading well above critical support levels and trailing moving average levels. Instead of reacting emotionally and abandoning our long positions, we simply made sure our stop levels were at proper support levels so that we would be able to lock in gains on our current winning positions.
Following Friday’s session, this disciplined trading proved to be prudent as only a few names clipped sell stop levels on Friday morning before the market took off higher. Going into Friday we were 85% long, 1.5% long a Volatility hedge, and 13.5% cash. Following a whopping five new long signals after Friday’s session we will be back to being fully invested minus the small Volatility hedge which has a clearly defined sell stop in place. If the market does continue to trend higher, this disciplined methodology will be given full credit for keeping us long stocks here. And if we reverse? I have my sell stops. I will be leaving with gains on almost all of our holdings. Those that we do not leave with gains will leave us with negligible losses.
While this has definitely felt like pulling teeth since the October lows, we are well positioned to profit nicely if the market continues to trend higher. If we get choppy, we will have some winners and more losers. However, we will then start to reduce our long positions and will increase the requirements it takes for a new long signal to enter our portfolio. That is what our market model is for. It tells us how hard to push it depending on what the signal is. Under a BUY signal new long positions the higher the quality get much larger positions. Under SELL signals it becomes extremely difficult for a long signal to enter our portfolio and even then the size will always be smaller than it would be under a BUY or NEUTRAL signal.
For now, we will continue to operate under a NEUTRAL signal on the short-term. That means stocks must pass a more strict set of requirements to be added to my portfolio (so it is impressive we have 5 new long positions on Friday) and we will continue to keep the positions manageable so that we can mitigate the losses in our portfolio when a signal proves to be false. If and when the indexes break out to new intermediate term highs, our models will switch back to an operational BUY mode. Until then, we will probably keep it NEUTRAL unless we get a huge up day in the Russell 2000 on huge volume across the board in the general market. For now, big-caps are leading and stock indexes continue to rally on lower volume than when they sell off. Until this pattern changes, it will remain tricky.
Enjoy the rest of your weekend. Remember, we offer a free trial to check out our services. Now is as good a time as ever as we continue to be in the middle of a seasonally very bullish period time of the year for the stock market. We wish you all the best during the upcoming trading week. Aloha and never forget rule number 1 is to always cut your losses. Never let a small loss turn into a big loss. Ever. Once again, aloha.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
PAYC long – +130% – 10/30/14
MEET long – +54% – 10/9/15
HCKT long – +53% – 6/18/15
FSB long – +31% – 10/23/15
MXL long – +31% – 10/9/15
EPAM long – +30% – 4/2/15
STRL long – +26% – 11/18/15
