Four consecutive down days (but a good January) and stop loss disciplines

Stocks going down are not normally good news for investors. The DJIA has declined during six of the last seven sessions. In reality, some down days after a good run-up make a rally sustainable. That might just be what is occurring now.

The good news is that stocks have fallen in small increments. Whenever the DJIA sees a large intraday drop, buyers are enticed back and stocks get bid back up. Clearly, money is flowing into stocks. Some of the funds flow is due to the promise of long term easy money.

If this is a period of consolidation, then the DJIA has more room to fall. Bulls should not start to get nervous until a retracement takes the DJIA back to 12,400. 12,400 is a noteworthy support level.

The Dow Jones industrial average rose 3.4 percent in January. The broad Standard & Poor's 500 gained 4.4 percent. These are the best January performances for both indexes since 1997.

For the day, The Dow Jones industrial average finished down 20.81 points, or 0.2 percent, at 12,632.91 on Tuesday. Up volume and down volume were almost evenly matched. Surprisingly, advancers beat out decliners by almost a margin of three to two. This is a significant statistic which indicates that buyers still lurk and stocks are being accumulated.

The benchmark 10-year Treasury yield dipped to 1.795 percent. That is the lowest yield for almost four months. The VIX is still below twenty at 19.4.

Corporate results have not been stellar so far. Despite 'ho-hum' earnings, investors have still bought stocks. Most importantly, investors have tended to ignore bad news, especially from Europe.

Stocks

RSH: Some months ago, I got RSH horribly wrong. I was looking for support to hold RSH above twelve. And look at the stock now – USD 7.2! Luckily, I cut my losses before Tuesday's earnings due to a stop loss discipline. Stop loss disciplines are key to growing a portfolios value – especially when holding stocks with vulnerable business models. RSH is back at five year lows and can only be viewed (or purchased) from the prism of a turnaround story; a risky play and only for the believers.

XOM: Taking a position in a company prior to earnings is always a risky proposition. Hence, when I sold short XOM I suggested it be part of a 'pair' trade including going long XLE or the energy ETF. Following Tuesday's earnings from XOM, the trade seems to be working so far. But as the pair trade risk is manageable, I expect to let the two positions run for a little longer.

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Talk of the Golden Cross – premature or late?

It is a simple idea but one that has historically helped investors to large profits: the Golden Cross. The shape formed when the 200 day moving average crosses the 50 day moving average. The mainstream media now talks of the Golden Cross on the Standard and Poor's 500 Index occurring sometime next week.

We will have to wait and see about the S and P 500. However, the DJIA Golden Cross happened early in the new year. It is not surprising the DJIA precedes other indices as the DJIA is comprised of large capitalization blue chip companies. These are the type of companies that move first in any rally – people tend to buy 'low risk' businesses before moving into more risky companies.

So, if the S and P 500 Index depicts the Golden Cross soon then the signal for an upward movement by stocks becomes stronger. Investors must pay attention.

Friday's market action was consolidation again. For the day, the Dow dropped 74.17 points, or 0.58 percent, to close at 12,660.46. For the week, the Dow slipped 0.47 percent. Despite the poor index action, advancers beat decliners by almost a two to one ratio. Up volume and down volume were evenly matched. The ten year yield dropped to 1.90 percent while the VIX closed at 18.5.

Investors must also take notice of the dichotomy between bond yields and stock market movement. Stocks have been going up while bond yields have gone down, i.e. interest rates have demonstrated a 'risk off' behavior at the same time investors have piled into a 'risky' asset like equities. Surely, the interest rate behavior has something to do with Europe and risks emanating from the Euro debt crisis. Nevertheless, once this contradictory signal aligns with stocks it could point to more gains ahead.

We get more earnings and data next week. Until then, enjoy your weekend!

Stocks

PG: PG came out with not so good results. PG is normally a stable stock – lots of investors 'buy and hold' PG forever. I am keen to see PG in the 63 range. It starts looking attractive to me.

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Stocks’ healthy behaviour and a possible 'Pair Trade'

I repeat myself when I write about the need for stocks to consolidate. Consolidation is what seems to be occurring as stocks are neither moving up nor down in any big way. In fact, a slight retracement say to 12,450 will be healthy and create sustainability for the current up move.

The good news is there is an underlying bid to stocks. Bulls can be seen prowling around freely. The bulls were given a positive signal by CAT and MMM results, which far exceeded expectations. However, there were a few misses too and housing numbers were not good.

According to Thomson Reuters data, 59 percent of the 152 companies in the S and P 500 that have reported earnings beat analysts' forecasts. That is down from the 70 percent 'beat' rate in recent quarters at this stage.

The big picture is that the economy heads in the right direction but very slowly. Some individual companies are having a tough time. Investors must select companies and sectors carefully.

The Dow Jones industrial average was down 22.33 points, or 0.18 percent, at 12,734.63. Down volume was almost twice up volume while advancers and decliners were almost evenly matched. Ten year money yields 1.93 percent while the VIX settled at 18.6.

It is difficult for me to enter into any long trades when most stocks are at resistance levels threatening to break into a new trading range. Likewise, I do not wish to sell stocks short for the same reason.

Stocks

XLE: The energy ETF is a laggard relative to indices such as the DJIA and SPX. XLE is nowhere near its 52 week high. A sector 'pairing' bet on XLE relative to a more expensive energy stock company is worth exploring, i.e. buy XLE and short say XOM (which is already at 52 week highs). Such a 'pair trade' requires XLE to appreciate more than XOM to be profitable.

XLF: Like its energy counterpart, the financial sector ETF has underperformed diverse stock indices like DJIA and SPX.

That both indices are well below respective 52 week highs suggests that there is a good likelihood that stocks have more room to appreciate, after a decent period of consolidation.

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Fed steps up - stocks go up

Stock investors like cheap money. Much of the cash finds its way into financial assets – stocks being a primary beneficiary. Surely, easy money distorts valuation and stock prices – at least temporarily – take on an 'artificial' factor.

However, there is nothing 'artificial' or unreal about rising stock prices. Investors and traders can transact with ease at the inflated prices, i.e. Fed policy must be factored into stock prices and investment decision making.

So, stocks went up Wednesday because of a 'soft' Fed statement. Nonetheless, I would still like to see a period of consolidation at these higher levels for the rally to sustain itself. A little retracement might not be out of order too.

Stocks are not overbought but have gone up almost without pause since late December.

The Dow Jones industrial average rose 83.10 points, or 0.66 percent, at 12,758.85. Advancing stocks beat declining ones by ratio of 3-to-1. Up volume was more than three times down volume. In another decent sign, new highs have recently outnumbered new lows quite substantially, 136 versus 9 on Wednesday.

The yield on the US ten year note fell to 2.01 percent. The VIX dropped 3.4 percent to close at 18.3.

Bulls retain control of stocks. AAPL's results gave bulls a shot in the arm. All lackluster guidance from other companies drowned in the glory of AAPL. Europe is missing. Everyone's enjoying the snow in Davos.

Stocks

TM: I got this one wrong and sold too early. TM has raced towards resistance at 76. However, it is a small constituent of my Core Portfolio so looking to sell covered calls on TM.

GOOG: Watching GOOG closely and hoping stock might drop towards 540. I wish management would do a stock split making it easier to buy in multiples of '100.' I like the flexibility of options which are sold in multiples of 100 shares.

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Europe, earnings and stocks

Several days of small movements or even some retracement will hardly be surprising given that the DJIA has touched a serious resistance level at 12,700. So far this year, the DJIA is up approximately four percent – and almost without any large down days.

Volume was lower than average on Tuesday. Technical indicators, e.g. stochastic, RSI, etc, do not indicate stocks to be in heavily overbought territory. That investors ignore or downplay European problems is also encouraging.

Earnings season is getting into full swing. Companies like JNJ, KMB – potential components of the Core Portfolio – have reported. The numbers are not great and guidance is a little weak. However, AAPL reported blowout numbers after the market close.

The Dow Jones industrial average closed down 33 points at 12,676. Rising stocks slightly outnumbered falling ones on the New York Stock Exchange. Up volume slightly outpaced down volume. The ten year yield closed at 2.06 percent. The VIX stayed below twenty at 18.9.

Bulls still have the upper hand but there is little point speculating at these 'risky' levels. It is better to wait for another breakout. Greece and Europe's problems remain very much on the horizon. (The Athens Stock Exchange dropped over five percent on Tuesday.)

Stocks

AAPL: Those who purchased Call Option contracts some sessions ago should do well on Wednesday. Given that time decay works against investors when options are purchased it is a good idea to take some profits. AAPL's breakout means the stock heads into a new higher trading range.

VZ: VZ is a hard stock to call. It is a great dividend yielder so has a place – if purchased at the right price – in a Core Portfolio. However, it just does not look right these days: slightly overpriced and heading lower.

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DJIA target reached – consolidation required

It did not take long for the DJIA to reach its target level of 12,700 once the index broke through 12,200. The index moved to its present level almost in a straight line. The index is near 52 week highs.

Now is the time for the DJIA to relax a little and consolidate at these higher levels. This might mean a pull back to 12,500. It is not healthy for stocks to move up rapidly without pausing for breath. Bulls regroup; bears concede defeat and general investors decide their next step.

Conventional wisdom is to let winners run. That is true for stocks in the Core Portfolio. For holdings in the aggressive Satellite Portfolio, I will take profits. Selling deep in the money Call Option contracts will maximize short term profits.

The DJIA has hit a new resistance level. Looking at a five year chart, the index must clear 12,800 before it can start moving towards previous five year highs around 14,000.

The Dow Jones Industrial Average fell 11.66 points (0.09 percent) to close fractionally lower at 12,708.82. There were three advancing stocks for every two decliners. Up volume outpaced down volume by a four to three margin. The ten year treasury yield moved higher to 2.07 percent. Significantly, the VIX index stayed well below 20 at 18.7.

Stocks certainly have more room to run but I would bet on a pause before the uptrend resuming.

Stocks

FXE: Investors who followed my technical advice and punted on the Euro a few days ago should be happy. I am. From lows below 126 the FXE has trended up to near 130. I am cutting my position in half and taking profits. (One of the issues with trading by selling long term put option contracts is that the profits are diluted – they do not represent the magnitude of the move in the underlying stock / currency.)

KO: The five year chart does not look great to me. A long term top looks to be forming at just above 70. I would like to see KO break through 70 decisively to get more positive on the company.

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More confirmation of a breakout

Bulls are buying. By and large, corporate earnings support the buying. GOOG has been one disappointment but it has been overshadowed by the financials. So far this year, financials are up over eight percent.

Most importantly, I hear little talk about the negatives and the risks out there. Fund flows into equity mutual funds are also reportedly good. Sentiment is strong.

The financials are moving up from a very low base and many see compelling valuations. I tend to be careful with financials as the contagion risk from Europe can hit US bank stock prices severely and without much notice. Although for the twenty percent 'Satellite Portfolio' some punts may be worthwhile.

On a five year chart, the DJIA's 'dirty uptrend' line is being touched by the DJIA's current level. Looking at the long term chart, the DJIA faces resistance at 12,750 where stocks formed a double top earlier. The twenty period moving average is about to do a bullish cross on the 50 period moving average.

The Dow Jones industrial average rose 45.03 points, or 0.36 percent, to end at 12,623.98. Advancing stocks outnumbered declining ones by a ratio of about 2 to 1 on the New York Stock Exchange. Up volume was almost two times down volume. The ten year yield moved up to 1.97 percent.

After quite some time, the VIX dropped below twenty. Now, one keeps an eye on the VIX to open a possible long position – as insurance if for no other reason.

Stocks

GOOG: I wish to get into the details of the results but a low risk long position – perhaps through buying a call looks attractive. I do not normally buy options as I dislike time decay but sometimes it is better to know one's possible loss before entering a trade.

FXE: A risky trade from a few days ago and I seemed to have called it well, short term. As currencies are highly susceptible to unknown political risks, it is tempting to close out soon with a decent profit.

Timing an exit (selling / covering) is just as important as timing the entry (buying / shorting).

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