It's hard to believe that the market could reap further gains after the strong rally we saw from November 2012 to May 2013, but upside trends and breakouts to new highs can often go much further than the mind can imagine.

Are we setting up for another upleg in US stocks (some foreign markets haven't participated, so we're focusing on the US here)?  The current pattern in the CBOE Volatility Index (VIX) (VXX) combined with a potential 'V' shaped bottom in the S&P 500 Index (SPX) (SPY) certainly raises the possibility.  The last similar setup to this was in November 2012, and we all know what kind of steady uptrend followed that.

Examine the chart below … the VIX staying above 16 currently is a sign of unrest/worry among options traders.  And there is understandable reason for that, with Fed tapering on the horizon and volatile price action in stocks over the past month.  Not to mention weakness in Gold and Bonds and volatility in Asia and Emerging Markets.  But "the chart tells the tale", as we often say … and the market has actually been rallying since June 6.

VIX & SPX Daily Chart

The last time the VIX hovered around in the 16/18/20 area was right before the incredible steady uptrend that followed.  Now, we've potentially formed a V bottom right around the key 1600 round level (also near the location of key Fibonacci retracements) and the VIX is showing signs of a Wall of Worry (that can feed further upside as the skeptics and bears come around).

Is it possible that we may enter an even more accelerated 'blowoff' type uptrend in US stocks?  Yes, it's possible.  Remember if we do end up going parabolic to the upside, it will end badly — but that doesn't mean you can't ride the trend higher as it may go farther and last longer than anyone expects.  In general in parabolic moves we advise from experience to ride the trend higher, keeping position sizes relatively small and taking profits along the way.  That way you don't get caught holding a greedy full overexposed bag when the bottom inevitably drops out.  Then be prepared to raid quick bearish moves on the downtrend as well.

Lest you forget how high and far a parabolic rally can go (and fall), take a look below at the NASDAQ Composite (COMP) from 1991 to 2002, with a zoom in on 1991 to 1995 and the current SPX 2009 to 2013.  This particular scenario was unique in its own way and is unlikely to be replicated, but we have seen parabolic rallies occur more frequently in a variety of asset classes over the past 10/20 years.

Parabolic Rally Chart – COMP & SPX

Calling a big market rally (especially after the strong performance we've seen in recent years) that could potentially go parabolic to the upside is not something I'm in the business of doing — you certainly stick your neck out by doing so.  What I'm saying is that in my analysis the possibility is there that this may soon be or already is underway. 

The price action the remainder of this week and over the weekend is important to determining if a strong new upleg is underway or we get pulled back down into volatility and potential downside.  This week ends with a monthly options expiration and there have been volatile Friday/Weekend/Monday moves recently as economic events and global news have impacted markets.

Right now, keep an eye peeled on the charts and an open mind when it comes to price action.

by Moby Waller,
co-Portfolio Manager, ETFTRADR & Rapid Options Income
BigTrends.com
1-800-244-8736

Exploring Market Physics

The swing trader faces a considerable challenge mastering the puzzle of market movement.  While most of us recognize conflict and resolution within the price chart, we fail to utilize these dependable mechanics in our trading strategies.  Fortunately, repeating elements of the charting landscape offer a powerful context to understand and manage these vital aspects of trend development.  Through repeating dynamics of crowd behavior, price action tends to mimic classic rules that modern scientists apply to our physical universe.

This is probably no accident of nature.  Emotion and mathematics interact continuously when, for example, some draw the Fibonacci retracements that we see every day through our chart analysis.  This fascinating relationship offers a glimpse into the profound order beneath common price movement.  At its core, convergence-divergence between these two forces helps us to understand and trade the market swing.  For example, we may search the chart for a reversal or breakout pattern that spells opportunity, but we also watch the 'ticker tape' to gauge the crowd's emotional intensity, and to predict where it will burn out or shift gears.

Successful traders draw intuitively upon these bilateral market mechanics as they master the art of speculation . Their advanced skills correspond with the peculiar logic required to unify left and right brain functions into a focused trading methodology.  Perhaps future technicians will quantify these profound interactions between herd behavior and physical law, and even open up a new branch of technical price prediction.  In the meantime, let's explore some primary characteristics of these underlying market physics.

1. AN OBJECT IN MOTION TENDS TO REMAIN IN MOTION

New trends awaken within the low volatility of a rangebound market and are characterized by directional price momentum.  During the early phases of new trends, volatility rises but inertia tends to slow down price rate of change.  This often generates a series of tests or congestion mini-patterns while price tries to escape the influence of the old range.  Eventually, momentum overcomes inertia and price movement takes on a more vertical appearance.  This freedom of motion actually lowers volatility as friction eases and a one-sided market assumes control.

New trends can be very difficult to stop once they are underway.  As with other objects in motion, trends feed on themselves because they draw in fresh energy (from cash and emotions on the sidelines).   This induces price movement to travel well beyond arbitrary barriers, such as targets set by outside forces.  But no trend can last forever or travel to infinity.  Just like its physical counterpart, intervening market force will eventually stop or reverse directional price movement.

Simple friction slows down a rolling ball.  Active trends experience friction in the form of market gravity.  Classic trading wisdom notes that rallies take buyers, but that markets will "fall from their own weight" under the right circumstances.  Unfortunately, the dynamics of this well-understood mechanism don't quite match those of Mother Earth.  If they did, all markets would fall to zero as soon as buying and selling dried up.  The fact that markets retain value suggests that each one has a hidden center of gravity that price development will reach if all participants step aside at the same time.  This "central tendency" gently pulls market movement toward a hidden mean during quiet times, but can act with shocking intensity when price action generates strong imbalances during extreme market conditions.

The distance from the current price bar to this elusive value quantifies a level of market inefficiency at each point in time.  It also defines most opportunity for the swing trader.  Bollinger Bands present a common tool to measure tension on this hidden spring.  But other indicators that rely upon deviation from the mean perform an adequate job as well.  And don't overlook simple chart patterns.  Certain formations can reveal major inefficiency through a simple set of price bars.  For example, a Shooting Star candle after a strong rally signals an invisible wall to the observant speculator.

The Pull of Central Tendency

IMNX Hourly Chart

[Combine candlestick patterns and Bollinger Band extremes to uncover hidden friction that will stop or reverse a strong market trend.  Note how Immunex pierces the top band on July 19th, but closes back within its boundaries in a tall Shooting Star candle.]

2. FOR EVERY ACTION, THERE IS AN EQUAL AND OPPOSITE REACTION

Traders at all levels must deal with the wavelike motion on price charts.  These define underlying cycles that strategies must align with, or risk failure.  At their core, these waves reflect constant battles between bulls and bears, and the underlying trend-range axis.  Price thrusts forward in a surge of participation but then pauses to test prior boundaries and dissipate volatility.  Price bars contract, volume drops significantly, and the trend pulls against its primary direction.  But just as that market returns to a stable state, the action-reaction cycle suddenly regenerates and volatility surges . Fresh momentum carries the reawakened trend toward a new price level, or reverses it back toward its origins.

But why aren't markets stuck between two horizontal extremes if trend and countertrend act with equal force, and are polar opposites?  The answer lies in how active markets dissipate directional force.  Every buyer must eventually sell and every short seller must eventually cover.  This induces layers of cycles that equalize price action and reaction over time.  Swing traders observe this dynamic process in the trend relativity of different length charts for the same trading instrument.  In other words, a single market may print a strong rally on the daily chart, a bear market on the 60-minute chart, and sideways congestion on the 5-minute chart, all at the same time.  While this phasing process may seem chaotic, it actually reflects the dissipation of underlying action-reaction polarity.  This 3-D trend-range axis also carries an added benefit: its alignment generates many of the setups in the swing trader's playbook.

Locate these important opportunities in the convergence of specific action-reaction imbalances through several layers of price activity.  This logical analysis also supports the contrary attitude that leads to successful swing trading.  For example, while the crowd sees a buying opportunity when price surges on heavy participation, the swing trader sees selling power increasing in that market due to the entrance of a new crowd of buyers.  Fortunes are made through this type of counterintuitive logic, generated by recognition of the underlying power in market physics.

Time Frame Divergence

QCOM Daily Chart

[Price action in 3 time frames generates different support-resistance considerations while Qualcomm tries to halt a sharp decline.  The daily chart prints a hammer reversal near a 6-month low.  The 60-minute chart shows a bearish pullback into an ugly down gap, while the 5-minute chart offers short-term traders excellent profits through a midday bounce near whole number 50.]

3. THE BRIGHTEST STAR BURNS OUT FASTER THAN A STAR EMITTING A COOLER, DARKER LIGHT

We measure the health of a rally or weakness of a selloff by the angle of its rise or fall.  Common sense dictates that more vertical price bars reflect more powerful price moves.  But how does the intensity of price change interact with the persistence of the trend itself?  To answer this question, we can rely upon the characteristics of central tendency discussed earlier.  If each market carries an underlying fair value at each point in time, a dynamic move should reach that price in less time (fewer bars) than a slow hike in the same direction.  In other words, vertical trend bars should burn out and end their movement much sooner than slower trend bars.

Unfortunately these angles of inclination and declination are relative to the observer.  Low price distorts movement on arithmetic charts.  A spectrum of growth rates distorts movement on log charts.  So before we can objectively measure how bright our market star burns, we need to adopt a common system of viewing price change.  Unfortunately this is more difficult than it first appears.  Diverse charting types and methods force us to apply measurements that are often dependent upon the software or service that we use.  The most fruitful analysis adopts a common view across an entire database, so that visual comparison of trend intensity has a point of reference.  Then we can use our eyes and simple standard deviation to examine the duration and stability of price change.

Apply this charting method to locate parabolas that are ripe for strong reversals.  In the contrary view of the swing trader, vertical price movement is seen as a prelude to a reaction of the same intensity in the opposite direction.  Just as a supernova signals the imminent demise of an aging star, the parabola informs the market that its trend fuel is about to run out, and likely cause a violent reaction.  First set a fixed log chart percentage between 15% and 20%.  Then scan the entire database for issues with the steepest angles of short-term price change. Isolate those markets with the tallest price bars and visible trends in excess of 45 degrees.  Then reset the log scale to automatic for these filtered issues, so that recent price action fills the screen.  Apply a standard Bollinger Band and look for bars that print well outside the upper or lower band.  Find your fade entry level by dropping down to a lower time frame and locating a small-scale reversal pattern that aligns well with broader landscape features.

A trend that moves at a very shallow angle also predicts its own demise, but for different reasons.  This reversal follows the mechanics of the rising or falling wedge patterns seen on many price charts.  Both traders and investors want excitement in their lives.  They buy or sell so they can watch price ramp to new levels.  Shallow trends never fulfill this need for gratification.  For example, participants watch price rise in an uptrend to a marginal new high over and over again, but never gather enough momentum to accelerate the rate of ascent.  Shareholders eventually lose interest in this type of price action and jump ship in search of a more exciting trading vehicle.  The market loses broad sponsorship and finally drops off a cliff.

Locating Blowoffs

EMC Daily Chart

[Skilled eyes uncover the most dynamic parabolic trends and then execute fading strategies at natural reversal levels.  Start with a fixed log chart setting, such as the 15% in figure A.  Scan your database quickly and locate the most vertical price movement that you can find, up or down.  Return to a more comfortable chart scale (figure B) and apply 3-D charting landscape techniques to identify low-risk entry.]

4. ENERGY SOURCES LEAVE TELLTALE SIGNATURES IN THE FORM OF EXHAUST OR RADIATION

This classic principle of physics requires little translation for the financial markets.  Real trading opportunities look like opportunities because they emit characteristics of impending directional price movement.  This reveals itself in crowd participation, price action at known boundaries, the creation of recurring price patterns, and the convergence of technical indicators.  Interpret these diverse market signatures correctly and book consistent profits as an options trader.

Engineers build machinery to investigate exhaust emissions and measure their internal characteristics . For example, a hose attached to a vehicle's exhaust pipe tells the auto mechanic the current condition of the internal machinery.  Option traders build similar measurement tools to evaluate the state of internal market activity.  But just as the engineer designs instruments to examine a very narrow range of physical information, swing traders must limit data intake to specific market characteristics and filter out many noise levels that can defeat profits.

Chart patterns with true predictive power emit evidence that these market engineers can detect and measure.  The radiation of opportunity builds through convergence of diverse elements at narrow intersections of price and time.  Each independent signal drawn into this small space raises the odds that a trade setup will produce a valid result.  Heat builds strongly at these important levels and tells the swing trader to get on board quickly.

Reading the Charting Landscape

AMCC Hourly Chart

[Highly predictive charts print well-organized patterns at expected price levels.  AMCC starts with an Island Reversal (1) that ends a clear Elliott 5-Wave (2) rally.  Price drops under the intermediate high at 48 and the 62% retracement (3) of the prior move.  Weak congestion (4) forms under the retracement level.  The bottom Bollinger Band (5) expands downward, opening the door to falling price.  All signs points to an impending first failure event (6), in which price will retrace 100% or more of a prior trend leg.  The trader measures this evidence, sells short into the congestion, and waits for the pattern to work out the expected result.]

CONCLUSION

Modern traders have great difficulty organizing market movement into a manageable feedback and execution system.  Too often, they ignore important chart data because it doesn't fit into a convenient system of horizontal price boundaries. T his obsession with simple-minded pattern recognition exposes a trader's inability to grasp the more powerful mechanics of price prediction.  Unfortunately, concentrating on a narrow execution strategy is like trying to play music with a single note.  It works only when a fleeting moment of opportunity demands a single, flat tone.

Expand your trading knowledge through the application of market physics.  Each new aspect expands your ability to profit from subtle aspects of crowd behavior.  Keep in mind that these natural forces rely upon mechanics that many speculators will overlook.  This lets you gain an important edge on the path to successful trading.  It might take a lifetime to explore these complex interactions between evolving price and the emotional crowd.  But each piece of this fascinating puzzle adds new levels of empowerment to trading performance.

Courtesy of hardrightedge.com

Despite a convincing reversal of a budding downtrend the week before, last week's bullish effort fizzled.  Although it's pretty clear the indices have been unable to fight their way back above a key ceiling, it's equally clear the bulls have drawn a line in the sand at a key support level. 

We'll look at how the market's trapped between support and resistance (and which is apt to break first) in a moment.  First, let's recap last week's major economic announcements.

Economic Calendar

Although it wasn't until Friday the market finally started to care about any of last week's economic numbers, we started to get some heavy data on Thursday.  That's when we got the retail sales report for May.  As it turns out, spending was up fairly well last month, growing by 0.3% without automobiles, and up 0.6% counting the impact of rising car sales . It was much better than April's stagnation, suggesting consumers aren't completely dead in the water here.

Friday, however, is when the pedal hit the metal, kicking off with May's producer price inflation rate.  As it turns out, input prices (for factories, fabricators, etc.) are only up 0.6% for the past twelve months.  Truth be told, it's alarmingly weak.

It was also on Friday we heard that May's capacity utilization fell, and that industrial production was flat.  One month does not make a trend, and it's not like the numbers fell precipitously.  Then again, the growth trend that was driving both sets of numbers through the latter part of last year has tapered off to little more than a flat line.  We're vulnerable here, which is a problem, given the strong (and largely unrecognized) relationship between those numbers and the long-term market.

Finally – and this was pretty much what crimped the market on Friday – the first reading for June's Michigan Sentiment Index score of 82.7 was lower than May's final reading of 84.5.  What the market seems to have forgotten is that May's reading was abnormally strong, and that Friday's reading was just the first of three reading for the month – it could end up being quite different later in June.  Traders needed an excuse to take some profits, however, and that was the one they glommed onto. 

Economic Calendar

The coming week will be a little lighter, in terms of the amount of economic data we're getting, and the importance of the data in the lineup.

On Tuesday we'll round out the inflation picture with last month's consumer price indeed (CPI) figure.  The most recent annualized inflation rate is 1.06% (for April), which like last week's PPI inflation rate is on the alarmingly-low side. 

We'll also get last month's housing starts and building permits numbers on Tuesday . Both have been rising for a year and a half, but we're getting to the point now where it's going to be very tough to keep that growth pace up.  The pros say starts will be up, and permits will be down, by more than a little in both cases.  Good or bad news here could make or break the market.

The real estate report card will be finished up on Thursday with May's existing home sales.  Economists expect the pace to reach 5.0 million units per year, up a tad from April's 4.97 million. That's pretty strong, though the growth pace is a little tepid.  Still, growth is growth.

Stock Market

Just to frame our analysis with the right perspective, traders aren't sure what to do here, so they're basically doing nothing.  The market's waiting for one side of the table or the other to show their hand, but neither side is budging.  Eventually the indices will rock their way out of this rut, and by so doing kickstart a trade-worthy move.  Until that happens, however, things are on hold.

With all of that being said, here's the deal – the S&P 500 is hitting resistance at its 20-day moving average line at 1642.16, but is finding support at its 50-day moving average line and lower 20-day Bollinger band around 1610. The good news is, the floor and ceiling are converging, so the market's going to be forced to break out of this rut pretty soon.

S&P 500 & VIX – Daily Chart

So which way is it going to break?  That's still up in the air, but we can say this – the bears are applying a lot of pressure here, and the bulls aren't able to put up much of a fight.

The chart below is another daily chart of the S&P 500 (SPX) (SPY)… only zoomed out to show more days. When you take this big step back, you can see how the CBOE Volatility Index (VIX) (VXX) is finally starting to TREND higher.  We've seen the occasional upward thrusts from the VIX since late last year, but it's only been within the past few weeks that the VIX has started to walk higher in a sustainable way.

The proof lies in the fact that the 20-day and 50-day moving averages (blue and purple, respectively) are now moving above – and away from – the VIX's 100-day moving average line.  In fact, the 100-day moving average line is now sloped upward, for the first time in months.  And, the VIX is repeatedly (now) pushing up and against its upper 20-day and 50-day Bollinger bands.  Put it all together, and it says the undertow is trying to shift even if it looks like the market's holding on.

S&P 500 & VIX – Zoomed Daily Chart

So what changes when you zoom out even further by looking at a weekly chart?  Not much.  But, it's with the weekly chart we can see just how important that long-term bullish channel we talked about last week (dashed) has become.  For the second week in a row the floor of that channel was tested, and for the second week in a row the bulls at least managed to defend that line.  It's at 1608 for this week, pretty much in line with the key floor on the daily chart.  So, while that support line is plenty strong – since it's the convergence of several technical support levels – if it should break, that could start a real avalanche.  The bigger bull trend is still intact, but we're a hair away from things getting real ugly, real fast.

S&P 500 & VIX – Weekly Chart

Let's see if the bulls can defend their ground for the third week in a row.  Our only caution is that the longer the S&P 500 just lingers around the floor, the more in-jeopardy it gets.  The bulls need to make a decisive push up and off that long-term support line for us to say the bigger trend is worth stepping into again.
 

After having traveled to the region, we should consider what Ancient Rome can teach us about things.  Here we discuss trading so we should look at what lessons it holds for us.  These lessons could all be learned elsewhere but that is no fun.  The stock market is full of historical analysis so let's apply that here.

Organization is Critical to Success

Rome was not victorious by being a disheveled mob of soldiers charging against the enemy at a whim.  They had proper tactics.

Early in the Republic, this was modeled after the Greek example delivered via the Etruscan rulers of pre-Republic Rome.  The Greek phalanx was effective in frontal combat against slow foes, but it suffered from being slow easily maneuvered around and struck in the back.  Rome was being beaten by a more mobile military formation, and adopted this as their own.  They defeated the very enemy they took the formation from.  Their formations and military organization expanded the Republic and build the Empire.

Two important lessons are learned.  First, stay organized with strong rules.  Follow those rules, because playing cowboy with your own rules is folly.  However, remain flexible and adopt changes when necessary.  This does not mean fly by the seat of your pants, but have a strategy and stick to that even if it is different from what you used before.  Roman formation did not have to change because they kept winning.  It was a clever commander that changed strategies when they proved ineffective.  It was folly to adhere to tactics when they were inappropriate and led to many failures.

Companies Will Expand Until it is Inefficient and Mask Inefficiency by Further Expansion

Rome expanded and expanded, giving rise to a major border and coming up against all sorts of people who did not like them.  Not only that but they became very numerous as time passed by.  Absent absolute control the border was too large and there were too many people not under the yoke of the Romans.  

Companies seek to grow and expand.  They are punished if high earnings stay high and do not grow higher.  That leads to more and more acquisitions.  Once a glorious company sees margins eroding it does even more purchases to seem like it doing something to return to the great days of old.

Rome used conquest for glory and to take people's mind off of things.  It also used it to plunder far off lands for money hoping to reap reward beyond that plunder by conquering territory.  Rome was notorious for taxing conquered or otherwise gained provinces like rich Asia, which is now the area in and around Turkey.  When it was not successful in making enough money to satisfy the rich men back home they had to conqueror yet more territory.  Reputations were made by bold action, just as now they can be made through bold acquisition . Once companies are grasping at straws it might be time to avoid them or look for downside gains.

Devaluation Will Occur in Harsh Times

Rome debased its currency often.  It would put less precious metal into its coins when it needed to.  When facing problems regarding dwindling balances you can devalue yourself by selling off more pieces of the same whole.  A company can issue more shares or do private placements.  Rome debased currency most often to pay its professional army once it moved to a volunteer force instead of conscripted farmers.  Companies can pay their employees a lot of stock options, which adds to the number of shares available hurting all shareholders.

Luckily employee stock options are not usually enough to hurt the overall value of shares.  On the other hand handing something valuable to a man like Marcus Crassus in exchange for money can lead to problems down the line.  For an influx of capital you give up all plunder and land to a rich man like Crassus or large investment pools.  Preferred shares that can be converted to common stock resemble this.  Whenever capital is needed a way will be found even at the cost of current loyalists, or shareholders.  The metaphor is getting a bit contorted, but dilution occurs especially with penny stocks.  A subtler form of dilution occurs with the respected members of the investing world.  Preferred shares with high conversion ratios fit the bill.

Everything Falls

Rome fell.  Nothing has permanence.  It is just a fact of reality.  Rome was not even the same at various stages.  The early Republic was not like the corrupted Republic of Marius and Caesar's time.  The Empire was different depending on who was ruling.  Greatness is not permanent. Companies that are forever stocks have felt the sting of time, and though they may have managed to reinvent themselves it is just part of their cycle and the end is most likely on its way.

Some companies go out of business.  Think about all the companies that have gone out of business.  Or think about companies at the height of their age just treading water.  They may have been rock stars once, but now they are no longer the leaders of the pack.

For a technology company it can mean the end through irrelevance.  Think about the unassailable Apple (AAPL), it could rise again but it has been rendered mortal.  It is not a stock with only one direction.  It did not reach a trillion dollar market cap before pulling back. It could soar again, but how long till the next fall.

That all things fall is probably the best argument in favor of trading, though Rome took a thousand years.  Companies tend to fall faster, though some can change enough to go on.  

Trading is a way of extracting value while you can.  Holding long-term can work, but not indefinitely.  Eventually you need cash in hand.

Courtesy of Timothy Sykes, timothysykes.com

4 Stocks to Weather Rising Rates

Investors should look at companies that generate cash and don't need to borrow money, Kim Forrest of Fort Pitt Capital Group said Wednesday.

"We've been anticipating that we can't have these rates (TLT) that low for that long, so I wouldn't say we're anticipating the exact move, but we knew that this day would come, and here it is," she said.

Forrest said that she had been looking for more "growthier" names.

"Nobody who can pay back seems to want to borrow," she added, explaining why she was avoiding financial stocks (XLF) and instead focusing on cyclical shares of companies that are "probably not going to have to borrow money because they're generating cash."

[BigTrends Editor's Note: We've added basic charts of the following 4 stocks with Percent R, Acceleration Bands, Bollinger Bands and Exponential Moving Averages.  BA & MSFT are the strongest 2 of the 4 according to our chart analysis.]

Intel (INTC):  "You can throw that baby out with the bathwater and say they're a PC-only company," she said.  "We don't believe it.  They' generate a whole lot of cash, they return it to shareholders, and they're not going to need to borrow to do what they do."

INTC Daily Chart

Microsoft (MSFT):  "I love them because they are an IT play," Forrest said.  "You're not going to boot them out of your data center.  Sorry, Google (GOOG).  You're not going to replace Word with Google Apps.  They really are an IT proxy, and I think they're here to stay for the long haul."

MSFT Daily Chart

Boeing (BA):  "It still is bleeding cash, but they have plenty of very profitable planes that people want," she added.  "They also do extremely well if book-to-bill is over 1, and we think that's going to happen through this year and into next year.  So, Boeing is still on our list, and we really like Boeing."

BA Daily Chart

Joy Global (JOY):  "Joy's really a coal (KOL) play," she said, adding that the company would be "very, very big" in China and India.  "Both of those markets need coal for electricity, and Joy has a really good track record of having operated there since 1979.  They did an acquisition. Unlike (CAT), they actually bought a company that made stuff, and they're doing OK in that country."

JOY Daily Chart

Courtesy of Bruno J. Navarro, cnbc.com

5 Popular Trading Strategies

This article will show you some of the most common trading strategies and also how you can analyze the pros and cons of each one to decide the best one for your personal trading style.

The top five strategies that we will cover are as follows:

Breakouts

Breakouts are one of the most common techniques used in the market to trade. They consist of identifying a key price level and then buying or selling as the price breaks that pre determined level. The expectation is that if the price has enough force to break the level then it will continue to move in that direction.

The concept of a breakout is relatively simple and requires a moderate understanding of support and resistance.

When the market is trending and moving strongly in one direction, breakout trading ensures that you never miss the move.

Generally breakouts are used when the market is already at or near the extreme high / lows of the recent past. The expectation is that the price will continue moving with the trend and actually break the extreme high and continue. With this in mind, to effectively take the trade we simply need to place an order just above the high or just below the low so that the trade automatically gets entered when the price moves. These are called limit orders.

It is very important to avoid trading breakouts when the market is not trending because this will result in false trades that result in losses. The reason for these losses is that the market does not have the momentum to continue the move beyond the extreme highs and lows. When the price hits these areas, it usually then drops back down into the previous range, resulting in losses for any traders trying to hold in the direction of the move.

Retracements

Retracements require a slightly different skill set and revolve around the trader identifying a clear direction for the price to move in and become confident that the price will continue moving in. This strategy is based on the fact that after each move in the expected direction, the price will temporarily reverse as traders take their profits and novice participants attempt to trade in the opposite direction. These pull backs or retracements actually offer professional traders with a much better price at which to enter in the original direction just before the continuation of the move.

When trading retracements support and resistance is also used, as with break outs. Fundamental analysis is also crucial to this type of trading.

When the initial move has taken place traders will be aware of the various price levels that have already been breached in the original move. They pay particular attention to key levels of Support and Resistance and areas on the price chart such as '00' levels. These are the levels that they will look to buy or sell from later on.

Retracements are only used by traders during times when short term sentiment is altered by economic events and news.  This news can cause temporary shocks to the market which result in these retracements against the direction of the original move.

The initial reasons for the move may still be in place but the short term event may cause investors to become nervous and take their profits, which in turn causes the retracement. Because the initial conditions remain this then offers other professional investors an opportunity to get back into the move at a better price, which they very often do.

Retracement trading is generally ineffective when there are no clear fundamental reasons for the move in the first place. Therefore if you see a large move but cannot identify a clear fundamental reason for this move the direction can change quickly and what seems to be a retracement can actually turn out to be a new move in the opposite direction. This will result in losses for anyone trying to trade in line with the original move.

Reversals

Reversals are generally used by technical based traders during times of little fundamental activity. At these times the markets tend to 'range' or move sideways with no clear direction. Traders look for key price levels that they can use to trade directly from in expectation of a 'bounce' when price hits it. These bounces provide small, quick opportunities to take a profit from low volume market activity.

Again, the tools used for reversal trading are almost identical to those used in the previous strategies and include support and resistance and fundamental analysis.

Before trading reversals, you must be sure that there is no major news expected to be released during that session, and that no key monetary policy makers are speaking or making comments to the press. These events can trigger moves that will result in losses on your short term trading.

Once the fundamental picture is clear, we then need to focus on the technical analysis and in particular the support and resistance levels that are near the current price.

Common levels used by traders with this type of strategy include, old highs and lows from previous trading sessions, Pivot point levels, Fibonacci levels and areas at which all three of these levels overlap. These overlaps are known as confluences, and these provide excellent areas at which to look for the price to bounce from during the session.

The reactions vary but very often traders will be looking for only a few pips of profit from these reactions, rather than attempting to hold the positions over several trading sessions.

Trading reversals is strictly for times when the market is not trending in a clear direction, and should not be employed blindly during all market sessions as this will dramatically increase the amount of losses you suffer.

Momentum

Momentum trading is much less concerned with 'precise' entries and more with the force and continuation of the move. Traders are not looking for the price to pull back or break out from any specific price, but merely to start moving more or less in the direction of the prevailing trend.

This type of trading is fundamentally based but also relies heavily on indicators such as moving averages and oscillators to give trading signals.

Traders will use momentum based strategies when they perceive a long term move to be taking place on the asset that they are trading. For example, if there is a significant change in the fundamentals of a nation that will result in an interest rate change, this will cause investors to act and begin buying or selling the currency of that nation in line with those changes. Other examples include geo political events that remain in place for many months and sometimes even years.

During these significant shifts, professional traders will be looking to trade these currencies over the long term, often holding their positions over a period of weeks and months.

Because of the longer term nature of this strategy traders are not as concerned about entry points and simply wait until minor technical analysis gives them an opportunity to profit from the move. A popular indicator for this type of trading includes the 200 period moving average, and very often traders will look for price to break above or below this moving average in line with the anticipated move, at which point they will enter the market and hold their positions.

Exits are generally governed by fundamentals in a similar way to entries, with traders watching the economic and geo political events very closely before deciding which trading approach they will take and how they will manage those ongoing positions.

Position trading

Position trading takes the momentum style of trading and further eliminates the importance of the entry. The primary concern of the trader here is to be in the market when the price does eventually make its move. Traders often build their position into the market over a period of days or weeks as the price moves. The main component of this strategy is a confidence in the prevailing fundamental conditions driving the price, and the anticipation that the market will eventually move in the desired direction.

This sounds extremely similar to the momentum style of trading but the key difference is the approach to entries that position traders very often take. When the market is expected to move in a single direction over a sustained period of time, traders will very often begin trading that asset almost immediately in extremely small sizes.

The reason for this is because during the long term move there will almost certainly be short term retracements and temporary adjustments to sentiment. These events will provide traders with multiple opportunities to trade the asset as it pulls back against the overall move.

These will be used as opportunities to trade at a better price and build up their position in the market while these temporary events cause confusion and loss of confidence. Position traders are effectively taking advantage of human emotions which causes most traders to liquidate positions and take profits during short term market moves against the prevailing trend.

Because the market moves in this way, traders will try and add to their positions as the price gives better prices so that they can gradually build up a better average entry price. This also means that their initial positions may enter sustained periods of draw down, which is why each individual position is usually extremely small in relation to the amount of capital they are trading.

Position trading should only be carried out on assets that have a very clear fundamental sentiment that is likely to last over the approaching weeks or months. Having the confidence to not only hold your position, but add to it is the key to this style of trading.

Courtesy of Dean Peter-Wright, tradingmarkets.com

Oil (and its accompanying energy stocks and ETFs) is probably the 3rd most widely followed trading instrument in the world (behind stock indices and gold).  Crude Oil has really been somewhat quiet now for several years in the big picture, but something may be 'bubbling up' soon for energy stocks.

We'll look at the US Crude Oil ETF (USO), Crude Oil Continuous Futures, SPDR Energy Select ETF (XLE) and Market Vectors Oil Services ETF (OIH) as some of the most widely followed ETFs in this field — and each does have a different story to tell.  All of the charts here are stripped down of most indicators to see the major trendlines and patterns.

First the big picture on USO, see the first chart below.  Here you see the parabolic bubble that developed in 2007 and crashed hard in 2008.  Since then, USO has basically been in a narrow sideways range for 4 years now.

USO Weekly Chart

Now, USO does tend to lag the underlying Crude Oil Continuous Futures in performance.  This is largely explained by most due to the contango in the ETFs makeup and rules — something to keep in mind if you're a long term investor in USO (as a shorter-term trader it's not as likely to be a major effect).  See the long-term Crude Oil chart below, same bubble and crash as USO, but a much more defined recovery.  That recovery has stalled, however, since 2011.  But overall, we again see years of churning and consolidation. with some fairly clear trendlines.

Crude Oil Weekly Chart

Zooming a little bit on USO, on the Daily Chart next below that goes back to mid-2012, there has been a mild narrowing formation going on.  See the article we recently posted on Triangle Patterns for more discussion of these.  In this case, the lower highs form a downward slope to the consolidation — but they also have acted as resistance to rallies multiple times.  There is a good support line of buying around the 31/31.5 area.  A narrowing of this range and a breakdown of that support would be an indication of a further breakdown in USO (could take some time to develop).  From there, 30 is the next line of support (also been a key technical area), but below that you're looking all the way down to 26/25 or even lower from the 2008/2009 lows and key levels.  If the trendline formation is broken to the upside and USO breaks out, the 36 area is the first likely target, beyond that lies the 40 strike which has been key several times in recent years.

USO Daily Chart

Now on to the most widely known ETF for energy stocks — XLE.  On the long-term XLE chart below, note that it recovered nicely from the plunge, reaching old key levels by the beginning of 2011.  You can see 80 and 90 are important levels on XLE going back many years.  Note that XLE has recently taken out 80, where it failed previously several times.

Sidenote, we often focus on the round levels and strike prices, using 80 for example rather than 80.14 … we've discussed this previously, but for longer-term analysis the round number area itself is appropriate to focus on, it's usually not necessary to go out to decimal point specifics.  Also, round numbers and key levels are watched by many people and are psychologically, technically and sentiment-wise important and can become self-fulfilling prophecies at times.  Finally there is the matter of option open interest, which can affect a stock/ETF/index around those key levels due to market maker delta/gamma hedging and other factors.

XLE Weekly Chart

Zooming in on XLE a bit to the Daily Chart since early-2011, you can see below that it is also forming a narrowing range pattern — but in this case it is to the upside.  Higher highs and higher lows form this since October 2012 — not a steep angle on the narrowing (some might view this as more of a trend channel), but it is there.

Note in early-Mary we just broke above both the upper trendline and the 80 level — and since came back and tested that level and have resumed higher just in the past 2 trading days.  This looks like a fairly significant breakout occurring.  And there isn't much overhead resistance to worry about on the way to 90 (the 83 and 85 levels are targets along the way).

XLE Daily Chart

Another major Energy Stock ETF (we trade all of these ETFs successfully short-term with specific option trade recommendations in the BigTrends ETFTRADR program) is OIH.  Despite one being 'Energy Services' and one 'Energy', OIH and XLE actually have some similar holdings and performance with a couple big exceptions:   31% of XLE is in Exxon Mobil (XOM) and Chevron (CVX) with the 3rd biggest holding being Schlumberger (SLB) — while OIH has 19% in 'Schlum-Dog' (as we used to call it on the trading floor) as its biggest holding and doesn't hold XLE and CVX.  That in itself explains most all of the difference in performance in the 2 ETFs.

Anyway, see on the OIH Daily Chart below covering the same time frame as the XLE Daily, it has lagged.  XLE has reached (and now overtaken) its 2011 levels, while OIH is 10+ points below those levels.  But OIH is also forming an upward sloping pattern.  This too looks likely to be broken to the upside.

OIH Daily Chart

Bottom Line:  Crude Oil has been consolidating for some time now.  USO is narrowing and may break down a bit shorter-term.  But even with the rather moribund performance of Oil, Energy Stocks are charting their own course.  XLE has just broken to multi-year highs and OIH is forming a bullish looking pattern.  Remember that these are longer-term charts (even the Daily ones cover quite a bit of ground), so keep an eye on these narrowing formations we've pointed out and look for breakouts/breakdowns of key support and resistance levels.

by Moby Waller,
co-Portfolio Manager, ETFTRADR and Rapid Options Income
BigTrends.com

The bears may have started out in charge of things last week, but the bulls took control on Thursday and Friday, pulling the market back in the black.  It would be easy (especially for the perma-optimists) to jump to a bullish conclusion as a result, but before you do that, we all may want to take a step back and look at things with a ‘realistic’ eye.  That’s not to say we’re bearish.  It’s just to say things are volatile – to the point of being deceptive – here.

We’ll run through the bullish and bearish scenarios in a second. Let’s first paint the bigger picture with a bird’s eye view of last week’s economic numbers.

Economic Calendar

While there was a truckload of economic numbers doled out last week, not a great deal of it was hard-hitting.  In fact, the only biggies all had to do with employment.

The good news is, the United States’ economy officially added 175,000 new jobs last month, at least according to the Department of Labor.  The figure was much stronger than the forecasted 159,000 new payrolls, and quite a relief following Wednesday’s disappointing jobs report from ADP . The payroll processor said it only saw 135,000 new payrolls added in May, falling short of the estimated 157,000.  Either way, both the DOL’s and ADP’s job-growth number for May was higher than April’s.

The bad news is, the Department of Labor’s unemployment rate crept up from 7.5% to 7.6%.  No, it’s not a big jump in terms of basis points, but when you’re talking about the economy, it’s not chump change.  How does that happen when the payrolls increase?  Because, though the number of employed people grew last month, the size of the labor market grew just a little faster.  [Remember, last month's graduations injected a whole new batch of potential workers into the economy.]

Simply put, the employment situation is decent .. .decent enough to support growth for the economy to those companies and individuals that play their cards right.  But, it’s not red hot.  We can put it like this - job growth isn’t strong enough to inspire the Federal Reserve to start ‘tapering’ its bond-buying efforts anytime soon.

The only other items of interest last week were both encouraging.  Factory orders were up 1.0% (though that was for April), and Q1′s productivity (2nd calculation) grew by 0.5%.  While both numbers are now a little dated, both are positive.

Economic Calendar

The coming won’t be as busy, but it will be more important.

There are going to be two real hot buttons this week.  One of them is May’s retail sales.  Economists expect retail spending to be up 0.30%, with or without automobiles.  Both would be much-needed improvements on April’s results.  As vulnerable as the market is right now, a disappointing number (or worse, a negative number) could really up-end things for stocks.

The second economic hot button this week will be Friday’s industrial production and capacity utilization.  Both had been modestly on the rise since late last year, but both fell a tad in April.  No big deal to see a dip one month, but if we see a second month of contractions for utilization and productivity, we may want to interpret it as a red flag.

Stock Market

Just to set the necessary tone, the market environment right now isn’t one of “predictable trend.”  It’s one of a coin toss, where we could rally just as easily as we could tumble.  That’s certainly not the kind of conviction-laden situation traders prefer, but we don’t deal the cards – we just have to play the hand we’re dealt.  That said….

The bullish case is simple enough.  All it took was a brush of the SPX 1598 level to spark a bounce.  That’s roughly where the 50-day moving average line was on Wednesday and Thursday when the S&P 500 (SPX) (SPY) began the reversal process, but honestly, we think the floor there had more to do with the fact that the S&P 500 had found that line to be a ceiling a couple of times in April (see dashed line).  Either way, it’s pretty clear 1598 is a major line in the sand that could become a factor again before it’s all said and done.

S&P 500 & VIX – Daily Chart

The bearish case is equally simple – even with the bounce from Thursday and Friday, the S&P 500 still isn’t back above the key 20-day moving average line (thin blue line).  That’s the primary short-term indicator line, and until the index can actually hurdle it, the bulls haven’t actually done anything impressive.

And even if the S&P 500 does clear the 20-day moving average line at 1647, there’s still a ton of resistance waiting for it around 1680.  That’s where the upper 20-day and 50-day Bollinger bands are waiting to push any rally back.

All that being said, there are a couple more charts we have to show you today, just for some perspective.

One of them is the weekly chart, where the overall uptrend is still visibly intact.  We mentioned a couple of weeks ago that there was a pretty clear rising support line on the weekly chart.  That may well have been what sparked last week’s bounce.  We’ve added the corresponding resistance line this week.  It’s currently at 1727, and rising faster than the support line.  This is obviously the most exciting chart the bulls are eyeing right now.

SPX & VIX – Weekly Chart

It’s also on the weekly chart we can see the CBOE Volatility Index (VIX) (VXX) bumped into its upper 26-week Bollinger band and immediately turned tail . Although the VIX gapped lower on the daily chart [an invitation for an upward rebound], there’s plenty of room for the weekly VIX to keep moving lower… allowing the S&P 500 to keep moving higher.

Last but not least, another daily chart, but this time, one with only one indicator, and the long-term channel lines.

The Bollinger bands are 26-day Bollinger bands.  It’s not your typical setting for Bollinger bands, but it’s one we’ve chosen to watch because, well, lately it’s a setting that’s worked exceedingly well at finding the major bottoms.  It’s also done a pretty god job at keep rallies contained; the S&P 500 has done no better than trace the rising band if the market was rallying well.

S&P 500 – Daily, with 26-day Bollinger Bands

The point is, last week’s bounce happened where it should have, for a lot of reasons.  If we assume the 26-day Bollinger bands continue to act as they have since November, the S&P 500 could rally at least to 1677 before hitting a ceiling.  And, given that some bullish volatility here would push the upper band upward again, the index may not hit the upper band until both are well above 1677.

Not that it’s on the immediate radar, but when-and-if the lower 26-day Bollinger band fails to act as a floor, that could start an avalanche.

Trade Well,

Price Headley
BigTrends.com
1-800-244-8736

Price Headley:

This is the toughest Belmont to handicap in the 14 years since I started my Triple Crown analysis after the launch of BigTrends.com.  It may be wet at the New York track and while Orb liked the wet conditions in the Derby and is the sentimental favorite for the owners in their home state, at 3-1 I'm looking for more value in a fairly wide open race.  So here's what I'm liking:

1) Overanalyze (Post Position 3, 12-1):  He's a closer and the misfire in the Derby aside, he's won on the Belmont track and sets up well if the pace is more reasonably than it was in the Preakness (which is why I'm also throwing out Preakness winner Oxbow).

2) Revolutionary (PP 9, 9-2): One of the most consistent horses after Orb, I look for a solid late stretch run from this one.

3) Orb (PP 5, 3-1):  Orb is bred to love the extra distance and looked like he liked the slop too.  The main question mark is why he didn't fire at all in the Preakness and if the horse is right health-wise for this race.  If he is he's tough to beat, but I'm thinking that the connections waffled a bit on whether to run him here and that makes me wonder if Orb is really 100%.

Also interested in Vyjack (PP 11, 20-1) as well as Golden Soul (PP 14, 10-1) and the filly Unlimited Budget (PP 13, 8-1). A big wildcard is Freedom Child (PP 2, 8-1).

Hypothetical Betting Portfolio:

$10 Win on #3

$10 Win on #11

$4 Exacta Box 3,5,9,11

$1 Trifecta Box 3,5,9 with 3,5,9,11 with 2,3,5,9,13,14

Moby Waller:  

I agree with Price that this is a difficult Belmont to handicap.  Orb could bounce back with a monster performance and win easily, but he just didn't look right in the Preakness (yet still finished 4th).  I think he'll probably be 3rd or 4th again the Belmont.  And are we both making a big mistake by writing off the chances of Preakness winner Oxbow?

For this year's race, I preferred rested horses who have shown they can gain ground at distance — also ones that have done well in a sloppy/muddy track, as we likely will have on Saturday at the Belmont (but check the updated weather on Saturday if that is a factor for you):

1) Revolutionary (PP 9, 9/2)
2) Golden Soul (PP 14, 10/1)
3) Freedom Child (PP 2, 8/1)
4) Orb (PP 5, 3/1)

Theoretical Wagers:

$1 Exacta Box (9, 14, 2, 5)
$1 Trifecta Box (9, 14, 2, 5)

Good Luck!

Price Headley,
BigTrends.com
1-800-244-8736

Since the market began its latest trend rally in November 2012, we've had several pullbacks.  Each of these was very rapid in nature and not very deep — reversed back higher quickly.  Now, we're in the midst of another pullback — with news from Europe and the US (and Japan/China) looming before the end of the week.  What are the key levels to watch on the S&P 500 Index (SPX) (SPY) going forward?

See the SPX Daily Chart below with Fibonacci Retracements, Support/Resistance Levels and Percent R.  We've added a new Fibonacci Retracement from the Nov 2012 SPX low of 1343.35 to the May 2013 high of 1687.18.

Note the previous pullback we had in April of this year, after the market had made new all-time highs at 1593.37 (and amid terrorism troubles and a huge plunge in Gold) — at that time, our analysis pointed to 1534 and 1497/1500 as the first likely potential bottom/reversal points on that downtrend.  In actuality, the SPX bottomed quickly at 1536 and resumed going higher.

In the current case, the question is whether this trend of quickly reversing higher will continue – seen clearly by Percent R on the following chart (but do note the worsening Percent R move on each pullback).  At this time the default underlying trend has been higher, so you have to lean to the side that we will bottom fairly soon and at least consolidate sideways if not move higher.

But what are the key levels to look at for the SPX if we do keep going lower – see the chart below (if you click on the chart it brings up a bigger version of it):

SPX Daily Chart

The first major signpost is basically upon us already — with the SPX closing at 1608 on Thursday, we're already near the 1606/1600/1593 which is the first logical stopping point.  So it is possible that the key bottom/reversal point is already nearly here.

If the short-term downtrend accelerates rapidly (which doesn't seem likely at this time) or grinds lower in a choppy fashion (could occur throughout this summer, especially given the big up move the market has already made in 2013), keep an eye on the SPX 1515/1500 area — this would mark a 50% retracement of the November 2012 lows to the May 2013 highs.

As we've discussed previously, a 50% retracement is something we see time and again on pullbacks with bigger trends and is a logical place for a pause — whether or not you care about or utilize Fibonacci Retracements, the 50% retracement is an "obvious" one that really can't be denied.  It basically means that once a trend has given up half of its gains (or losses), that is a likely area to pause/reverse.

Right now, we're focusing on that 1600 SPX round number as support (and the accompanying support around it).  Remember also that big round numbers are important to the market as sentiment, widely followed, psychological importance and also as key option strike prices with large open interest — they often become self-fulfilling prophecies in a way.  If things continue lower in the coming weeks/months, the 1500 level comes into view as a downside target.

Finally a related side note on the CBOE Volatility Index (VIX) (VXX) — this measure of option implied volatility also shows expectations of forward volatility among option traders and the "fear" level.  On the current pullback the VIX has reached near the 18 area — this was the basically the same high area reached on those quick pullbacks in February and April of this year.  On the December pullback at the end of the last calendar year, the VIX quickly spiked to 23 before rapidly heading back lower.

by Moby Waller
co-Portfolio Manager, Rapid Options Income & ETFTRADR
BigTrends.com
1-800-244-8736

Triangles: A Short Study In Continuation Patterns

In the study of technical analysis, triangles fall under the category of continuation patterns.  There are three different types of triangles, and each should be closely studied.  These formations are, in no particular order, the ascending triangle, the descending triangle and the symmetrical triangle.

Triangles can be best described as horizontal trading patterns.  At the start of its formation, the triangle is at its widest point.  As the market continues to trade in a sideways pattern, the range of trading narrows, and the point of the triangle is formed.  In its simplest form, the triangle shows losing interest in an issue, both from the buy side as well as the sell side: the supply line diminishes to meet the demand.

[BigTrends.com Editor's Note:  We wouldn't necessarily call this 'losing interest' in all cases -- this type of pattern can also indicate a strong narrowing 'tug of war' going on between the bulls and bears.  When that tension is snapped at the narrowing point, a breakout or breakdown often emerges.  The direction of the triangle or wedge is often very important, as discussed below -- and there is a logical basis behind why this resistance/support, higher lows/lower highs, etc, forms and the subsequent breakout/breakdown.  Also, this type of pattern can be called a "consolidating sideways range" or "narrowing / flying wedge" among other terminology.]

Think of the lower line of the triangle, or lower trendline, as the demand line, which represents support on the chart.  At this point, the buyers of the issue outpace the sellers, and the stock's price begins to rise.  The supply line is the top line of the triangle and represents the overbought side of the market, when investors are going out taking profits with them.

Ascending Triangle Pattern 

Often a bullish chart pattern, the ascending triangle pattern in an uptrend is not only easy to recognize but also can be a slam-dunk as an entry or exit signal.  It should be noted that a recognized trend should be in place for the triangle to be considered a continuation pattern . In the above figure, you can see an uptrend is in place and the demand line, or lower trendline is drawn to touch the base of the rising lows.  The two highs have formed at the top line.  These highs do not have to reach the same price point but should be close to each other. 

The buyers may not be able to break through the supply line at first and they may take a few runs at it before establishing new ground and new highs.  The chartist may look for an increase in the trading volume as the key indication that new highs will form.  An ascending triangle pattern often will take about four weeks or so to form and often will not likely last more than 90 days. 

How do the longs (the buyers) know when to jump into the issue?  Most analysts will take a position once the price action breaks through the top line of the triangle with increased volume, which is when the stock price should rise an amount equivalent to the widest section of the triangle. 

Descending Triangle Pattern

The descending triangle is recognized primarily in downtrends and is often thought of as a bearish signal.  As you can see in the above graphic, the descending triangle pattern is the upside-down image of the ascending triangle pattern.  The two lows on the above chart form the lower flat line of the triangle and, again, have to be only close in price action rather than exactly the same.  The development of the descending triangle takes the same amount of time as the ascending triangle, and volume can again play an important role in the breakout to the downside.  (Some analysts believe that increased volume is not all that important.  We, however, believe it to be paramount. We always consider the strength or weakness of volume as being the "straw that stirs the drink.")

Symmetrical Patterns 

So far we have seen two triangle patterns: one, from an uptrend and bullish market move and one from a downtrend with a decidedly bearish look.  Symmetrical triangles, on the other hand, are thought of as continuation patterns developed in markets that are, for the most part, aimless in direction.  The market seems listless in its direction.  The supply and demand therefore seem to be one and the same.

During this period of indecision, the highs and the lows seem to come together in the point of the triangle with virtually no significant volume.  Investors just don't know what position to take.  However, when the investors do figure out which way to take the issue, it heads north or south with big volume in comparison to that of the indecisive days and/or weeks leading up to the breakout.  Nine times out of 10, the breakout will occur in the direction of the existing trend.  But, if you are looking for an entry point following a symmetrical triangle, jump into the fray at the breakout point. 

Sideways Triangle Pattern

The Bottom Line

These patterns, both the symmetrical triangles on the bullish as well as the bearish side are known to experience early breakouts that give investors a "head fake."  Hold off for a day or two after the breakout and determine whether or not the breakout is for real.  Experts tend to look for a one-day closing price above the trendline in a bullish pattern and below the trendline in bearish chart pattern.  Remember, look for volume at the breakout and confirm your entry signal with a closing price outside the trendline. 

Courtesy of Investopedia

Warning: 'Prepare' for Commodity Supercycle End

With multiple investment banks signposting the end of the commodity supercycle, a World Bank director has warned developing countries that have benefited from the surge to protect themselves against a price crash.

Marcelo Giugale, the World Bank's director of economic policy and poverty reduction programs for Africa, told CNBC that states which have gained from the commodity boom should prepare for a slump.

"We don't want another wasted opportunity," he said.  "This time around, things should be done differently. The material bonanza has the potential to become a human bonanza – whereby the standard of living for many people across these developing countries can be raised."

The high prices of commodities, such as industrial metals and oil, have boosted the revenues of countries rich in these resources.  But notoriously volatile commodity markets have had catastrophic consequence for countries in the past.  The so-called Commodity Crisis of the 1980s saw countries in Latin America and Africa battle financial, social and political instability, following rapid, commodity-driven expansions.

Economists describe the apparent pattern in these price booms and busts as the commodity supercycle, with decades of rising prices followed by a crash.

4th Cycle

Last year, Columbia University's Bilge Erten argued there have been three complete supercycles of between 30 and 40 years: the first peaking in 1917, the second in 1951 and the third in 1973.

We are in the midst of the fourth cycle, she said, which began at the start of the century and is driven primarily by the industrialization of China.

"It is not clear how long this cycle is going to be," Erten told CNBC . "Overall, we found that supercycles have between 15 and 20 years of expansion. We've had about 10 years of expansion since 2000 so we have maybe five more years to go if this cycle fits the pattern of previous ones." 

But a number of economists – including Giugale – are far from convinced that these supercycles even exist.

"The commodity supercycle has been to economics what the Higgs boson has been to physics – all theories point towards their existence but we've never been able to see it," Giugale said.

China's Appetite 

The rate of growth in China (FXI), the world's largest consumer of industrial metals, would be crucial to prices, Giugale added.

Until recently, China had seen decades of unprecedented growth, driving up the price of commodities amid increasing demand.

But the world's second largest economy disappointed in the first quarter of this year, growing by just 7.7 percent, from 7.9 percent in the previous three months.  It followed the slowest rate of annual growth in 13 years in 2012, and last week, the International Monetary Fund cut its 2013 growth outlook for China from 8 percent to 7.75 percent.

The accompanying slowdown in China's appetite for commodities has put downwards pressure on their prices, with the cost of almost all of the main traded commodities falling in the first quarter of this year. 

One striking example is Copper (JJG), which has slipped by around 16 percent over the year to date.  Three-month copper on the London Metal Exchange slumped to an 18-month low of $6,762.25 a tonne in April and was trading at around $7,335 on Monday morning in London.

Dramatic price slumps like this have led some analysts to claim the commodity supercycle is coming to an end.  Last month, Citigroup's commodities team said 2013 would be the year in which the "death bells ring" for the supercycle, and last week, Saxo Bank's chief economist said the cycle is "winding down."

The Middle of the Storm 

This potential change to the commodity landscape should motivate countries to put their fiscal houses in order, Giugale said. 

"They should sort out government accounts, not run large deficits and have a large cushion available to provide more social protection and assistance," he said.  "They should also allow their central banks to fight the inflationary pressure that a crisis like a crash in prices might generate.  These two macroeconomic pillars, to me, are sacrosanct."

The prioritization of investment was also key, Columbia University's Erten said.

"It's important for the countries to save part of the commodity boom and invest it in new industries, such as the services sector or manufacturing."

Chile was one of the few countries succeeding in saving the supercycle's windfalls, according to Erten; but most were not.

"Even in South Africa – the continent's most developed country – the majority of industrial policies are pushing for more metal production," she said.

"It's even worse in less-developed African countries.  There are very few attempts to diversify, which is really bad because relying on high commodity prices for long-term growth is subjecting economies to very volatile swings."

But Giugale stressed that even though commodity prices were slipping, demand remained high, meaning that developing countries' fiscal revenues should hold up for a while longer.

Being prepared is crucial, he added.  "Developing countries don't want to have to deal with issues like this right in the middle of a storm. It's like worrying about your house catching fire when it's already burning."

Courtesy of Katrina Bishop, CNBC.com

March Case-Shiller Housing Numbers

The March S&P/Case-Shiller Home Price indices were released last week, and below is an updated look at where the 20 cities tracked currently stand.  

As shown below, 18 of 20 cities saw month-over-month gains, while all 20 are now up year-over-year.  San Francisco was up the most in March with a gain of 3.85%.  Seattle, Las Vegas, Portland and Tampa round out the top five month-over-month gainers.  The two cities that saw declines in March were New York and Minneapolis.  

New York was one of the two month-over-month decliners, and New York is also up the least year-over-year at just +2.62%.  While New York did not fall as much as areas out West or down South did during the bursting of the housing bubble, it has been extremely slow to recover.  

On the upside in terms of the year-over-year numbers, Phoenix and San Francisco led the way with gains of more than 22%.  Las Vegas is up the third most with a gain of 20.57%, followed by Atlanta (19.08%) and Detroit (+18.45%).

Below is a chart we created showing how much each of the 20 cities tracked is up off of its financial crisis low.  As shown, the two 10-city composite indices are up roughly 10% off of their lows, but two-thirds of the cities are up more than that, with San Francisco and Phoenix leading the way above 30%.  New York is again at the bottom of the pack with a bounce of just 3% off of its lows so far.  

But while every city is up off of its low, we've still got a long way to go to get back to the pre-crisis highs reached back in 2005/2006.  The composite indices are still nearly 30% off their highs, while Las Vegas is still down more than 50%.  Miami, Phoenix and Tampa are all down more than 40%, while San Francisco (which has bounced the most) is down 30%.  Two cities are getting close to their prior highs, however.  As shown, both Denver and Dallas are now just 3% off their all-time highs.  

Related Stocks & ETFs:  (XHB) (HD) (LOW)

Courtesy of Bespoke

Well, the bulls may have started the month of May in charge, and even retained control for the better part of last month.  There's little doubt as to who was in charge at the end of the May, though – it was the bears, hitting the S&P 500 (SPX) (SPY) with a 1.43% selloff on Friday.  The close of 1630.74 brings the index to 3.34% below the peak from May 22nd.

Of course, the question everyone has on their mind now is whether or not last week was just a stumble, or the beginning of a bigger (and overdue) corrective move.  We'll discuss the question in a moment, right after our usual look at the economy's major data points unveiled last week.

Economic Calendar

It wasn't an overly-eventful week last week on the economic front, but we did get a few items of interest.

For starters, consumer confidence came in much higher than expected, and much higher than April's final readings.  The Conference Board's consumer confidence score ended up ay 76.2, versus the prior month's 68.1, while the Michigan sentiment index posted a final reading of 84.5 for May, up from prior May estimates, and leaving April's score of 76.4. 

While consumer confidence is supposed to gauge the potential of (and optimism about) the future, in this particular case these big jumps were likely driven by a short-term look-back at the market's recent strength.  The S&P 500 gained 3.6% in March, 1.8% in April, and had been up as much as 5.6% for May, around the time the Conference Board and the University Michigan were recording their final tallies for their respective confidence indicators.  Those high readings may have been driven by a soaring stock market rather than true confidence about the future.

Interestingly, though consumer confidence was high, consumers didn't actually feel confident enough to spend more of their money…. which is a big deal, since the whole point of consumer confidence measures are to suggest how much money consumers are apt to spend.  While consumers may be talking a big game, they sure didn't back it up with dollars.  Personal spending fell 0.2% last month, and incomes didn't grow a bit. What are consumers so excited about?

You'll also see that home prices flew through the roof in March; the Case Shiller 20-city index ended the month 10.9% higher than it was a year earlier.  It's a tad misleading, as the year-ago figure was uncharacteristically weak.  Still, it's pretty clear home prices – and the pace of home sales – are still improving.

Economic Calendar

The coming week will be a pretty busy one, though nothing will be all that important until we get to Friday's unemployment numbers . Economist believe the unemployment rate will hold steady at 7.5%, as job growth for nonfarm private payrolls should roll in at 174,000, down just a bit from April's 176,000 new private jobs.  Hourly earnings are projected to grow by 0.2%.  Just keep an eye on Wednesday's ADP employment change number for an early glimpse of what to expect on Friday.  Forecasters say the ADP jobs growth number should jump from 119,000 to 157,000 for May.

Stock Market

After walking on the edge of the cliff for a week and a half, the market finally slipped on Friday, pulling under the 20-day moving average that had been holding it up since May 23rd.  Now that the support's been broken, the bears are going to have a much easier time taking shots at stocks. 

On the flipside, there's still plenty of potential support below where the S&P 500 closed on Friday… one of the upsides of making an overheated run for the better part of May.  Specifically, the lower 20-day Bollinger band at 1612 as well as the converged 50-day moving average line (purple) and the former ceiling [and perhaps now support] at the 1598 level could both be floors for any more downside.  For that matter, as squirrelly as the market's been acting of late, we may not even get a chance to test either of those floors before the buying kicks in again. Check it out.

S&P 500 & VIX – Daily Chart

You can also see on the daily chart that the CBOE Volatility Index (VIX) (VXX) has finally pushed its way above its upper 50-day Bollinger band, signaling that its uptrend is the real deal.  Indeed, that may be far more alarming than anything the market's indices themselves are suggesting.  Problem: We've seen the VIX surge several times before recently, and none of them have followed through; none of them have sent the broad market lower.  This time may well be different for the VIX though.  This time, the pace of the uptrend is smoother and a little more sustainable.

The weekly chart of the S&P 500 puts things in a little more perspective.  The market's well overbought as a result of the 20% runup since November's dip, and the VIX is making a slow, arc-shaped (higher lows since mid-March) rally effort now. 

S&P 500 & VIX – Weekly Chart

It's also on the weekly chart we can see another key floor – the rising support line (dashed) currently at 1590, though it will be at 1598 this week . That 1598 was a key support level on the daily chart as well, but for different reasons.

Still, in both timeframes there's clearly at least a little more room for the market to keep falling before a firm floor is hit.  Let's presume the sellers are going to at least test those floors before giving up.

For what it's worth – and we have to go all the way back to the daily chart to see it – the S&P 500's upper 20-day Bollinger band has crossed back under the upper 50-day Bollinger band.  And, both band lines are now sloped downward.  That's a real challenge for stocks, since falling band lines tend to be tough to hurdle.  Even is the S&P 500 does manage to fight its way back above the 20-day moving average line this week, it's still got a very tough set of hurdles around 1679.  Let's cross that bridge if and when we come to it though. 

Trade Well,

Price Headley
BigTrends.com
1-800-244-8736

10 Demographic Trends Investors Should Be Thankful For

"Demographics is destiny" – Arthur Kemp

Every day there's some new horror in the news.  One of the most common questions you hear in bars, office break rooms, bus stops, and kitchen tables is "How did the world get so messed up?"

The answer I usually give is: "It didn't. There's just more news."

It's a sad fact of human psychology that negative headlines grab people's attention.  This "If it bleeds, it leads" ethos transcends the mainstream media.  21st Century marketers don't sell products, they sell the fear of living without their products.  (A trend that fans of AMC's Mad Men know began in the 1960s.)  Gold bugs are laser-focused on inflation, but often the VIX (the "fear indicator") is what moves prices in the near term.  Negative political ads pay higher dividends than positive feel-good ads, regardless of how loudly the voters deplore them.

Fear sells. It's just the way we're wired.  But the reality is that the Big Picture isn't nearly as grim as the media portrays it to be.  To illustrate my point, here are 10 Demographic Trends for investors to be thankful for.

1.   The air is cleaner.

Total toxic air releases in 2012 were down 8 percent from the 2010 figure, a survey by the U.S. Environmental Protection Agency found.

(Source: EPA)

2.  The U.S. job market will continue to expand.

Of the five largest global economies today, only the U.S will see significant growth in working-age population between now and 2050.  Keep in mind, however, that labor force participation rates will continue to decline by % until 2020 before slowly picking up again.

Labor force participation rates, 1960-2010 and projected 2020

(Source: Bureau of Labor Statistics)

3.  More Americans are completing high school and going to college.

Record numbers of young Americans are completing high school, going to college and finishing college, from less than one-fifth of young adults in the early 1970s to 33% in 2012.

Potential Play: SPDR S&P 500 Trust ETF (SPY).  87% of upper-income Americans (annual income =$75,000+) own stocks, as do 83% of postgraduates and 73% of college graduates.  Despite the incessant drumbeat of doom and gloom in the media since the financial collapse, the public perception of the markets continues to rise and fall with the indexes.

4.  Divorce rates are down.

Many Americans are convinced that "half of all marriages end in divorce," though divorce rates have declined by almost a third from their early 80s high of around 50%.  Men report themselves increasingly happy with their spouses; Women are less so.

Percentage of married persons age 18 and older who said their marriages were "very happy," by period, U.S.A.

(Source: nationalmarraigeproject.org)

Potential Play: Toll Brothers (TOL)  Census results show that married couples with families are significantly more likely to own their own home.

(Source: U.S. Census Bureau)

5.  Poverty is falling.

Even though the world's population has doubled over the past 50 years, the percentage living in poverty has declined by 50% over that period.

Potential Play: Monsanto (MON). Developing nations improve the quality of their diet before anything else.  This process begins with grains, and therefore seeds.  Monsanto now controls up to 90% of the seed market, a fact that will make the agricultural conglomerate pivotal over the next two decades.

6.  Infant mortality is decreasing.

Infant mortality and life expectancy have improved by more than 40% in Latin America since the early 1990s . No country in history has improved its average standard of living faster than China has over the past two decades.

Potential Play: UnitedHealth Group (UNH). Health coverage – and therefore healthcare consumption – will continue to rise regardless of the employment rate.  UnitedHealth is well-positioned to exploit this trend within the U.S. Market.

7.  Violent crime has plummeted.

The violent crime rate (crimes per thousand people) dropped from 51 to 15 between 1995 and 2010.  Since 1991, the homicide rate has been reduced by half; violent crime and property crime are also way down.

(source: FBI, Uniform Crime Reports, 1950-2010)

8.  Americans are smoking less.  

The rate of current cigarette use among U.S. teens decreased from nearly 12 percent in 2004 to about 8 percent in 2010, and dropped from nearly 40 percent to about 34 percent among young adults, according to the analysis from the Substance Abuse and Mental Health Services Administration's National Survey on Drug Use and Health.

Potential Play: British-American Tobacco (BTI) looks to be the first tobacco company to embrace the e-cigarette paradigm.  Last September, BTI CFO Nicandro Durante remarked that alternative tobacco products like the e-cig may revenue within the next two decades.

9.  Americans are drinking less.

While overall sales are on the rise, Americans as a whole are drinking less.  In 1980, per person consumption was 28.5 gallons of alcohol.  By 2008, that volume was down to 25.7 gallons.  This decrease reflects a decline in beer and liquor consumption.  Wine drinking rose during this period.

10.  Fewer Americans are killed in war.

Today's wars tend to be sputtering, guerrilla conflicts that, on average, kill only about 10% percent than did violent, large-scale mechanized struggles of the 1950s. Indeed, the first decade of this century witnessed fewer casualties from war than any decade in the last century.

Conclusion

Super-investor Warren Buffett is routinely pilloried for his optimism by young bucks like me who "know better."  Sure, the Dow increased from 66 to 11,497 over the course of the 20th century, but that was an "outlier."  Things are "different now."  The system is not safe!  Uncertainty is everywhere.  The world is a more frightening place than it used to be.

This is pure fiction.  Every civilization criticizes itself in the light of some Golden Age/retro-Utopia that never existed.  When the famed Roman orator and elitist martyr Cicero inveighed against the standards of the day in his iconic First Oration Against Catiline with the words "Shame on the age and on its principles!," he was merely repeating the same self-indulgent tripe that every dominant civilization has told itself since the dawn of time.  The world has always been "going to hell in a hand-basket."

The internet has done investors excellent service in reducing broker fees while speeding up the flow of the information, but it has also encouraged the viral propagation of extreme, panicky worldviews; particularly in response to crisis.  The resulting spike in the noise-to-signal ratio surrounding securities today implies that mispricing is more likely, not less, as financial motives are increasingly multidimensional.

If you bought a stock in the 1928, you did it for one of three reasons:

* To make money when the price went up.

* To receive dividend income.

* To assert beneficial ownership/vote the stock.

Today, between diversification, hedging, mechanical strategies, options, 401k requirements and tax accounting, no one can tell you with certainty why a particular security is being bought or sold at any given time.  Such thoughts are disturbing, especially considering the empirical collapse of homo economicus and the Chicago School.

In the decades to come, I believe a healthy dose of skepticism and an appreciation of social inertia will be even more critical to successful investing than it is today.

Courtesy of Kyle Spencer, seekingalpha.com

Understanding The 3 Kinds of Volatility

With recent market activity in assets like Bonds, Gold and Japan, it reminds traders that prices can go down as well as up — and we're suddenly starting to hear more about volatility again.  Today we'll discuss the different types of volatility related to stocks and ETFs.

1) Historical Volatility -  The first type of volatility is Historical Volatility, or HV, which may also be referred to as Realized Volatility.  Historical volatility is something that we can observe and measure based on the past price movements of a security.  It is typically calculated as the standard deviation of the security's daily returns over some lookback period.  For example, the 30-day historical volatility, or HV(30), calculates the standard deviation of the daily gain or loss from each of the past 30 trading days.

Volatility is almost always expressed in annual terms, regardless of the lookback period.  Therefore, if a stock has an HV(30) value of 45, it means that if the stock continued to move as it has for the past 30 days, it would likely experience a total price change of 45% (up or down) over the next year.  If we assume that daily returns are normally distributed, then we can infer that there is approximately a 68% probability of the price landing somewhere in this range.

Although HV is an expression of how much a stock's price may change in a year, it's more typically used as a way of comparing the recent price behavior of two securities.  If XYZ has an HV(100) value of 25 and PQR has an HV(100) value of 75, then we know that PQR has experienced more extreme price changes over the past five trading months.

2) Relative Volatility – Sometimes you'll hear Beta used as a measure of Relative Volatility.  From a mathematical standpoint, Beta is the correlation coefficient between two price series.  The Beta value of a stock or ETF is most often computed relative to the market as a whole, which in most cases means the S&P 500 (SPX) (SPY) for the US market.  

A Beta value greater than 1 means that the stock generally moves more than the market, while a value of less than 1 means that the stock typically moves less than the overall market . Negative values, i.e. negative correlations, mean that the stock price has a tendency to fall when the market rises, and vice versa.

3) Implied Volatility – The final type of volatility that we'll address today is Implied Volatility, or IV.  Implied volatility cannot be calculated from historical prices of the stock, but rather is the byproduct of an options pricing model.

In simplest terms, IV is an expression of the market's expectation of the future volatility of the stock price between now and the option's expiration.  Market participants "express" themselves via the prices they are willing to pay for option contracts.  Like HV, implied volatility is always annualized to make comparison of values more straightforward.

Each unique option contract, i.e. combination of put or call, strike price, and expiration date, will generate a different implied volatility value.  These values are often combined to provide some sort of "consensus opinion" of the IV of the stock.  For example, your trading platform may display an IV value for each expiration date, which was likely calculated with some type of weighted average of all the different strike prices for that expiration.  The different IV values for each expiration date will indicate whether the market is expecting more volatility in a specific time-frame, like when quarterly earnings are announced.

You might also see IV expressed over a constant lookahead period such as 30 days.  The CBOE Volatility Index, or (VIX) (VXX), is the most popular metric of this type.  While a full discussion is beyond the scope of this article, the basic idea behind the VIX and similar measures of this type is to use front month and second month option prices to create a synthetic ATM option contract that expires in exactly 30 days.  This synthetic contract can then be used to generate an implied volatility value.  Note that in the case of VIX and related indices, 30 days means 30 calendar days (approximately one month), not 30 trading days.

Courtesy of Matt Radtke, tradingmarkets.com

Dividend Stocks, the New Nifty 50?

While central banks' policies inflate a bubble in income equities, a nervous bull says the greater risk is not to buy them.

Nifty Fifty.  It's a phrase out of stock-market history, one familiar to most of today's investors only from history books, but an indelible memory to those who were active in the markets back in the 1960s and 1970s.

They were so-called one-decision stocks you were supposed to buy and put away forever, because these supposedly elite growth companies would continue to grow no matter what.  As a result, no price-earnings multiple was too great to pay given their unlimited and certain future growth prospects.  Of course, it didn't turn out that way in the devastating bear market of 1973-74.

Yet there was a kernel of truth in buying the Nifty 50, whose members included the likes of Coca-Cola (ticker: KO), International Business Machines (IBM), McDonald's (MCD), Johnson & Johnson (JNJ) and Walt Disney (DIS), just to mention a few of the great Dow Jones Industrial Average (DIA) members whose stocks have gone on to record highs in subsequent decades.

But this group also includes companies that have become footnotes to history, especially in technology, such as Digital Equipment and Burroughs.  There also are companies such as Polaroid and Eastman Kodak, which became quintessential buggy-whip companies with the advent of digital photography.  And then-dominant retailers, Sears, Roebuck and K-Mart's predecessor, Kresge, now are part of Sears Holdings (SHLD) and are fighting against a then-unknown chain, Wal-Mart (WMT).  Microsoft (MSFT), Intel (INTC) and Apple (AAPL) not only didn't exist but weren't even conceived.  Sic transit gloria.

Despite this example of history, a new Nifty 50 could be in the making, according to Chen Zhao, managing editor of the BCA Global Investment Strategy advisory from the organization that publishes the highly regarded Bank Credit Analyst.

This elite group of stocks would consist of reliable, high-dividend payers, which have become ever more sought-after in a market parched of income.  He notes the Standard & Poor's Dividend Aristocrats have returned half-again that of the Standard & Poor's 500, a pattern that closely parallels the original Nifty 50 at the beginning of their run in the 1960s.

And while the original Nifty 50 became "massively inflated" during their heyday, the current bubble in dividend payers could continue to be pumped up for some time.  To spoil the ending of the story, Zhao thinks the end-point won't be reached until interest-rate expectations turn decisively to the upside; that's a worry for next year or the year after.

Every decade or so, Zhao posits, there is a new, can't-miss investment concept.  After the original Nifty 50, it was gold and other real assets during the inflation of the 1970s; then came the Japan bubble of the 1980s; the dot-com bubble followed in the 1990s; and then there was the bull market in China and other emerging markets, which also resulted in a commodities boom.

[From Dividend.com:  The following dividend stocks have been increasing their annual dividends every year for at least the past 50 years]

Long-Term Dividend Increasing Stocks Table

The conditions spurring income-producing stocks now are similar to those that boosted the original Nifty 50 — artificially low interest rates held down by government actions (Regulation Q rate ceilings then, central-bank quantitative easing now.)  In the 1950s, stocks routinely yielded more than bonds because of investors' risk aversion, just as they do now for many Blue Chip companies.

Zhao expects the Federal Reserve and other central banks to maintain interest rates at or near zero given the large slack in the world economy.  Government bond yields under 2% make equities the highest-yielding asset class.  But after the repeated financial traumas of the past decade and continuing uncertainties, "most investors are longing for stable portfolios that generate steady income streams.  Naturally, stocks with fixed-income characteristics have become the favorite target of investors," he writes.

The resulting asset rotation could be "incredibly strong," according to Zhao, and has "the potential become the next mania."  But income stocks aren't in a bubble, yet, which is a condition built on unrealistic expectations.

"Some say defensive stocks behave like fixed-income products and hence could weather weaker market corrections or shakeouts.  In reality, they rarely can . My feeling is that the dividend party will not stop until interest-rate expectations begin to rise.  That could be one or two years away."

['The following dividend stocks are a very select group, as they have been increasing their annual dividends every year for at least the past 25 years' -- highest yields shown]

25 Year Dividend Increasing Stocks, Ranked By Current Yield Table

"What should investors do? For me, I am afraid to be in it, but I am equally, if not more, afraid to be out of it," Zhao pointedly concludes.

That speaks volumes of how the Fed and other central banks have inflated asset values.  Still, that is the world in which we live, whether we like it or not.

[The following is a list of the best ranked dividend stocks for long-term investors from dividend.com.  'Currently,less than one in 20 dividend-paying stocks qualify for this exclusive list.']

13 Highest Ranked Dividend Stocks Table

Precious Metals & Miners Start Bottoming Process

Precious metals and their related mining stocks continue to underperform the broad market.  This year's heavy volume breakdown below key support has many investors and trader's spooked, creating to a steady stream of selling pressure for gold and silver bullion and mining stocks.

While the technical charts are telling me prices are trying to bottom, we must be willing to wait for price to provide low risk entry points before getting involved.  Precious metals are like any other investment in respect to trading and investing in them.  There are times when you should be long, times to be in cash and times to be short (benefit from falling prices) . Right now and for the last twelve months when looking at precious metals, cash has been king.

In 2008 we had a similar breakdown in price, washing the market clean of investors who were long precious metals.  If you compare the last two breakdowns they look very similar.  If price holds true then we will see higher prices unfold at the end of 2013.

The key here is for the price to move and hold above the major resistance line.  A breakout would trigger a rally in gold to $2600 – $3500 per ounce.  With that being said gold and silver may be starting a bear market.  Depending what the price does when the major resistance zone is touched, my outlook may change from bullish to bearish.  Remember, no one can predict the market with 100% accuracy and each day, week and month that passes changes the outlook going forward.

The chart below is on I drew up on May 3rd.  I was going to get a fresh chart and put my analysis on it but to be honest my price forecast/analysis has been spot on thus far and there is no need to update.

Gold Long-Term Chart

Gold Daily Technical Chart Showing Bottoming Process:

Major technical damage has been done to the chart of gold.  Gold is trying to put in a bottom but still needs more time . I feel gold will make a new low in the coming month then bottom as drawn on the chart below. 

Gold Chart

Silver Daily Technical Chart Showing Bottoming Process:

Silver is in a similar pattern as gold.  The major difference between gold and silver is that silver dropped 10% early one morning this month, which had very light volume.  The fact that silver hit my $20 per ounce level and it was on light volume, has me thinking silver has now bottomed. 

But, silver may flounder at these prices or near the recent lows until its big sister (gold) puts in a bottom.

Silver Chart

Gold Mining Stocks Monthly Investing Zone Chart:

Gold mining stocks (GDX) (XME) (SIL) broke down a couple months ago and continue to sell off on strong volume.  If precious metals continue to move lower, then mining stocks will continue their journey lower. 

This updated chart which I originally drew in February warning of a breakdown below the green support trend lines would signal a collapse in stock prices, which is exactly what has/is taking place.  While I do not try to pick bottoms (catch falling knives), I do like to watch for them — so I am prepared for new positions when the time and chart turn bullish or provide a low risk probing entry point.

GDX Monthly Chart

Gold, Silver and Mining Stocks Conclusion:

Precious metals continue to be trending down, and while they look to be trying to bottom, it is important to remember that some of the biggest percent moves take place in the last 10% of a trend.  So we may be close to a bottom on the time scale but there could be sharply lower prices yet.

The time will come when another major signal forms and when it does we will be getting involved. The exciting this is that it could be just around the corner.

Courtesy of Chris Vermeulen, www.TheGoldAndOilGuy.com/

After gaining 7.2% thanks to four consecutive weeks of gains, the market finally took a well-deserved break, falling 1.1% last week.  The move still didn’t technically snap the uptrend, though last week’s modest pullback could end up being the beginning of a more significant correction.  Then again, the rally has survived worse.

We’ll look at what’s good and bad about the broad market in a second . Let’s first run-down what was good and bad about the economy last week.

Economic Calendar

Frankly, there wasn’t a great deal of market-moving economic news last week.  But, we did get a fairly good look at the real estate market via the existing home sales and new home sales numbers.  Existing homes sold at a pace of 4.97 million, and new homes sales reached an annual pace of 454,000 units last month.  Both were solid numbers, and continue to confirm the real estate market is firm.

Existing and New Home Sales Chart

On the jobs front, the continuing claims figure fell to under three million, hitting 2.912 million last week.  Both it and the initial claims figure continue to drift lower, though the number of Americans who are actually working is still rising at a slower pace than unemployment claims are falling.

Durable orders – with or without transportations orders – came in much better than expected, providing some needed fuel to a stalling rally.  Overall, orders were up 3.3% for April, and were up by 1.3% when taking planes, trains, and automobiles out of the calculation.   It was a much-needed turnaround from March’s disastrous durable orders figures.

Economic Calendar

The coming week will be a little busier, but even less meaningful.  In fact, the only item of any real significance we see in the lineup is a good look at consumers’ mood; the Conference Board’s consumer confidence score will be released on Tuesday, and the final Michigan Sentiment reading for May will be posted on Friday.  Both are projected to be a little higher from the prior month’s readings.  Both confidence measures are also in bigger-picture uptrends, which bodes well for the market.  But, if either (or both) stumble, it could be a problem for this vulnerable market.  The Michigan Sentiment reading will be the third and final reading for May, which is up from April’s final score of 76.4.  It’s unlikely the third reading will differ much from the prior (2nd) May reading, but anything’s possible.

We’ll also hear the second reading for Q1′s GDP growth, but it’s not apt to deviate from the first estimate of 2.5% either.  That’s good news, though at this point a little dated… we’re now 2/3 of the way into Q2.  There’s not much else of interest this week in terms of scheduled economic releases.

Stock Market

As they say, if you play with fire long enough, eventually you’ll get burned.  The S&P 500 (SPX) (SPY) had been playing with the fire of its upper 20-day Bollinger Band (blue) since late April, testing it and brushing it that whole time.  Eventually – last Wednesday – it pushed a little too far, brushing the upper Bollinger Band and opening the flood-gates of selling.  By the next day (Thursday) the index had given up as much as 3.0%.  Granted, it bounced a little that day, and even bounced off of Friday’s lows.  But, even with Friday’s intraday bounce it closed at a small loss for the day. Interestingly, the S&P 500 never even had to test the 20-day moving average line as a support level.

So now what?  Well, we’re still in limbo land, so above all else we need to employ some patience and let everyone else tip their hand.  We do have some key lines in the sand we’re watching though.

Above all else, the key to any real bearish opinion lies in the afore-mentioned 20-day moving average line at 1633.71 (versus the S&P 500′s close at 1649.60).  Until the index actually closes under that key short-term indicator line, then there remains enough hope to keep the bulls interested in buying.  And on something of a side note, the 1598 mark (dashed) is also apt to be a key floor, even if the 20-day moving average line fails to hold the market up.  That was a key ceiling in April, and is where the 50-day moving average line (purple) and the lower 20-day Bollinger band will both be within a couple of days.  Take a look.

S&P 500 & VIX – Daily Chart

On the other side of the table it’s pretty clear the bulls have a ceiling to contend with… the upper Bollinger band at 1685.11.  Though the S&P 500 managed to dance with it for a short while after rebounding in late April, it was the prompt for last Wednesday’s sharp reversal.  No big deal, except if you look closely, you can see that upper Bollinger band is flattening out rather than rising.  It’s a problem for the bulls because, in general, a falling Bollinger band makes it tough to keep pushing up and into it.  In other words, falling Bollinger bands tend to make for a string of lower highs.

The CBOE Volatility Index (VIX) (VXX) is also drifting a little aimlessly in the middle of its Bollinger bands, telling us nothing about what to expect.

It’s a conundrum to be sure, as each side has an equal technical chance of winning this battle.  Just for the record though, we’re still leaning towards the bearish side of the fence.  We’re not looking for a bull-market-killing correction, but after a 24% rally in just the past six months, odds are good that a lot of would-be profit-takers have their finger on the ‘sell’ button.

And where might such a minor correction take us?  No surprise here… it’s the weekly chart of the S&P 500 that offers some real perspective.

We’ve mentioned it before, but it’s worth repeating now that the S&P 500′s rally since November has been framed quite reliably by a rising support line (dashed).  It wouldn’t be unreasonable to think it will act as a floor again.  The rising 100-day moving average line (gray) will also be right around that rising support line by the time it could be tested, somewhere near 1595.

S&P 500 & VIX – Weekly Chart

This week will clearly be a critical one. If the bulls want to keep things going for the foreseeable future, they’ll have to establish a base this week, and stave off the slightest of technical stumbles.

Trade Well,

Price Headley
BigTrends.com
1-800-244-8736

Homebuilders, Home Depot, and Lumber Prices

The Headline Data That Financial Media Ignored This Week

Wednesday was a wild trading session where we saw the largest intraday selloff in the S&P 500 E-Mini futures (SPX) (SPY) that we have seen in some time.  Intraday price action was driven largely by statements made by Chairman Bernanke and the release of the Federal Reserve Meeting Minutes, which saw some monster intraday moves and a large spike in the CBOE Volatility Index (VIX) (VXX).

While the world is focused on when the Federal Reserve is going to taper their Quantitative Easing program and the impact those actions will have on financial markets, I wanted to look at another divergence in the economic data which is supported by market action.

Instead of trying to determine how or when the Federal Reserve will taper or end their monetary experiment, I wanted to juxtapose statements that were made today with the actual facts. Readers can draw their own conclusions.

Recently, we have been told that the housing market is in the early stages of recovery.  Unfortunately due to low interest rates housing has turned back into a speculative market.  Consequently, a lot of so-called fast money is flowing into housing which in many cases is either being purchased for rentals or by foreign investors as a speculative investment.

At present the housing market is not being driven by capital formation at the household level and data indicates that construction jobs are under pressure and affordability is reversing.  The chart below illustrates what has recently transpired in the 10 Year Treasury Yield (IEF) (TLT):

10 Year Treasury Bond Yield Daily Chart

As can be seen above, the 10 Year Treasury yield has risen considerably since the beginning of the month of May.  Normally when interest rates are rising and Federal Reserve policy is indicating that a form of tightening seems likely, we typically see a rush of mortgage applications and home starts as borrowers try to lock in lower interest rates.  Furthermore, the spring and early summer months are generally considered a very favorable time to sell existing homes in the United States.

In light of all of the above mentioned facts paired with our Federal Reserve Chairman stating that housing is starting to recover, readers would expect that housing starts and mortgage applications would be jumping higher.

Unfortunately the mortgage application data came out on a day when the Federal Reserve was controlling the headlines.  The mortgage application data indicated the largest 2-week rate of decline in mortgage applications since the housing bubble popped. 

Furthermore, this is supposed to be a strong seasonal time for real estate and interest rates are rising as shown above.  If readers look at recent price action in the SPDR Homebuilders ETF (XHB) or Home Depot (HD) it would appear that all is well in the land of housing and Chairman Bernanke and the Federal Reserve are spot on with their bullish analysis.

XHB Daily Chart

Until the past few trading sessions, the homebuilders have been in an obvious bullish run to the upside.  The rally that transpired since the late February 2013 lows tacked on close to 20% gains in XHB.  However, as noted above, the past few trading sessions' price action appears to have stagnated and we saw new recent lows on Wednesday.

Home Depot (HD) is another stock that relies heavily on home construction and improvement, and would likely benefit from both new home building and existing home purchases — which typically require immediate customization or improvements.  The recent price action in Home Depot is shown below.

HD Daily Chart

Home Depot has had an impressive rally since the beginning of 2013 . HD has tacked on over 20 points on its share price, representing a near 30% move higher year to date.  However, exuberance on Tuesday after earnings were released saw a spike Wednesday morning, which was promptly reversed intraday.

Based on the recent price action in both the homebuilders ETF (XHB) and Home Depot (HD), readers would tend to agree with Chairman Bernanke that housing was recovering and that the recent mortgage application decline was merely "transitory."

However, there is one eye-opening concern that does not support Chairman Bernanke's position about a housing recovery, and unfortunately points to less demand in the immediate future.  While many investors do not track lumber prices, the chart below demonstrates the sheer bear market that has befallen lumber futures prices.

Lumber Futures Daily Chart

As can be seen above, random length lumber futures have gotten crushed to the downside over the past two months.  In early March, lumber futures were trading up around the 410 price point.  At the close on Wednesday, random length lumber futures closed at 305.20, a more than 25% drop in price in roughly 2 months.

How is housing rebounding with lumber prices falling?  While Home Depot sells many products, most major remodeling projects and even smaller upgrades require the purchase of lumber.  Have logging companies discovered an untapped lumber resource?

I will let readers decide whether to believe the price of lumber and mortgage application data, or a Federal Reserve Chairman that declared on January 10, 2008 that "The Federal Reserve is not currently forecasting a recession."

For those paying attention, the macroeconomic data is crumbling in the United States and Europe.  The printing press and monstrous liquidity can only fuel markets for so long.  Can Chairman Bernanke and the Federal Reserve print Cap-EX spending increases and rising profitability ? I think we all know the answer.  In the end, when the Federal Reserve is printing $85 billion dollars per month to buy U.S. government debt, perhaps fundamentals are largely irrelevant.

Courtesy of JW Jones, www.OptionsTradingSignals.com

The recent plunge in Gold has been one of the leading talking points among many traders and investors out there for some time.  The who/what/where/when/why of the acceleration of the downtrend in Gold ( (GLD) ETF) has been speculated on by many.  It is rumored that a legendary investor has lost billions by doubling down on a losing Gold bet during the downtrend (stubbornly doubling down on losing trades is normally a bad proposition in our view).  Not to mention the constant chatter of the many Gold perma-bulls, who have been arguing for some time that a bottom or the next upleg is here — and the Fed policy critics who point to a Gold rally as an inevitable result of global fiscal policy (which may end up being correct in the long run).

However, as we always say at BigTrends, the chart tells the tale (to paraphrase Jessie Livermore) — and the trend in Gold has largely been down since it topped in late 2011.  We’ve profited on GLD, the Silver ETF (SLV), Gold Mining Stocks, Metals, etc many times in BOTH directions throughout recent years in our ETFTRADR and other real-time option trade recommendation services.

So as I mentioned, we’ve had no problem riding Gold and other metals downward recently — but now, amid a cacophony of volatility, a clear picture emerges on the long-term GLD Weekly Chart.  Using a Fibonacci Retracement of the 2009 lows to the 2011 highs, we see that a perfect 50% retracement in the old GLD rally is close upon us.  If you’re not familiar with Fibonacci, it’s a mathematical formula and series of numbers created by an Italian mathematician in the 12th century – Fibonacci patterns and sequences are seen and used in nature, science, astronomy, finance, and many other fields (it occurs so often in nature that is it far from a coincidence).  See the chart below:

GLD Weekly Chart

The 127.36 level on GLD is a 50% retracement of the uptrend — regardless of whether you see a value in Fibonacci Retracements or not, the 50% one is a logical, key area to pause a trend which we’ve seen occur time and again.  It basically points to the level where a stock has given up half its previous rally.  So we are near a very likely area for GLD to pause the downtrend and likely consolidate (a bounce then a re-test of that level is also something that occurs often).  If we do overshoot to the downside, that is also within reason given the overall bearish technical picture and the multiple simple trendlines that GLD has violated recently.

Zooming in to a stripped down version of the GLD Daily Chart will be helpful as well — see the chart below:

GLD Daily Chart

So, above you can see that we’ve already approached and are near that 127.36 Fibonacci level.  Also note how the violation of the trendlines led to more downside.  But finally, there is this interesting volatile pattern that’s emerged since the big 2 day gap/drop down last month (after the historic 2 day drop in Gold).  This technical pattern resembles a Greek “Omega”, and looks to be a setup for another big move.  Some may view this as a possible bullish island reversal pattern being created — but it looks like a “volcano” or “plateau” island to me, which is unusual.

It will be interesting to watch how this plays out in the coming weeks and months in Gold — but definitely keep an eye on that 50% retracement level as a likely bottom for GLD in our analysis.

by Moby Waller
co-Portfolio Manager, ETFTRADR & Rapid Options Income
BigTrends.com
1-800-244-8736

How to develop a trading system

Back-Testing

Each trading system has to have an edge.  The edge is what should make your system have positive expectancy.  In other words it must be profitable over the long run.  We will go into the calculations and common misconceptions about expectancy later.  But for now it is just important to understand that an edge should ideally make the system profitable in the long run and make you more likely to make money than lose money over a large enough sample size of trades.

Indicator Co-linearity

When selecting an edge it is very crucial not to over-optimize or fit the data.  One common mistake that people make when developing a system is using 2 similar or confirming indicators and optimizing them.  This causes the system to look great historically; however the system will not do as well in the future.

Indicators are broken down into 5 types:

* Trend
* Volume
* Overbought/Oversold
* Momentum
* Volatility

Examples of each Indicator Type:

Trend

=  Moving Averages, ADX

Volume

= On Balance Volume, Accumulation/Distribution

Volatility

= Bollinger Bands, Keltner Bands [BigTrends.com Acceleration Bands fit here]

Momentum

= Stochastics, Rate of Change [Percent R the BigTrends Way fits here]

Overbought/Oversold

= CCI, RSI

System Robustness

It is also important that the edge is robust.  A system is robust when it maintains positive expectancy.  The system should be tested on an up, down and sideways move.  Many trend following systems perform well when the instrument trends but don’t do as well when the instrument is in a sideways whipsaw period.  It is crucial that the period is taken into account during back testing.

Amount to Back-Test

I recommend back-testing on at least 2000 bars.  If you are backtesting a system on the daily charts; I recommend using 10 years.  On the intra-day charts I recommend back testing the systems as far back as your data vendor will allow.  This is usually 6 months to a year.

Back Testing Programs

It is important to use professional level software with back-testing capabilities when developing your system. To name a few:

MetaStock

BigTrends.com MetaStock Toolkit 

TradeStation

Courtesy of Alexander Nekritin, tradingmarkets.com

While the poker craze has died down quite a bit, there is still much to learn from this game of skill AND luck that can apply to improve your trading.

Poker is not a pure skill game in the same way that chess and bridge are.  That’s because there is much short-term luck in poker, whereas there is virtually no luck in chess and bridge.  Still, you can’t help but notice that the same people cash winning tournament after tournament, enough to become almost household names.  WSOP winner Chris Ferguson once said that “you don’t measure how well someone plays by his performance in one tournament, rather you judge him on how well he does over a year. Is he profitable?”  Does that sound familiar?  Sometimes, even investing geniuses like Warren Buffett buy stocks that tank in the short-term.  But does it really matter?  No, it’s the long haul that matters.  That is, long-term profitability.  Today, we will discuss systematic trading and avoiding the phenomenon of “tilt”.

Every Pro Has A System

Profitable poker players build a system (even multi-faceted ones with multiple approaches) and stick to it.  So do profitable traders.  There was once a TV reporter that asked a champion poker player what the secret is to winning so many hands.  He answered that the object is not to win hands, but rather to make money.  That being said, strong players play strong hands with few exceptions.  They don’t get involved in hands that have a low probability of winning.  Instead, they invest in hands that have a high probability of winning.

The point is that traders and players should stick to the situations that have a high probability of winning – get the probability ”edge” on your side.  They should also remember that the object is to make the maximum amount of money – not the maximum number of trades.  It sounds simple enough, but it’s not the whole picture – why would anyone change his system?

Lesson: Adhere to a precise, tested, winning system.  Anything can happen in the short term.  Stick with your system until long-term analysis determines a change is necessary.

“Tilt”

“Bob” is a very intelligent doctor who plays poker weekly at a local casino.  He sticks to good strong hands and folds everything else.  In fact, his system is very precise.  He only plays 2 face cards, an Ace and a high card, or a pair.  The system worked like a charm for 3 months.  Then one night, Bob threw away a 7-2, a terrible hand in Texas Hold’em.  (This hand is the worst and should rarely be played if ever.)  Then, low and behold, the board came up 2-2-7, and the Bob missed out on a full house!  He started to go crazy!  His head began to steam and his face grew hot!  “Why did I throw that hand away?” he fumes.  By the time the night was over, Bob abandoned his entire system that had made him thousands of dollars.  He was convinced that his system was flawed and the game was all luck.  The next 3 months were the worst of his poker career.  He gave back the thousands he had earned and lost his mind as well.

This phenomenon also exists in trading.  One thing that traders love to do is watch their trades after they exit.  They want to be right so badly.  They watch in horror as stocks skyrocket right after they sell, and begin to question the system that may have been working for them for years.

Have you ever shaken a pinball machine until it shut down?  If not, you should know that if you pick up a pinball machine in the middle of play or if you kick it too hard with your knee, lights start flashing and the flippers stop working.  The lights blink and you see the word “tilt” on the screen.  That’s where the word tilt comes from in poker.  It’s when a player loses control and shuts down like a pinball machine on tilt.

Getting angry at that moment is not what tilt is about though.  It’s about what happens AFTER a player goes on tilt.  Often times, a player will get a good hand like a king-high flush only to have it beaten on the “river” (the last card) by an Ace-high flush.  Many players describe that situation like this: “I feel my face getting hotter, and soon I feel numb”.  Or, “I get very angry and start swearing”.  Soon afterwards, the same players will be seen playing inferior hands that they would never play, or they might start bluffing too often.  The bottom line is they can turn $10,000 worth of bad cards into a $100,000 loss.  Is that possible?  You’d better believe it is.

The amazing thing about tilt is this: it exists in EVERY competitive field.  It happens to basketball teams when they are losing and even when they are WINNING big.  Have you ever seen your favorite team up by 20 at the half only to go on “tilt”, slack off, and lose the game?  It happens all the time.  Have you had a huge trade that paid off big time and then soon after made you felt like Superman and you started trading like a reckless maniac?  Many traders have!

Control Your Emotions 

Have you lost huge on a trade and started a month-long or year-long slump?  Most traders have at least once. It all comes down to emotions!  Recognize that there are times when you lose control and examine ways to avoid it.  Better yet, when you recognize that you are on tilt, stop trading for a specific amount of time.  I recommend not trading for the rest of the day at least, or depending on severity, maybe even the rest of the week.

A strong poker player once advised, “Do not judge yourself on how the hand turns out.  Instead judge your actions.  You have no control over what comes next.  You should criticize your play if you play badly and the hand turns out a winner.  You should praise your play if you play well and the hand turns out bad.  This keeps you in focus on your SYSTEM and helps you avoid “TILT.”  It sounds philosophical and psychological, doesn’t it?  It is!  So, do the same when trading:

* If you trade well, and an unforeseen global calamity drops the value of your portfolio and the market big time, relax.  You can only do your best and no better.  This will save you from a lot of mental blow-ups.

* Also, don’t congratulate yourself when you make a trade mistake and it turns out profitable.  That’s the worst thing you can do!  This will cause you to question your system or revert to luck.

* Do not express emotions when trading.  That means no jumping out of your seat when you have a winning trade.  Okay, you are allowed to grin, but that’s it!  No cursing, crying, or hiding under your desk when you have a losing trade.

Can you believe poker teaches us about trading?  It does, so don’t forget these 2 lessons when trading:

1. Operate by a system.  Take note of it when you deviate from your system.  Review your system at least quarterly.

2. Avoid “tilt” by keeping your cool when you trade and treat trading like a business.  Focus on your actions and not short-term fluctuations (until your quarterly review).

Trade Well,

Price Headley
BigTrends.com
1-800-244-8736

Funds increase bet in consumer discretionary, Google present in majority of funds

Q1 2013: Funds Increase Bet in Consumer Discretionary Stocks

The 50 largest hedge funds increased their equity exposure by over 5% in Q1 2013.

This quarter, Boeing Co. (BA) was the favorite allocation of the funds. The stock experienced $1.6 billion in inflows, which amounted to nearly 250% of its Q4 value in the funds’ aggregate portfolio.  Boeing’s shares are up 28.2% year-to-date (“YTD”), compared to 15.7% for the S&P 500 (SPY) (SPX).

However, the largest dollar-value increase in equity exposure arose from the January IPO of Norwegian Cruise Line Holdings Ltd, (NCLH) which was backed in part by Apollo Global Management LP.

It’s also interesting to note that, though the funds sold some exposure in Google Inc. (GOOG), the technology company was present of the majority (62%) of the fifty hedge funds’ portfolios.  This distinction was previously held by Apple (AAPL).  Two quarters ago, Apple was held by just as widely as Google, and it was the largest equity holding of nearly one-fourth of the funds.  However, by Q1 2013, Apple was held by only 40% of the funds, with only four carrying it as the top stock holding.

While the top 50 hedge fund managers largely increased their exposure to equities, the funds also made significant reductions to their stakes in two successful stocks in 2013: News Corp. (NWS) and American International Group Inc. (AIG).  The funds reduced their holding in News Corp by 20.3%, and the stock represented the largest individual equity sale in three of the fifty hedge funds.  In addition, the funds reduced their exposure to AIG by 16.2%.  With these sales, fund investors seem to be predicting a slowdown or reversal for these two issues, as AIG and News Corp. have had very similar YTD returns as Boeing in 2013: 27.2% and 28.8%, respectively.

At the country-level, the top 50 hedge funds continued their home country bias by adding primarily to U.S. equities (90% of the top 50 funds are domiciled in the U.S.).  Stocks domiciled in Australia, on the other hand, received the largest decline in country exposure.  This was primarily due to sales of Aurizon Holdings Ltd., a local Australian freight transportation and infrastructure company.

Sector-Level: Funds Add to Overweight Consumer Discretionary Exposure

On the sector-level, the top 50 hedge funds added the most exposure to their overweight position in the Consumer Discretionary sector (XLY). The funds made large purchases in CBS Corp (CBS), Virgin Media Inc. (VMED), and Comcast Corp. (CMCSA), and also benefitted from the new exposure to Norwegian Cruise Line Holding and Liberty Media Corp. (LMCA) (which was spun off from its Starz assets in January).  VMED was also the largest equity purchase for three of the fifty funds, including Third Point Management Co. LLC,
which disclosed a 4.1% position in the company.

As a result, the 50 largest hedge funds showed a 20.1% weighting in the Consumer Discretionary sector at the end of Q1, which was 8.5 percentage points larger than the sector’s weight in the S&P 500 index.  On the other hand, the Information Technology sector was the only group to experience outflows in Q1. This trend was driven by sales of Symantic Corp. (SYMC), Oracle Corp. (ORCL), Facebook Inc (FB), and Yahoo! Inc (YHOO). Though these sales contributed to an underweight portfolio exposure in the Information Technology sector (XLK) (-1.7 percentage points), the Consumer Staples sector (XLP) remained the most underweight group relative to the S&P 500. The sector’s weight of 6.4% in the aggregate portfolio was 3.6 percentage points smaller than its weight in the S&P 500 index.

Funds Overweight AIG, EQIX, HAIN, TTWO

On the security-level, LyondellBasell Industries (LYB) was the most overweight equity of S&P 500 constituents in the aggregate portfolio (+2.5 percentage points*), but this was primarily due to Apollo Capital Management’s 15.2% stake in the company.  Other overweight exposures included AIG, which, despite its overall reduction in the portfolio in Q1, was the next largest active weight relative to the S&P 500  (+1.2 points, but down from +1.6 points in Q4).  On the other end of the spectrum, Exxon Mobil Corp. (XOM) was the most underweight holding of all S&P 500 stocks, with a portfolio weight 2.4 percentage points lower than its exposure in S&P 500 index.  Other underweight equities in the portfolio included Berkshire Hathaway Inc. (BRK-B) and Wal-Mart Stores Inc (WMT).

In looking at S&P 400 mid-cap stocks, the hedge funds pared exposure to their most heavily-weighted position during Q1 2013: Equinix Inc. (EQIX).  The funds’ holding of the provider of network-neutral data center and colocation services decreased from 6.8 percentage points above that of the S&P 400 index to 6.5 points over the quarter.  Equinix was a positive bet in 2012, returning 103.4%, but the stock has only returned 10.5% year to date (“YTD”) versus 17.6% for the S&P 400 Mid-Cap index.

Within small-cap stocks, the funds’ again reduced their most overweight holding for the second consecutive quarter. Hain Celestial Group Inc. (HAIN), a natural and organic beverage, snack food, and personal care company, was overweight by 4.8 percentage points versus the S&P 600 in Q3 2012, but only +3.9 points in Q4 2012 and +3.7 points in Q1 2013.  The stock has continued to outperform though. Its 47.9% gain in 2012 has been followed by a return of 22.3% YTD (versus 16.2% for the S&P 600).  In addition, the funds added to their next largest overweight position in small-caps: Take-Two Interactive Software Inc. (TTWO) (+2.2 percentage points versus +1.8 points in Q4). The developer of interactive entertainment through its Rockstar Games and 2K labels underperformed in 2012 but has returned 44.5% YTD.

Activist Shareholders: Positions Taken in SVU, GRPN, NUAN

The “SharkWatch50″ is a FactSet compilation of the fifty most significant activist investors. In Q1, the nine SharkWatch activist investors within the top 50 hedge funds disclosed several large, new positions.  JANA Partners LLC-which just broke into the top 50 hedge funds this quarter-took 5.5% and 3.3% stakes in the depressed shares of SUPERVALU Inc. (SVU) and Groupon Inc. (GRPN) (the companies’ lost 69.6% and 76.4%, respectively, in 2012).  In addition, the activist fund also announced a 9.1% stake in Oil States International (OIS), in conjunction with a statement of interest in splitting the oilfield services and accommodations segments of the company. Since the April 29th announcement, OIS’s shares have returned 31.8%.  In addition, several other SharkWatch funds previously disclosed material positions prior to the recent release of 13F filings. ValueAct Capital Management took an 8.2% stake in Invensys PLC, a diversified technology group, and Icahn Associates disclosed a 10.0% position in Nuance Communications Inc. (NUAN), a voice and language solutions company

Top 50 Holdings: Top 50 Hedge Funds

Market value is in millions of dollars and represents the market value held by the top 50 hedge funds at the end of the quarter. The market value change measures the total position change of each security multiplied by its quarter-end price. “% Port” indicates the weight of the stock in an aggregated equity portfolio of the top 50 hedge funds. “% Shares Out” indicates the proportion of the shares outstanding of the stock owned by the aggregated portfolio of the top 50 hedge funds and the “Total” and “50 Highest” lines show the average for this item*. “# of companies” indicates the number of funds (out of the top 50) holding the stock.

Most Widely Held Hedge Fund Stocks Table

Courtesy of FactSet