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Keys to a Wining Stock Market Strategy

By  +Follow August 13, 2013 7:03PM
Tickers Mentioned:

Hello Tom,

Quote worth Quoting Again

One of the common failings among honorable people is a failure to appreciate how thoroughly dishonorable some other people can be, and how dangerous it is to trust them."...
Thomas Sowell

This week begins some of the changes I have been talking about. To begin with, a little further down in this week's letter is a section on the "Signal Investor Portfolio". The Signal Investor Portfolio is a combination of the Top 15 Portfolio and the CycleProphet Trades Portfolio. Going forward, I will be listing the trades and the updates in this weekly newsletter. You can expect this newsletter to come out on Tuesdays.

We have other changes (I think of them as major enhancements...) planned, but as much as I want to tell you about them now, I have sworn myself (and my bet with the staff) to secrecy until everything is good to go. The sooner, the better, as far as I am concerned!

Now... What about this market?

I don't know the exact figures on what I am about to discuss, but I am pretty sure I am correct. Most of the world of individual investors who were in the market during the 2008 crash, have not yet come back into the market. Most of those people have either decided that they cannot afford to suffer the kinds of losses they sustained in that horrific year, or they have decided that they have waited too long (again) to get back into the market when they 'just know' another crash is about to happen.

How can we blame them... After just this week, we heard more than one doom-and-gloom pundit claim the market is way overbought and that it could lose 20% or more by the end of the year. Actually... if the market is going to sell off, I would prefer a nice long Bear trend down 20% or more than a collapse of 20% or more. As you will see in my Bull/Bear/Oscillator Report, below, there are, indeed, some conflicting data regarding a move lower in the near term.

But, getting back to our 'twice-burned-individual-investor-syndrome', of which you, dear reader, do not ascribe... The ONLY reason that those poor folk lost so much money in 2008 was, unfortunately, rather simple: They did not have stops in place that would have triggered well before the 2008 debacle. They did not have an inverse ETF strategy (granted, there weren't a lot of them available at that time) or short strategy to move in to when the sell-off began in 2007.

I believe the best stock market trading strategy includes the following:

  • Keep your eggs evenly divided among all positions... don't put more money into one position than in another.
  • Keep your stops set at just below each position's implied volatility for the upcoming trading week (the CycleProphet Stop Loss).
  • Don't own too many positions. You have to be able to watch all of them all of the time.
  • Always have an exit strategy. Know what you're going to do in any market condition.
  • Be prepared to move into inverse ETF's when the segment of the market you are following, moves into an extended Bear trend. Inverse ETF's are easily found via the CycleProphet Equity Screener.

The Bull/Bear and Oscillator Report...

The Bull-Bear sentiment continues to weaken is Bullish bias. This week's ratio is only about 1.5-to-1 in favor of the Bulls. This ratio has been dropping for the past several weeks. 

But, the biggest concern (if you are wanting a Bullish market) is how close the black line (sum of both new buys and new short sell signals) is getting to the red line (new short sell signals). This pattern is still Bullish, but if this trend continues and if the black line crosses the red line, the probability of a near-term correction would be in play. 

But, this week, a conundrum has arisen... The time-cycle trend bias charts for the broader markets have become decidedly more Bullish. From a time-cycle perspective, now looks like a great time to be buying long. 

The conclusion? Any negative exogenous event of significance will, most likely, be the catalyst to push the market a lot lower. The risk is growing that a correction is coming... the problem is timing. If you are a risk-taker, then buying on dips this week for short-term plays, makes sense. If you are risk averse, then taking profits on rallies, could be the better course of action.



Turner Bull/Bear Forecast
For the Upcoming Week

Investor Sentiment Weekly Forecast

The Turner Bull/Bear Forecast™ provides a one-week directional forecast on the market, with [-5] being the most Bearish and a [+5] being the most Bullish. This is predicated on the ratio of number of new Buy Signals to the number of new Short Sell Signals for the previous week. The assumption is investors are becoming more Bullish the more lopsided the ratio becomes in favor of new Buy Signals; and, the converse is true; the more lopsided the ratio becomes in favor of new Short Sell Signals, the more Bearish investor sentiment.



Turner CrossOver Oscillator

The Turner CrossOver Oscillator™ provides an indication of the over-bought or over-sold condition of the market. The red line (New Short Sell Signals) shows a technical direction and strength (or lack thereof) of investors to push stock prices lower, triggering new Short Sell Signals. The higher the Short Sell Signals line, the more Bearish the market. The black line (Composite of both Short Sell and Long Buy Signals) is the combined impact of both the new Short Sell Signals and the new Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite of Signals line is moving higher. The higher this line moves, the more Bullish the market. Market bottoms are represented by a change in direction of the Composite of Signals line from moving lower to moving higher. Market corrections become much more likely when the Composite of Signals line crosses the Short Sell Signals line from below the Short Sell Signals line to above the Short Sell Signals line. The market is represented by the green shaded area.


The Signal Investor Portfolio...

We had a great week where we were up nearly 2% while the market was down more than 1%. It's always tough to beat the market, but when you can be significantly positive while the market sells off, you have traded well. This past week, we traded well.

Our goal is to have a maximum of 20 positions in the portfolio. With 17 positions filled, we have selected 3 more to give us a full complement of 20. Below are some details on the 3 positions we are adding this week.

As I mentioned earlier, my newsletter will be (as it is today) delivered to you on Tuesday. This will be the typical timing going forward. Here's why... We make all of our trading decisions on the first trading day of the week and I write this newsletter on the first day, as well. So, by the time we finish our analysis and I finish my writing, it is often late on Monday. Then, we have to get the content to our distribution partner so they can get everything put together and emailed out to everyone. That generally takes until noon or so on Tuesday (the second trading day of the week). We will post the trades on the website as soon as we can, but details on the trades, if any are made of course, will come out in this letter on Tuesday's.

As for this week's trades... With the new combined Signal Investor portfolio now fully operational, let's get the trading started - by not buying anything. The market looks flat at best according to the Bull/Bear and Oscillator. Of the stocks in the Top 100 that we would like to own, most of those were added by combining the two portfolios together. We kept all of the stocks in the Top 15 and added in ($VIPS), ($RAX), ($OCN), and ($BX) from the Trades portfolio. Those four stocks still matched the criteria set forth by the Top 15 (and now the Signal Investor).

We are selling one stock. Over the weekend, VIPS fell out of the Top 100 and we are going to take the opportunity to cash in a solid 30% gain.

Also, since we are now operating the portfolio on a 20 stock limit instead of 15, we will only be putting 5% in each position. We took off the percent of portfolio for this reason as the percent invested should stay the same for all positions.

Going forward, we plan on updating the stops in the portfolio before the market opens on Monday mornings (or the first trading day of the week, as the case may be). We raised the stops on the following positions: ($OCN), ($EMN), ($BIDU), ($AFSI), ($CVLT), ($JAZZ), ($KORS), ($ASGN), ($FLT). Click here to see the details.

I do plan to put the actual trades into this letter each week. Perhaps next week, we will pick the trading back up.

Closing Thoughts...

I was talking with a prospective Sabinal client today. We were discussing his financial situation and whether or not his risk tolerance and trading objectives were a match for my Sabinal One portfolio. During the course of the conversation, I mentioned to him that the Sabinal One portfolio is a long/short portfolio where it is designed to be mostly long the market when the market is bullish (as it is now) and mostly short the market when the market is bearish. He jumped in at that point and said, "I expect that bear market to start any day, now."

I told him it would not surprise me if that were to occur, but a lot of people have been expecting that to happen for the past 4 years of a raging bull market. They could still be on the sidelines for the next 4 years of a continuation of a raging bull market. But, that is not the point. The point is, the market 'could' reverse course at any time and move into an extended bear market trend. How are you prepared for that possibility is the real question?

I have a bear-biased strategy for each of my 20 positions in the Sabinal One portfolio that will kick in when the inverse ETFs issue a technical buy signal. I mention this to you only as an idea of how you probably should be thinking about what you're going to do when (if?) the market moves into an extended bear trend.

We have the luxury, as traders, to incorporate inverse ETFs into our portfolios when needed. But, you should be thinking about how you would implement such a strategy. Certainly, in the Signal Investor portfolio, I will be consider adding high-scoring inverse ETFs to the mix when those ETFs issue buy signals.

It is important that you hope for the best, but always plan for the worst. Use stops and be prepared to think short (inverse ETFs) when the time comes.

Have a great week in the market!

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By  +Follow August 13, 2013 7:03PM



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