Momentum Book Update: Riding the Trend

by: Leigh Drogen

It was a wild week for momentum traders as the cloud fell on the head of those long in the space. But the damage was well contained and we saw many other industries continue to push higher through the end of the week as we closed at a new high for the rally. The burning buck helped materials regroup after a bit of a hiccup mid way through the week. We continue to see nice rotation take place, as certain industries and whole sectors become overbought and need a rest, others step up to take us higher, a sign of a very healthy market.

I’m not going to spend too much time opining on my macro thesis as to why there seems to be a little sticky money in the market these days, but that is the case. We are not seeing stocks get run up and smacked down, they are holding levels, flagging out, and moving higher. Maybe it’s QE2 and the pure rush for hard assets, maybe it’s something else, and maybe we will roll over soon and it will all feel fake. Who knows, who cares, we are riding an uptrending market right now and will continue to do so while managing our risk with stops that will take us out of this market if in fact we are living in dreamland.

We’re still focused on a few major trends, precious metals, momentum tech, especially the cloud, chemicals, agriculture (which we haven’t really played), emerging market banks, and this week we really began to increase our exposure to biotech and started to take positions in China.

Biotech, and healthcare at large for that matter, have not lead this market, but set up really well here. As tech gets extended I believe we will start to see a rotation into high momentum quality healthcare names. Along with our positions in Nektar Therapeutics (NASDAQ:NKTR), Incyte (NASDAQ:INCY), and Perrigo (NASDAQ:PRGO), we’re also looking at HealthSpring (NYSE:HS) for an entry. In terms of China, along with our new position in (NASDAQ:CTRP) we’re also looking at Home Inns and Hotels (NASDAQ:HMIN) and (NASDAQ:BIDU) which have both pulled back a bit here and look decent.

Gold and silver did look quite toppy Thursday afternoon with big outside days, but recovered nicely on Friday. A close eye should be kept on the metals next week as the dollar is extended to the downside.

I was very glad to have been in company meetings most of the week and not able to completely focus on the market. Sometimes getting away from the screens is a great thing for you, and keeps you from overtrading in a market where less is more, which is what we’ve got right now. As the market is trending, allowing your positions to work for you is key, and taking set stops at important pivot levels is very important in order to protect profits. We saw this week what happened to traders not willing to sell at those pivot points or major moving averages in high momo tech names, they get slaughtered.

Positions added this week include Lubrizol (LZ), INCY and CTRP. We also added to positions in Universal Display (NASDAQ:PANL) and NKTR.

Positions sold this week include Chemical & Mining Company of Chile (NYSE:SQM), Nanometrics (NASDAQ:NANO), VirnetX Holding Co. (NYSEMKT:VHC), and a closed short in Fifth Third Bancorp (NASDAQ:FITB). Oh what a ride it’s been in VHC. Look, if I were a little different, I’d be screaming about the fact that I closed out VHC for over 160% in a few months. That’s not my style, the returns speak for themselves. We got in with a full position on the first day of the move and got out of the last 1/3 on what looks like the last day of the move. Check the Trading Book as always for exact entries and exits. Now on the other hand, if William O’Neill reviewed this trade he would probably smack me in the face for peeling off little tiny bits along the way instead of pyramiding my position. Oh well, if he wants to do that I’m more than willing to get slapped in the face by Mr. O’Neill, it would be an honor. The stock didn’t break the 5 day moving average the entire time, it was amazing. I want to one more time thank @zortrades for mentioning the stock a week before it took off, it would have never been on my radar, the market cap was just below my screens.

I will be looking to reenter NANO and possibly SQM, but both broke through important pivot levels and in the interest of managing risk I sold.

Positions that performed well this week include Compania de Minas Beunaventura (NYSE:BVN), NKTR, iShares Silver Trust (NYSEARCA:SLV), PANL, Oracle (NASDAQ:ORCL), and LZ.

Positions that did not perform well this week include Silver Wheaton (NYSE:SLW), Amerigroup (AGP), and Grupo Financiero Galicia (NASDAQ:GGAL).

Our pairs trade long Apollo (NASDAQ:APOL) and short Strayer Education (NASDAQ:STRA) is starting to work again as the market is no long melting straight up but now trending. It looks as if the big money shorts in STRA are back, this is a long term trade, eventually there will be an event that takes STRA far lower.

We put up another 370 basis points of absolute return and another 120 basis points of alpha between the beginning of the quarter last Friday and the end of this week.

Overall long exposure is almost 80% with short exposure at about 14% (click on charts to enlarge). I feel this is a good spot right now as we are well developed in this trend and have not had a significant pullback to really load up. Right now the focus is on staying long, staying with the names we’ve chosen, and managing risk well so that when this trend ends, and believe me it will, we are out within a few days of the top.

As always you can find the complete Trading Book with entries, exits, performance, and current holdings HERE.

Disclosure and Disclaimer: Nothing that I say or show on this blog should ever be considered investment advice or a recommendation to buy or sell any security. The performance numbers that I post in the momentum book should never be regarded as representative of any specific client account managed by Surfview Capital, it is there solely for educational purposes and should be treated as such.