Classically Trained, for the Revolution

Friday, January 07, 2011

2011 So Far (study as she goes)

Much of the opening week in a new trading year is a bit like reading tea leaves. Now that we're one week into it, we can begin to study the establishing trends and act accordingly.

The key now, typically at this point in a new year (for me at least), is to identify new trends and act accordingly:

On the long side - I'm most interested in identifying the best acting industry groups which are already ranked in the upper 25% of all groups (this, because laggard groups will often show out-performance early in a year, but quite often these do not follow-through to become new leadership groups. When a laggard group moves upward AND becomes highly-ranked, instead of a mere catch-up move, then I become willing to shop the group for core longs; quick trades are another matter. Otherwise I never like getting long a loser, just because it looks to be improving. True losers often look best on the chart just before the floor falls out - again! Stick with leadership to avoid the looming disasters).

What I am looking for then, is the best acting industry groups in a new year, within the top 25% of the current rankings. Determine these in order to generate your go-to attack list of live longs.

On the short side - I will take shots at some of the laggards showing out-performance (faith-shorts that this type name will not graduate to become a true leader). Otherwise, I will focus on groups rapidly descending in relative strength, which were not highly ranked coming into the year (these will be better apparent next week, though flashes of ill-brilliance are capable of being seen now; Foreign Banks, Apparel-Shoes and Retail Auto Parts come to mind, but it's still early).

I will be compiling good sectors and bad, as the early-year trends take shape; perhaps even posting results.


Anyway, now is the time for intensive weekend study. Identify the new trends now and repeat the same work next week. I can almost believe in new trends now, but I will better believe in the new trends a week from now. Capital flows change year to year and many of the best new themes begin to emerge in January. Relative strength is one key in identifying the best and worst acting stocks. Start with the groups, then move onto the individual names.

If the market moves into correction mode, it becomes important to gauge the health of the pullback. More formidable action gives me a green light to enter leadership as entries set-up, whereas a less healthy pull-back (characterized by higher-volume, broad-breadth decline, leaders leading-lower instead of resisting selling, etc.) means I must wait for the market to turn and trend upward again before getting sufficiently net-long.

As for as my previous post, I'm pleased with the adjusted strategy approach here. My broker is making a little less in commissions, while the more concentrated attack generated a stronger performance clip out of the gate in 2011. I did neutralize my position yesterday, but I haven't turned negative on the market. I want to grade the action on a pullback (or an attempted pullback as might have been the case) before pushing on the accelerator again.

If today's yelp lower in equities is rendered an anomaly, I'll be increasing the net-long exposure again by Monday. There's no reason the market must sell-off now, just to please me or anyone else. A market which cannot sell-off, when given the opportunity, usually just continues then upward.

Easy stuff.

Follow Centrifugal to fade trades in real time

Total Position: Currently 1.16-to-1 net-long, 105% invested (moved aggressively long early-wk and neutralized yesterday).

Currently Long (according to size): CRM (20.7%); ULTA (15.6%); PPO (10.2); NOV (reloaded today, 10%)

Currently Short: AAPL (hedge for now, 20.6%); TIE (18.2%); DISH (reloaded yesterday, 10%)

Futures: no current position.

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