Aloha from the beautiful island of Maui everyone. Another weekend has come and gone and it is back to the trading stations on Monday. The good news for those invested in stocks is that despite the insane v-shaped move off the lows many leading stocks in a wide variety of sectors have been able to either form solid consolidation patterns or have already broken out to new highs. This has all been happening while most traders refuse to take the bull bait as the AAII survey this past week came in with bulls declining to 27% and bears rising to 25% from the weak before. A rally that traders deny is a rally that can fly.
We have received a flurry of long signals over the past two weeks that should have us fully invested by now. However, due to the incredibly crazy move off the February lows without any real consolidation and an overall uptrend that has been highlighted by below average volume the entire time (minus one day in the IWM) we have taken measured long positions rather than load up on any 5-10 names. On my personal end this works as I have a larger account and pay low commissions. Obviously, this would not work for those under-capitalized with higher commission cost.
While it is not an ideal situation to have as this is very reminiscent of 2015 where we had a lot of long positions and it still turned out pretty decent compared to the overall market. In fact, everything was going very well until December 1st. That is going to happen in extremely volatile markets. But the biggest problem of very volatile markets is that you simply do not get the extremely high quality patterns that I was accustomed to in the late 90s and early 00s. Hence why we have such a difficult time receiving signals that allow us to push our capital into just one name.
The most bullish sign that this market can continue higher, despite the rally being completely unloved, is that all of our higher quality long positions are still working. We have only received one or two full sell signals (I am not at my workstation currently) over the past two weeks while receiving a whopping 20+ long signals. However, to be fair, at the same time, as you can see below, for the first time in a very long time we do not have any stocks producing 20%+ gains from any of our signals in under two weeks–yet. In every uptrend where we make significant gains in our portfolios we normally see a few stocks make strong gains right out the gate. This time around, it isn’t happening.
However, I am not taking too much stock into this data point as this rally has been so straight up following the heavy distribution from the end of December to February that a lot of stocks are only now setting up in proper patterns that can be purchased for outsized returns. If the sentiment remains bearish and the uptrend continues, we are sure to see some consolidation at some point. If that occurs the chances of a series of setups materializing in extremely high quality merchandise is very plausible.
When/if this occurs that is the moment when we will look to really increase the size of our individual trades. However, if this is like 2002-2003, we will already be fully invested by the time this situation comes around. I don’t think it will be but it would be nice to see another 2003 moment once again. That is the last time the market started what I would call a “perfect” rally following a bear market. What is a bear market you ask? Nobody knows anymore. They are not allowed.
As long as the market does not reverse here and start a major sell off, the list of ‘top current holdings’ are sure to grow as we head into the summer months. At the same time we are not going to be so blind to all the potential setups that we do not recognize that it is always possible that this is one big low volume suck out for another round of clear and heavy distribution. For now, nothing indicates that this is right around the corner but it is always wise to be prepared. That is why we always keep an open mind at Big Wave Trading and always operate with stops on the books if you cannot watch your positions during the market hours. In this tape, my #1 rule remains to absolutely protect my capital and not let any tiny loss turn even into a small loss.
Enjoy the rest of your weekend everyone. I wish you all the best during the upcoming week. There are a lot of high quality setups out there. Don’t let the overall bearish sentiment blind you to the reality of price. There are just too many setups right now. If you are having a tough time finding the right signals or are having trouble with your methodology or risk management feel free to give us a try. We offer a free trial and welcome any and all feedback. Aloha!
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
CLR long – +61% – 2/11/16
SWHC long – +46% – 12/4/15
