SPY is still Long 03/17/12

The chart on SPY is still l,ong. Chart is attached below. I have not posted this chart in a while because there have been no changes from my Go Long post on SPY back in 12/23/11 I believe. SPY is the Exchange Traded Fund (ETF) for the S&P 500 and is a decent proxy for the market. SPY is now more heavily weighted with AAPL and some say when AAPL pauses and will pull back, so will the market. Others offer RSP as a better proxy for the market. RSP is an equal weighted S&P 500. Kind of like the US Congress vs the Senate on its representation of States in the Union. No commentary on politics here.

SPY is tearing up in a tight trading channel heading North. First signs of weakness will be a break in the channel; and then the push back up. Usually markets take a while to top, so I feel I have plenty of time. I am long on my 401K as well; but I do have hedges on.

I have seen a down signal on GLD as well as TLT which is a bond fund. Clearly the market is demonstrating strength and the bond funds are losing participation as money moves away towards equity. Real estate funds IYR, SPG have picked up. At the down signal; on GLD, I sold GLD Call spread. That means I sold a Call At-the-money and bought a Call Out-of-the-Money to reduce my risk exposure. It is the opposite of buying a Vertical Call spread. As GLD swings sideways and drops, the Call spread is worth less and less and I can buy it back for less than I sold it.. I am currently about 60% profitable on the Call spread – wish I had done more.

When I got the down signal on CAT and I sold my long Call option position, I should have done the same and sold a Call spread on CAT. I did not want to fight the long market direction and CAT and chose not to; but my technicals were correct and that too would have made money for no other reason than time decay on the ATM call option. Usually I like to sell the ATM call option as it has the most time value.

I learned options from taking a course with Optionetics in Detroit, MI with Tom Gentile himself as the teacher. He is an excellent teacher but back then, a lousy technical analyst. He was high on Elliott waves and gave 5 picks to the class of about 150, and all 5 went the wrong direction!!! I could not have done worse…but he taught the class real well, and I learned how to handle options to protect my investments, collect premium, as well as use vertical spreads for reduced risk, maximize gain. We also learned more complicated methods that I choose not to use. Enough on options. Market direction remains Long albeit a little overbought.

All I needed to Know about the Stock market I Learned in Kindergarten

By Paul Townsend  Associate Vice President – Investments, Wells Fargo Advisors LLC
3/9/12
Review A-

I attended Paul’s talk at our local AAII Chapter meeting this Saturday. Turns out I had heard him speak many years back in Birmingham, MI at a local AAII chapter there. It was interesting to see how his methods and perspective had changed from then.

Although Paul has a catchy title, let us be real – they certainly could not teach these methods at Kindergarten! After debunking the first myth with his title I found Paul’s talk interesting and informative. He still uses Dorsey’s Point and Figure (P&F) techniques combined with trend lines and has combined this with IBD and Dorsey Wright’s Relative Strength comparison tools to pick and invest in the strongest. I like that – and I think that strategy comes from William O’Neill, the founder of IBD. Buy strength as the strong rise faster in an up trending market.

Paul points out that the most important lesson one needs to master is to have a disciplined method to Buy – Hold – Sell a stock, mutual fund or ETF. He has also been disillusioned with mutual fund money managers and has switched to ETFs. He learned his lessons in 2002 when he blew through his IRA account holding tech stocks like Sun Microsystems from 60 to 4. Unfortunately I did the same back then, which is what prompted me to learn technical analysis… Paul gave a basic lesson in Point and Figure charting. I have read Dorsey’s book on P&F and also tried it with Metastock and although it is fairly sound if you stick to it and follow it, I found it to be no better or different than any other technical analysis tool. I did like the fact that Paul has stayed with P&F charting and expanded his tool kit by using IBD and Dorsey Wright’s comparative strength analysis to select ETFs in a portfolio.

“As long as you are being rewarded for the risk you are taking, we should hold the stock” is one of his quotes. Agreed.

Another quote from Paul has to do with following a disciplined method that makes you do what you don’t want to do – buy and sell at the right time.

“My job is to get men to do what they don’t want to do” – Tom Landry, legendary Dallas Cowboys football coach.

Paul attributes success in investing to the P&F method which allowed him to stay with his big winners for a long time – 1-2 years. He points to his holdings in MCD which he just exited after being in it for 1-2 years. He clearly has learned to use P&F and understands how P&F ties to support and resistance, and when a stock is above a trend line. He also had charts showing the fall of Enron and how P&F had allowed him to advise his clients to exit when the stock was in the 70’s. Same with C where he saw exit signals when C was 49.

None of this is earth shattering in my mind. Basic technical analysis also permits you to do the same. Part of the key is how clear is the method in giving you a Buy and Sell signal and finally do you believe it enough to follow it? The real gem in his talk was at the end when he described how he has adapted and follows Dorsey Wright’s Relative Strength matrix to select which ETFs he stays in. This is the essence of how I manage my 401K choices as well. Visiting Dorsey Wright’s website gave this white paper that I will highlight

http://dorseywrightmm.com/downloads/hrs_research/White%20Paper%20-%20Relative%20Strength%20and%20Portfolio%20Management.pdf

There are many more gems there and I will enjoy digging and hunting for them. I believe there is good value in Relative Strength (RS) analysis to select the strongest. Still, I find the drawdowns can be excessive and therefore prefer to use tactical asset allocation models to limit my buy and hold times or use options to reduce the volatility.

I heard Dorsey give a talk at the MTA meeting here in Charlotte last year. He was very confident and impressive. I really like what he is doing. Also, I like IBD. Perhaps the key here is that Paul has evolved and found a good combination in Dorsey Wright’s methods and IBD to put a complete package together.

For full disclosure I must say that a friend of mind did give Paul a large sum of money to manage about 7 years back. Paul did not do much with it and his results were very mediocre. My friend eventually pulled the money out. While Paul gives a great talk and has put some great tools together, I cannot verify how good he is as a money manager at this time. I will stick to my own methods. I still appreciated the talk he gave and will spend more time with using IBD and relative strength as one of my strategies to select what I should put money into and will take a close look at the Dorsey Wright website..
http://dorseywrightmm.com/

And remember  “Up is good and Down is bad, unless you are short the market”.

401K Analysis remains Green 3/4/12

It is the beginning of the month. Time to run my 401K analysis and look at the weekly charts. Quick glance through the charts show everything is pointed upwards with the exception of the Fidelity Government Income Fund which is meandering sideways to slightly down and same with the PIMCO Global Bond Fund. Rest is mostly equities and they are all enjoying the push from the markets climbing nicely over the last two months and throughout 2012.

The first Fidelity 401K fund I am in points towards Vanguard Explorer Admiral, Artisan Mid-Cap, Fidelity Mt Vernon Growth and Lazard Emerging Markets Equity as the top funds I should be in.

The second Fidelity 401K fund I am in says Royce Opportunity, WFA SPL Mid Cap VL, Fidelity Growth Strategies and Fidelity Blue Chip Growth have the strongest momentum.

I am long in my 401K strategies accordingly although I remain partially hedged due to my cautious nature.

Otherwise, I closed my position in Gold and Oil and took the profits of the table. I have covered rising gas prices for the next quarter with the profits made – value of the dynamic hedge as posted last week. I got a long signal for SNDK and went back long in it.

The market is at a resistance level and we shall see how it handles it. Normal expectation is for it to pull back, gather strength and then surge through in April. After that we shall see if we need to sell in May and go away.

The only thing we have to fear is fear itself-nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. 
– Franklin Delano Roosevelt

Hedging Rising Oil Prices 2/25/12

The company I work for got hit with several million dollars of higher material prices on plastics last year. That made me think about how the company could reduce this volatility and have more predictable performance results based on manufacturing operations only.

Plastics is made from oil. When oil prices rise, so do prices on a wide range of plastics. So why not hedge oil? Sure, that would be quite easy to do with oil futures. People who are in the agricultural business do that with crop futures. So why not hedge oil for rising plastics prices? Buying a hedge against a known position lets you stay neutral to the price of the material as it stands now at a future point in time. When oil prices rise, the oil futures price would also rise. My understanding is that our company does take a hedge on a material that we consume in large quantities. That is good but there is a better method.

Using dynamic hedging techniques, I could stay long on oil futures as long as the price of oil was rising. When the price of oil starts dropping, it would be better to drop the hedge and let material prices decline and increase company profits when plastics become lower in price. The only catch is that most financial people do not know how to do dynamic hedging. Maybe one day I could do this for our company and for others but in the meantime, I could practice this on the family portfolio and finances. Our family uses gas for the two cars we have and gas prices are rising. So why not practice dynamic hedging on it?

The hypothesis is: I want to be hedged against rising gas prices and not feel any negative affects.

I am tracking two ETFs for oil; one being OIH and the other USL. I am long in my position of OIH and have already generated enough profits to fully offset a potential rise in oil prices for the next several months. When I see the system generating an over bought situation or generates a down signal, I will exit.

Meanwhile here are the charts of OIH and USL with a trading system I am using on them signaling when to go long and when to exit.

Pull Back 2/15/12

It looks like a pullback in the making. The rise has been sharp and steep and the market has to pause for breath. The short term averages are running away from the long term and that cannot be forever. AAPL paused and appeared to halt the whole market.

My chart on CAT shows a pause as well and I have closed out my long position. I am hesitant to take a down position only because the broad market trend is up and I hate to bet against the broad market. I have also closed out my position on AMD at a nice profit. Entered at 5.66 and closed out at 7 something. The exact numbers don’t matter. My system is still long but the short term cycle indicators are saying pause. Better to be safe than lose profits.

Still holding on to my GLD position and of course I am also strongly long in my 401K positions. I had added some more SPY put options in as a hedge against the long position. That means I am still long but a pull back will mean less loss. Went back long in TIP as well.

Here are some of the charts on CAT and AMD.

401K Analysis says Go Green - 2/5/12

It is Sunday morning and the first week of the month. That means it is time to do my monthly 401K analysis to select where to put my 401K money among the various mutual fund choices I have in each of the two companies that I have my Fidelity 401K funds in. One is my current company and the other is my previous company.

Cranked through the numbers and what they are saying is Go equities. Previously it said go partially long in equities and partially in Fidelity Government Income fund. My current company analysis is suggesting Royce Opportunities fund, Mid Cap and Fidelity Growth Strategies.

The previous company selection is Vanguard Explorer Admiral, Fidelity Extended Market Index fund and Artisan MidCap fund. Real estate is also moving but I have to avoid funds that make me stay in it 90 days or else they charge me redemption fees if I exchange it to money market before the 90 days of holding period. I noticed that Fidelity Government Income fund is now near the bottom of my list. The time to stay in it is over.

This is certainly a change and is in line with my early signal on 12/23/11 on SPY to go long. I am already vested partially long in the markets and with this analysis I will put my foot in deeper into the waters. I don’t like taking risk but I also don’t like leaving my money under the mattress doing nothing. I will go in but I will keep some level of hedge on should there come a Black Swan like event. I am currently re-reading Taleb’s book “Black Swan”. It is recommended reading.

When to Exit? 1/29/12

After waiting patiently for a long trade signal, and then entering it at the right time, it is a good feeling to see the stock rise. And as we watch it patiently step up, we feel invincible and good about our trading methodologies. Yes – these trading systems work etc. etc. That has been how it has felt with F and some other stocks and ETFs I am holding. Unfortunately there comes a cataclysmic event like an earnings announcement on Ford (F). There were some issues with commodity prices rising and the future looking a little less bright. The stock responds by dropping 6% pre-market. That easy money is now half gone and I am wondering do I exit or wait for my exit signal. I know my trading system is lagging and is dampened to the individual changes of the stock market day to day. So I wait. The stock opens low and claws its way up in typical contrarian style and ends lower for the day but with only a 4.5% drop. Now what do I do? It’s the weekend and I have more time to think.

I have to follow my stock trading system signals if I am to succeed in the long term. I know that. I also know that I do not want to see all my profits evaporate because I am waiting for an exit signal. Therefore I will opt to sell half my shares at a limit price. Why a limit price? Because after a long weekend, there are probably many others wanting to sell and the market maker for F can drop the price substantially at open and later let the price slowly come up. Of course I may be over thinking this and time will tell. But here is the chart on Ford.

I have had a couple of stocks do the same think to me last week; SNDK and PCP. Fortunately there was the up move by CAT on earnings announcement and my entering GLD and IAU that have climbed nicely during the last week. I am seeing the benefits of having a portfolio spread between regular stocks and other alternate investments like commodities, bond funds, TIP, real estate and currency funds.. As the waves caused by stocks going up subside and start pulling back, I get a fresh wave from the alternate investments. Their wave rides over the pullback. And then there are a few from the stocks that were bigger waves and they continue on. My only regret from the coulda, woulda and shoulda category is not having taken the buy signals on my real estate fund and real estate stock (IYR and SPG) and also my currency funds (FXA, FXC). No excuses. I should have taken them. Now I wait patiently for the next pullback on those.

We have had a strong positive start to this year. I am sensing a pullback is due. That could be a good buying opportunity. Trick is going in as it pulls back. Not fun to do.