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Michael Noonan Edge Trader Plus Michael Noonan is the driving force behind Edge Trader Plus. He has been in the futures business for 30 years, functioning primarily in an individual capacity. He was the research analyst for the largest investment banker in the South, at one time, and he... More
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  • SnP, NAS - New Highs V Your Individual Stocks 0 comments
    Nov 3, 2013 7:21 PM

    Sunday 3 November 2013

    Markets tend to rally during the last two months of the year, but like
    the indexes, that is a statement of averages, and averages do not
    always tell the whole story. It is not a secret that the Lying Ben
    schemers have been responsible for propping up the volume-
    deficient, individual-investor-absent stock market. What is of critical
    importance for any investor is to measure his/her portfolio against the
    overall market.

    There have been some subtle signs of inner-working[s] market
    weakness of which any investor should be aware. Given that the
    central planners running this country have created a financial
    environment, via zero interest rate policies, that makes stocks one
    of the few areas in which to invest, one should be deeply suspect of
    their motivations. While there may be little incentive to hold cash, at
    times it is a preferable approach to preserve funds as opposed to
    putting them at risk in an artificial trading environment.

    Seeking a return on investment is not always the best pursuit when
    getting a return of invested capital may be inviting too much risk
    exposure. What every investor should be doing, at this juncture, is
    measuring their individual stock performance to that of the averages.
    This goes to an important concept called relative strength. You
    always want to choose relative strength as a gauge for whatever
    choice is made in your stock portfolio.

    The S&P and NASDAQ are measures of each respective stock
    universe. Any stock[s] you choose should be outperforming the
    averages, or be relatively stronger. If the stock indexes are
    performing better than your individual stocks, you may have a problem. In all likelihood, you do have a problem: dealing with
    underperformance, and that almost always translates in weak
    gains, at best, or more often, losses.

    If you were to go to a racetrack, you want to bet on what you think
    will be the strongest and fastest horse. You would not go down the
    list of horses and pick out one that has been placing 5th, or worse, for the last several races. The same holds true for selecting a stock.
    Every once in a while, a fluke horse wins the race and pays off well, as a long shot, but when it comes to responsible investing, you want
    consistency in performance.

    Here are the charts for the S&P and Nas. All time frames show an up
    trend, and when any market is showing such a strong trend, be long,
    preferably with stronger performers, but do not be short! More money
    is lost trying to pick tops and bottoms than at any other time in the
    markets.. We will have more current details for the daily charts, at
    the end.

    There is no question as to the exhibited market trend. The point to be made is that each of your existing individual stocks should be doing
    equally well, at a minimum. If not, there needs to be a close
    assessment for retaining them in your portfolio.

    (click to enlarge)

    This index has been even stronger than the S&P, and any holdings
    within the NAS index should be at least as good in performance as this
    chart depicts. The chart includes more history to show that the NAS
    is not making all time highs, despite its relative strength.

    (click to enlarge)

    There are signs that a market turn, or a correction, could be forming.
    So far, every other market turn as provided a buying opportunity.
    Making that determination need not be done until we see if the market
    does correct, and the extent of the correction as it develops. In other words, we do not need to know or even guess until the event happens.

    (click to enlarge)

    Small ranges at a high usually indicate demand has been spent, and
    sellers are meeting the effort of buyers and able to keep the market
    from extending higher, at least for now. There is no need to read
    anything further into this development. It is a warning to look for a
    correction, and even winnow out any/all weaker performing stocks.

    NAS W 3 nov 13

    Stock leaders have been struggling to hold their rallies, of late, and
    these are the ones that have been outperforming the indexes. When
    the leaders falter, it is a warning that a turn may be near at hand, and by a market turn, all we mean is a correction. It could turn into
    something more, but that has not happened, and there are no signs
    that it will be greater than a correction, at least not yet.

    The leaders have been showing a tendency to correct while the
    indexes have reached there recent new highs. This is a divergence
    and a sign to be alert for potential change.

    The relatively wider ranges of the last 3 bars is more typical of
    distribution by smart money holders, and the lack of leadership stocks to rally to new highs, at the same time as the indexes, adds to that
    assessment.

    (click to enlarge)

    The current TR, [Trading Range], shows a form of upside stopping
    action. It may only be temporary, a resting spell before resuming the
    trend higher, or it may turn into a correction of some degree.

    The list of NAS stocks making new highs is less than the number of
    new highs from previous new high occasions. The down volume is
    close to being greater than the up volume, and this rarely happens
    while a market is making new highs.

    The breakouts of lesser-quality leadership stocks have been failing to
    carry through to the upside. These are lesser observable events by
    most investors, but they convey a message.

    Now is the time to be doing some portfolio cleaning, getting rid of any
    and all stocks that have underperformed over the past few months. If they cannot respond well to market strength, they will do more poorly
    on the downside. If you have stocks that are showing minimal gains,
    or worse, a loss, this is the time to take action and reduce your
    exposure to further erosion of capital.

    This is the message of the market. Cash may not be earning much,
    sitting idly, but you are not losing capital as you otherwise could when keeping it at risk in current market conditions. Keep relative strength
    uppermost in your mind. If your stocks are under- performing the
    market, why would you want to keep them? It is that simple a
    question.

    (click to enlarge)

    Themes: SnP, NAS, DOW, Stocks, Portfolio
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