Pray the Well - Prey the Weak (go-to list of shorts)

While the Dow managed new highs Friday, the rest of the market is on its heels; smaller-cap stocks in particular.

Not so enchanting a divergence if you are long of stocks.

I'm much smaller now (as planned in my previous post) and in particularly good spirits today. Not only did I succeed in getting out of the market's way, I've begun now planning for my South American bloodlust hunt-and-grunt adventure get-away.

I've got to get my action somewhere.

It is not for me to say the bull market in stocks is ending. I could proclaim a dramatic downside call here and look to highlight my worth once it (finally) hits, but why cement myself an idiot? This is the 3rd and historically best year of the Presidential Cycle, and if inflation will continue to rise for months and months to come, then stocks are likely undervalued still (fixed-income folks ought to watch equities here, now that they've stopped rising in straight-up action for the first time in months. If stocks are in the midst of a simple, healthy correction and ultimately burn to higher and higher highs, it becomes rather clear where inflation and subsequent fixed-income purchasing power are headed. Buying stocks in that environment would become defensive, odd as that may seem).

These remain unprecedented times. Gigantic fiscal experiments from the world's largest economy and the ultimate outcomes are difficult, if not impossible to predict. Anyone calling for a bear market right now is either a gambler, an attention whore, a stupid fool, or all the above. Don't pay any attention to anyone right now who knows what is going to happen. Ignore subjective humans; some of whom have agendas they are not even aware of, since their own sub-conscious drivers commonly ignite their folly (something they fail to predict).

The markets are the best economist you've got. Imperfect predictors as they may be.

Having barked all that out (Bah!), I'm not jumping up and down bullish anymore either. New-woot highs in the DJIA, coincident to a leadership pummel, is not the kind of divergence I want to soak my feet long in. Unless and until the larger, upward trends are broken, I'm not keen on shorting aggressively, or proclaiming squat. This then is the right time to take it easy some and allow the market picture to paint itself. The peanut gallery is for pathetic artists and followers only.

What I will contribute though, is an objective hit-list of what are now the weakest industry groups (and the not-too-pathetically-thin corresponding stocks). The screen is compiled from the lower-ranked relative-strength (RS) groups, which are performing weakest on the year so far (YTD).

This is not a list of the year's worst-performing groups so far, since shorting the more leadership groups which have already been hit is a risky affair (those beasts have sharp teeth). Rather, these are the worst groups YTD - which are lowest-ranked (the worst or the worst). They may not be as exciting, but they are the weaker animals and in that regard the safest (to attempt) to kill. The YTD performance of the major indices are shown at the bottom. All of these are well off their highs now, but the Russell-2000 in particular, has painted itself red.

As always, shop this list at your own risk. It is a working list only - a go-to kill-list for when I'm in a pinch. It's compiled for myself and you can make of it (or fade from it) what you want. You're (still) on your own. Follow Centrifugal to fade (my) trades in real time.

Worst Performing + Low-Ranked Industry Groups thus far in 2011 (from O'Neil's 197 ranked groups, as of Friday's close):

1. Bldg-Cement/Concrt/Ag -7.75% (CADC*, TXI*, EXP*, MLM, VMC, CX, CRH)
2. Leisure-Toys/Games/Hobby -7.5% (MCZ, OMEX, LF, RCRC*, JAKK*, HAS, MAT)
3. Consumer Svcs-Education -6.5% (LINC*, CAST*, COCO, UTI*, APEI*, LOPE*, BPI*, LRN*, CPLA*, STRA*, COCO, ESI, EDMC*, DV, EDU*, APOL)
4. Tobacco -5.83% (BTI, AOI, CIGX, UVV*, VGR*, LO, RAI, MO, PM)
5. Retail-Discount&Variety -5.58% (NDN, BIG, FDO, DLTR, DG)
6. Retail-Consumer Electronic -4.8% (RSH, BBY, GME, CONN*, HGG)
7. Steel-Producers -4.5% (AKS, CHOP*, CPSL, GSI*,
8. Retail/Whlsle-Auto Parts -4.38% (AZO, GPC, ORLY, AAP, CPRT, MNRO, PBY, LKQX)
9. Wholesale-Food -4.35% (UNFI*, GMCR, SYY)
10. Beverages-Alcoholic -4.18% (HOOK*, BORN, SAM*, CEDC, STZ, DEO, BUD, ABV)
11. Banks-Foreign -4.08% (IRE, GGAL*, BFR*, BMA*, NBG, BAP*, CIB, SAN*, KB*, HDB*, IBN, RBS, BSBR, NABZY*, BBD, ITUB, BNPQY*)
12. Retail-Super/Mini Mkts -3.38% (TA*, QKLS*, WINN, PTRY*, SVU, CASY*, RDK*, TFM**, SWY, WFMI, CBD, KR)
13. Bldg-AC & Heating Prds -3.08% (FIX*, AOS*, WSO*, LII*)
14. Food-Dairy Products -2.83% (ADY*, DF, WBD, DANOY*)
15. Food-Packaged -2.58% (SMBL*, BGS*, THS*, FLO*, RAH*, SJM,

Notable (dropping rapidly in Relative Strength):
- Auto/Truck-Tires & Misc -4.24% (TWI, CTB, GT)
- Retail-Mail Order Direct -3.14% (WTV, HSNI, LINTA)
- Retail-Leisure Prod -2.13% (BGP, HIBB*, BKS, POOL*, CAB*, DKS)
- Transportation-Truck -2.02% (YRCW, QLTI*, ABFS*, HTLD*, KNX, WERN, ODFL*, CNW, SWFT, LSTR*, JBHT)

-Russell 2000: -1.3%
-NASDAQ Composite: +1.4%
-NYSE Composite: +1.8%
-S&P 500: +2.0%
-NASDAQ-100 (NDX): +2.3%
-Dow Jones Industrial: +2.5%

* Thin
** IPO

Updated Position (damage control action plan)

While I had positioned myself nicely for such an accelerating momentum death-wash, I covered out of that plan too soon and without any spoils to show for it.

Looks like I picked the wrong week to stop sniffing glue.

I am not aggressively net-long, fortunately, but some of my position is capable of finding the woodshed and I'm in a bit of a spot as far as that is concerned. Here is my outline for getting out of the predicament, and go find some other bloodsport (if I end up on vacation, something will have to pay):

-Given the sizable degree of selling and increased emotion in the after-hours session Wednesday (both suggesting we'll see a reasonable gap-lower Thursday), I will be buying, not selling, the opening minute tomorrow morning (or possibly pre-market, depending). Momentarily then, I will be further net-long, in this case.

-If the open is less dramatic, or higher for some reason, I will do nothing early or else begin selling.

-If internals are deemed severe-negative (my judgment after the initial minutes of the session), I will not buy beyond whatever I have done by the open, but will quickly begin to neutralize (via mammoth hedge) and then begin bailing out the problems one by one until I'm essentially liberated. In this scenario, I become more and more net-short as my longs are further and further reduced. I would ultimately unload most or all the hedge then by late-session (earlier if there is a miracle recovery; not at all likely when we see severe-negative internals*).

-If internals are not severe-negative, I may add further long (on top of whatever buying accomplished by the open), but then I will begin reducing long-exposure on strength, accordingly. The new buys will theoretically be profitable and subsequently other improving longs will minimize net-losses on the session. My exit is especially graceful in this case.

-Ultimately then, regardless of how tomorrow plays out, I am going to scale to a smaller position; even if I get momentarily larger first. After reducing exposure (as gracefully as I can manufacture), I will let the market define itself some before re-committing with any size (whether long then or short).

This has been a great bull run and the market is perhaps at an interesting crossroads. This may be something of a normal correction within a bull market, or something more sinister. I try not to care. Nothing should surprise us anymore - not even a dull, trendless market which has you catching up on too much sleep.

One bellwether worth watching Thursday will be Salesforce.com (CRM). This name will gap lower with the FFIV woodshed party already in progress. Watch and see if CRM's action is ultimately accumulative or distributive; from its opening price onward. The name is a thermometer still and indicative of general near-term market health (some of that thermometer will heat up my ass, depending on how bad it is; I remain long here, although a multi-month winner).

Don't try any of this yourself, or at least not because of me. This post helps me focus my plan and my thoughts and I share it for information only. Thursday should be an exciting day - trade 'em well and be disciplined - your discipline.

Best luck.

* Severe-internals is when market breadth is running >8-1 negative in the opening hour and/or greater than 6-1 negative after the first hour. I generally never expect the potential for a market reversal when internals are severe-negative (or severe-positive, as the case may be).

Follow Centrifugal to fade trades in real time

Total Position: Currently 1.46-to-1 net-long, 91% invested

Currently Long (according to size): CRM (reduced today, 14.8%); OVTI (10.1%); CYMI (9.9%); MCP (reduced early today, 9%) ULTA (15.6%); PPO (reduced today, 7.9%); MIPS (reloaded today, 5%)

Currently Short: CMCSA (reloaded today, 15%); DISH (10.1%); (NDX index via long-QID, 9%)
...currently weighting QID at 1.5 x's instead of 2 x's on net-long calculation.

Futures: no current position.

Industry Group Leaders (highest-ranked YTD)

I was going to post this over the weekend, but given that bellwether Intel reported after the close Thursday, I want the results in hand now for Friday.

One comment on INTC for Friday - the last two quarters saw the name gap-up strongly and weaken from there (otherwise known as gap and crap). After the close Thursday INTC was up a more modest 2.1%. I know a lot of traders are expecting to see disappointing INTC action (yet again!) following Friday's open. This is far from my favorite name, but it hails from a highly ranked industry group and I suspect the stock will not oblige.

I'm looking to trade INTC long tomorrow (1-day trade), beginning pre-market, assuming it is higher by around 2%. Much weaker and I will pass. Much stronger than that and I will let it open first and look at buying into the first slice lower. Come and sell it into me - I'll take those shares and run with them ;)

Okay, we're nearly 2 weeks into the new year, so pin-pointing the best performing highly ranked industry groups is a way to keep sharp with the new leadership (sticking with highly ranked groups only avoids most, though not all, of the potential landmines. CSTR, for example, is not from a highly ranked group at the moment).

As always, read these at your own risk. This is my working list for new buys and it will gradually change as the year's trends progress. Make of it what you want, or not. You're on your own.

Finally, it's now very late. I tried to incorporate the leading stocks within these groups, but that list is incomplete; primarily so that I can get some sleep. Hit me up with questions or comments, especially if you want something clarified.

20 Best Performing + Highly Ranked Industry Groups thus far in 2011 (from O'Neil's 197 ranked groups, as of Thursday's close; subscription-service):

1. Telecom-Fiber Optics +13.93% (FNSR, JDSU, OPLK, CIEN, EXFO*, ABVT*)
2. Leisure Travel-Booking +9.56% (PCLN, TZOO, EXPE)
3. Machinery-Farm +8.18% (DE, CNH, AGCO, LNN*)
3. Oil&Gas-Intl Expl&Prod +7.52% (CEO, EGY, APA, HDY, FXEN, GTE, TRGL)
4. Elec-Semi Fablss +7.76% (ARMH, GSIT, MIPS, OVTI, ENTR, CAVM, AVGO, XLNX, ALTR, NVDA, MRVL, BRCM, PMCS, TSRA, ISSI, QUIK, SLAB, ARX**, NXPI**, IPHI**)
5. Internet-Network Sltns +7.14% (FFIV, ARUN, RAX, AKAM, LOGM, SPRT)
6. Energy-Coal +6.77% (WLT, ANR, ICO, BTU, ACI, TCK, MEE, CNX, PCX, JRCC)
7. Telecom-Infrastructure +6.73%
8. Telecom-Cable/Satl Eqp +6.51% (APKT, IDCC, AUDC*, ADTN, SHOR*)
9. Computer Sftwr-Enterprse +6.35% (CRM, SNCR, ULTI*, CNQR, SFSF)
10. Computer-Networking +5.5% (RVBD, JNPR, ALLT, PLCM, NTGR, ELX, BSCI)
11. Auto/Truck-Original Eqp +5.11% (WBC, TEN, XIDE, AXL, MGA, ALV, LEA, GNTX, ARM, ACW, JCI, DAN, MOD*)
12. Machinery-Tools&Related +4.91%
13. Leisure-Gaming/Eqp +4.73%
14. Machinery-Mtl Hdlg/Autmn +4.62%
15. Chemicals-Agricultural +4.58%
16. Auto/Truck-Replace Parts +4.55%
17. Computer-Data Storage +4.35%
18. Medical-Long-Term Care +4.33%
19. Elec-Contract Mfg +4.28%
20. Trucks & Parts-Hvy Duty
-NASDAQ Composite: +3.1%
-Russell 2000: +2.17%
-S&P 500: +2.1%
-NYSE Composite: +2.0%
-Dow Jones Industrial: +1.3%
* Thin
** IPO

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.

Battle-Plan for 2011 (strategy shift for a lower-volatility environment)

I'm changing my strategy somewhat for 2011, largely due to reduced volatility in the equities markets.

While volatility should likely rise this month, compared the December lull just ended, I'm moving to a more concentrated approach in my equities attack. I've been formulating this in my mind for several weeks and think it better suited, unless and until volatility heats-up again dramatically.

In recent years, in a more charged environment, I've done well emphasizing reducing volatility in my managed accounts. I employed a steady diet of hedging (playing both sides of the market at the same time, to varying degrees); increasing and decreasing position sizes, more or less in-line with the direction of the market; and using a wide-spread number of positions (a larger number of relatively small positions; sometimes as many as 20 long + short names combined).

This afforded me to push an aggressive growth portfolio and out-perform all averages, but demonstrate lower draw-downs vs. the overall market at the same time (yes, lower gains on occasion...perhaps unavoidable in such an approach).

If volatility rises dramatically, I'll revert in the direction of this strategy again. In the meantime it is going to look more like this:

-Fewer total trades. I will scale in and out of positions still, but with fewer numbers and lower frequency.

-Larger, more concentrated positions. View 10-20% weightings now as normal (down from 5-10%); View 5 positions as typical (5-6 positions on one side of market as maximum and 8-10 positions as maximum if neutralizing or playing both sides of the market/smoothing account volatility).

-Employ hedging strategies accordingly. Employ less hedging in a trending market and more in a choppy environment, but certainly continue to hedge.

-Trade far less in a choppy + low volatility market. Let the machines have the spoils in that environment; take to the sea and rest-up during this period.

The risks of such a shift are that I will be more concentrated and thus post larger swings in performance (account volatility should rise relative to the indexes themselves). If I get the market wrong, it will cost more (as always, but more so in this case). If volatility is running relatively high, I will front-run market direction less and follow a quick-step behind directional turns instead (every high and low is potentially important in a higher-volatility environment). On the other hand if volatility is low, I'll be more keen to front-run direction and/or wait-out more minor directional waves and hold more to the larger trend (resulting in fewer numbers of trades).

There are worse fates in this business than the occasional unnecessary retreat and I remain willing to behave accordingly. But the lower the volatility, in general, the more performance suffers by running to and from every shifting tide. Fewer positions make the dance somewhat simpler to manage and extremely low volatility renders over-trading succinctly ill productive. Ride with the larger trend and hold to your guns in that case; unless or until pressure is clear and adequate your position is on the wrong side of the tracks.

Best trading for 2011 - let's rock and roll!

Follow Centrifugal to fade trades in real time

Total Position: Currently 1.41-to-1 net-short, 76% invested (net-short stance, taken only at the end of session on Friday, expected to be short-lived; unless correction commences out of the gate with the new year; which is not unprecedented).

Currently Long (according to size): BA (12.1%); CRM (increased Friday, 8.6%); ULTA (7.1%); CENX (5.9%)

Currently Short: AAPL (temporary hedge for now, 20%); (NDX index via long-QID, 10.1%); GMCR (7.3%); CVS (4.9%)
(currently weighting QID at 1.55 x's instead of 2 x's on net-long calculation, based on relative beta of longs vs. qid)

Futures: no current position.

Note: More Battle for Investment Survival lectures to come soon; fast and furious perhaps.