"Everyone has a plan 'till they get punched in the mouth" - Mike Tyson

November 29, 2015

A Look Ahead

Goldman Sachs recently came out with their 2016 preview.  They mentioned they expect 2016 to be a flat year in the markets.  My buddy Ryan Detrick over at Kimble Charting Solutions  notes that back to back flat years just don't tend to happen.  In fact, they tend to lead to strong moves.

Here's Ryan's take:
The bottom line is a flat year next year is highly unlikely.  As with anything, it could happen - but history would say be on the lookout for a big move next year.  In fact, I found 22 years were flat and the following year moved at least 10% (up or down) 14 of those times.  So, about two out of three times it moved double digits after a flat year. 
Aaron here - So we want to figure out if a big up or big down year is more likely.  The two critical factors we need to consider are earnings trajectory and the chart of the S&P 500.

First lets look at earnings via Goldman Sachs chart.  They expect about a 10% increase in 2016.  That's bullish.


Let's look at the S&P 500 chart.


That's pretty clear resistance we're leaning up against.  Pattern wise we may be looking at a rounding top.  We'll have a clear read sooner or later.

My Take:  If the S&P 500 can take out the 2015 high by more than a few pennies, we could be setting up for a strong 2016.  Otherwise, it's not worth being aggressively bullish from a broad market view.

We also need to consider the fact that forecasting is hard.  Murky global economic trends are only complicating matters.  The point is, it's very important to not be blindly bullish based on earnings projections.  After all, the market will sniff out the truth.

Floor-natic

I love floors that form in charts.  Why?

Floors capture the essence of buying low.

Plus, they tell us when longs are buying and shorts are covering.

People tend to become disinterested in a stock when the floors are going to work.  You can use psychology as an added edge.

Frankly, they just fit my trading.


What's awesome about floors? 

You know where you are wrong.

Where you're wrong is close by.

Similar principles work on nearly all time frames.

They often form after a long term false breakdown.


What stinks about floors?

They can be temporary or closer to permanent.

It's hard to know when they will hold.

You never know how long they will consolidate.




America's biggest problem

There's a lot of talk and frustration over the Allergan and Pfizer merger that takes Pfizer's massive tax base overseas.

As an American, this is disappointing.  Unfortunately, this is a continuing trend that uncovers one of America's greatest problems today.  Poor treatment of capital.

Wriston's Law of Capital states that capital flows to where it's welcome and stays where it's treated well.  Wriston also notes that capital isn't just money.  It's people and ideas too.  Let's take a look at the state of 'capital treatment' in the U.S.

Monetary Capital

Ever since the financial crisis, large corporations and the wealthy have been targeted by our society.  It's one thing if that is a public perception.  It's taken to a whole new level when the government gets involved.  The Obama administration has basically led the charge.  Not only by tax code, but by rhetoric as well

If the next administration continues down this path, that really reiterates a negative tone for corporations.  This could be very problematic, as the east quickly catches up to the west and global competition continues to rapidly escalate.


People

One area that the U.S. is really thriving in is how it treats people.  Yes there are many things that are shoved in our faces because of media, but what countries around the world are competitive economically and treat their citizens better?

What's really interesting is the college bubble.  We're all aware of the bullshit degrees and universities out there that don't prepare you for much.  That said, so many employers are willing to pay for employees to go to trade schools.  Special skills such as coding, of course are in ever increasing demand.

We have a certain percentage of the population completely screwed in important industries such as healthcare and education.  This horribly mis-aligns incentives.  

Perhaps this created our current 'mixed bag' dynamic - the best and brightest are still in a great treatment, but the environment for creating more citizens that will greatly contribute to society continues to erode.

Ideas

There are a lot of controversial emerging technologies from medical science to machine learning and robotics, self driving cars and virtual reality.  We know the U.S. largely has a 'bought government'.  How does regulation end up treating these massively disruptive technologies?  If we see resistance emerging from the government, the U.S. is, for lack of better words, in a confirmed structural downtrend.


All in all, America is still relatively friendly to every type of capital.  However, if these cyclical problems become secular, we have a lot to be concerned about as U.S. citizens.  Come to think of it, these might already be secular in nature.  Again, it's just as important that the U.S is better relative to its global competitors.

It's a good thing that people freak out about this stuff, it helps keep America's compass on the right track.

Thanks for reading!

November 25, 2015

Detroit Stocktwits Meetup ideas

I just wanted to quickly touch on a couple of ideas discussed at the Detroit StockTwits meetup last night.

This chart from JC Parets has had my attention all week in GPRO.  I asked if anybody liked Go Pro down here - crickets.  The conversation immediately moved to AMBA.  That's the type of dis-interest that I like in my long ideas.




We also talked about Twitter.  This is a pretty solid floor that has developed around the IPO price.  Remember how twitter hearts caused outrage for like a day?  Well, that negative sentiment still hangs in the air.  Let's not lie to ourselves, it hasn't affected our twitter usage one bit.  Also, since the stock is doing nothing, people are becoming disinterested.  Again, this is an interesting combination that seems like it could lead to a good trade.



While talking about TWTR, I brought up China's twitter counterpart Weibo.  Shares have had a great run of late.  Maybe it's a cultural thing, maybe it's a management thing, but WB is acting pretty well.



I wish I had time to share more, but holiday travel awaits!  Have a great Thanksgiving!

November 22, 2015

Subprime Auto Loans

Here's a quick note from Friday's Wall Street Journal

'There are now more auto loans (in number) than mortgages'

A somewhat distant family friend works for Credit Acceptance Corp - CACC - a sub prime auto lender.  I remember this only because he kept bringing up the concept of management wanting to 'get the stock price to 1000'  You can imagine how this is going to end.

I'd lost track of the stock, but clearly shares are suggesting turbulence(at least).  The relative weakness is really standing out.  Add this to your list of signs of a weakening consumer.


Thanks for reading!

November 20, 2015

A turn in CAT?

Are we finally seeing a turn in Caterpillar shares?  Let’s take a look.

After a panic gap down in late September, the stock formed an island bottom on heavy volume over the next week.  Since then, the new floor has been 67.50.  We can now say this has gone from a bearish to neutral market.

cat.png

Looking at long term chart, we see that 62.5 level is the bottom of a four year range last seen during the 2011 panic.  The strong reaction at that level is a positive.  Technically, above that island gap, we can look for a push higher within the range.  Also note the potential head and shoulders bottom pattern developing.
catwk.png

Moving to the fundamentals and psychology, CAT posted dire sales numbers earlier this week.  

What really stands out is 1) the stock held the new floor level around 67-68 and 2) Analysts are piling on with their negativity.  

This is in no attempt an attack at any analysts or publishers, just an attempt to share interesting pieces of evidence.  


Screen Shot 2015-11-20 at 10.51.12 AM.png


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No offense to Gordon, but using all caps and exclamation points suggest emotion in one’s opinion.  Also, let’s remember that CAT is trading at 70.  They’re expecting a 60% decline next year.  That is aggressive.  

So again, we have strong opinions with emotion.  Also, the stock is holding a new higher support.  Frankly, this combination reminds me of nearly every time I sold at or near a bottom.

Will that be the case this time?  Time will tell, but it’s an interesting combination.

Thanks for reading!

November 17, 2015

How I share

Twitter and Stocktwits are a staple of my content sharing diet.  Here's how I share:

Ideas 

I chart all day, so I like to share different charts with a LARGE variety of flavor.  I focus on swing trades, but i'm also a big picture guy.  The market is a huge puzzle and I like to get an idea of the broad framework.

I throw out trade ideas here and there.  I usually don't throw out my process or follow up because - well i'm mostly just trying to share ideas.  Who cares about kudos or being right.  When i'm trying to lay out trade plans, I lay them out.


Random thoughts are a given :)

You will often catch me thinking out an investment thesis on stream.  I try to spark conversation with people who know more than me.

Retweets

I try to share the best reads on the financial web.

You will see me retweet plenty of content from See It Market.  I'm sure many people think it is spam sharing.  Well, it is and it isn't.  I read all the articles I retweet and there are just a ton of good insights from the nearly 50 contributors.  

I don't know much about much, other than my specific niche of charting and trading - and sports.  I constantly post things that make me think.  This definitely comes across as scattered thinking and it really is.

I share the work of friendly folks who I respect.  We all have different market interests and styles.  If what I share isn't necessarily for you, my goal is to point you in a good direction.  It also pays to understand different perspectives.

More on Charts

I get vocal about my favorite ideas.  Pay attention when I constantly repeat myself.

Sometimes I throw charts out there to see if there is strong sentiment.



Hopefully this adds some perspective to my wild sharing habits!

Thanks for reading!

November 16, 2015

Emerging Themes

The last few days I've talked about how I believe there are some excellent trading opportunities and the chance that there is a group theme emerging in the defense stocks.

Well, all of a sudden, most of the great trading buy points have been bought up.  Let's walk through a few thoughts and what to expect if we think a group theme is emerging.

First thing is first.  You don't know with 100% certainty this is the case.  You never do.  

If one of these themes emerge, the opportunities keep coming for some time.  You could say this theme really started in Mid-late October when LMT, RTN, NOC and company all broke to new highs ahead of the market.  

in an emerging group theme, the opportunities keep coming. If it is one, the opportunities will show themselves. There is no need to chase

We're looking for leaders to:  

1) pullback on lighter volume
2) see flat longer term moving averages start to rise

We're looking for laggards to: 

1)  bounce at key supports 
2)  form bases and eventually breaking higher

What we need to do:

1) be patient
2) consistently monitor the price action in the group
3) evaluate whether action is constructive

Thanks for reading!


Dog Whistle

Sometimes you hear something randomly that really gets your attention and sparks an ah-ha moment.

As I continue on this defense stock rift; Obama's speech in Turkey stood out to me.  He said that the war on ISIL and extremism isn't a traditional war.  He then referred to them as smart and crafty.  Some of the emerging details from these attacks really back that up.

What I gather is we need to think about not just defense but focus on defense tech stocks.  Tracking, satellites, things like that.  I'm sure there are plenty of not so obvious ideas.  Maybe there is a cyber security corporation with a key lesser known technology.

Globally, governments really need to step up their investments in tracking.  demand for those products are going to likely increase as war and conflict develops.  

So how do we find the not so obvious defense tech plays?  Get creative, be aggressive and don't be afraid to do some work.

Trade 'em well!




November 15, 2015

On my mind

The defense sector is interesting across the board for long buy points.

I'm just guessing Gold gaps up Monday.  If I had to speculate on a gold miner at this point, I like the action in Newmont Mining (NEM).  I'd consider it a low risk - high reward - lowish probability idea.

Many Consumer Staples charts are looking good.  Outside of defense, this is seemingly the most interesting sector right now on the long side.

Leading global brands like Starbucks, McDonalds, Disney etc are the healthiest in the consumer discretionary space.  Is that just another sign money has flown into the mega caps?  I think so.

I'm not convinced it's a good idea to short biotech stocks.  The price action isn't the best, but the group isn't tied to the very questionable global economy.

So many growth stocks are trading like they are under significant distribution.  This is a concern until bases show up.

The gobs of bases and bottoms formed at the October lows led to corrective rallies within downtrends.  Many are already making new lows.

This week is going to be a helluva ride!  You don't have to be smart, just don't be stupid.

Hide Out

The attacks on Paris are actions of cowards.  Of course, thoughts and prayers are with the people of France and all those affected.  

Extremists are only getting smarter and technology is enabling them.  How do we fight this extremist ideology?  I don't have that answer.  We do know the intensity of the war against ISIS has turned up multiple notches.  Let's translate that to markets...

Many aerospace and defense stocks are at good and great buy points.  I'm surprised how clean and clear this is.  Some have actually been acting well for weeks now.  The broad market is very messy, but defense seems to be a group for large funds to hide out with potential catalysts.  Let's dig in to some of the cleaner trade ideas.

Lockheed Martin continues to make new highs and new lows.  It has pulled back into the rising 50 day moving average.  


Orbital ATK held up through the fall correction and broke a base on strong volume.  It has pulled back in an ABC correction into the pivot area and close to the rising 50 day moving average.


October's rally in General Dynamics has faded right into prior support and the 200 day moving average.


Aerojet Rocketdyne had a VERY high volume doji day Friday.


Looking at the weekly chart, we see this area has been a MAJOR support area for years and it coincides with a rising 200 week moving average test.  


Raytheon broke a 20 point base and it has consolidated in a tight range for a month in in this newly re-emerging uptrend.


Loral Space and Communications is testing an old multi-year base.  Downside momentum is exhausted.


On a related note, I'm watching the Tourism Index and Priceline to see where we head from here.  The recent ISIS attacks are already adding scrutiny to who we let cross our borders.  There's a chance regulations across the world over-react and restrict travel and trade.  


We haven't seen a legitimate rotation theme emerge in a while (I hear you 'FANG' peeps).  Is this going to be an intermediate term market theme?  Maybe, nobody knows.  It's just an excellent time to bet that it will be.


Trade 'em well!

November 12, 2015

Re: Drone Investing

U.S. lawmakers are in a rush to regulate drones.  Odds are pretty good that regulations will be unduly harsh at first.  Overkill and stupid rules are getting thrown in left and right at this point.  I drew a quick diagram to explain the apparent path of U.S. drone regulation over time.


It could take years for regulation to ease as we have to find out what exactly is necessary and what isn't via trial and error.  The trajectory of the U.S drone market is uncertain and uncertainty tends to breed opportunity.  The great part is investors can wait for quality bases to form in their favorite drone and drone component stocks.

Some names to keep in mind with brief companies bios via investors.com

Aerojet Rocketdyne manufacturers satellite and weapon propulsion systems.


AeroVironment manufacturers unmanned aircraft and test systems for the US government.


Invensense manufactures motion processing chips and software


IXYS manufactures complex signal power management chips


On a somewhat related note from the aforementioned article, the U.S. isn't even the cradle of drone innovation.  Phantom, the world's leading consumer drone is made in China.  Not only made in China but by a Chinese company.  What?!  That's just something i'm noting for the very long run.

Disclosure: I have no positions as of this update(11/15) , but may have positions in names mentioned above soon.

Thanks for reading!

November 11, 2015

Stock by Stock

I generally gather my best market intel by going through hundreds of individual stock charts.  So let's talk about what's been happening within those charts.

At the beginning of October, chart after chart was at a long term support area.  Many were building a base or forming some short term divergences and so forth.  For a couple of weeks, we saw some broad participation.  That participation tailed significantly as the S&P 500 pushed into the high 2000s.

Now, the market has pulled back for over a week.  Naturally, we're looking all over for long setups and ideas.  I've been looking all week.  It's hard to find quality price structures.

Numerous strong short term rips have been followed with immediate selling.  That is a characteristic we've seen a ton in the commodity complex, but that action is not exclusive to the space.  It's happening in numerous sectors.

We can't forget the damage that was done across the board throughout August and September.  Many stocks are still working through a ton of supply.  Mega cap leaders have rallied hard, making the market capitalization weighted indices look better than the full market of stocks we're actually working with.

On another note, it's no coincidence price action has soured after everyone's resistance levels were blown out.  After all, the market fools some of the people all of the time.

Trade 'em well!






November 06, 2015

Why the bull will roar again

You often hear about how companies are just financial engineering there way to profits.  That's often attached to the stigma they aren't spending on new projects and research and development.

Well, it turns out that's just more sloppy rhetoric.  In the second quarter, S&P 500 companies spent the most on R&D in ten years.

The point here is, the economic machine is working.  Corporations see growth slowing, so they see no choice but to invest the giant piles of cash they've built up.  This is no doubt a net positive for the economy in the intermediate term.

Perhaps this in part explains the strength of the 'mega cap, change our world tech stocks'.  These are the best type of technologies (mobile, social, web-based) and themes to invest in.


Busy Work

The investment industry is filled with complex terminology and busy charts.  The name of the Wall Street game is to sell complexity.  Often, new traders and investors confuse complexity as 'a requirement for success in markets'.  After all, it seems like that is what everybody is doing.

That in and of itself is a sign that we don't need significant levels of complexity in our trading.

You do not need complex charts, indicators or data to make good trades or wise investments.  PERIOD!

It's so easy to get caught up in intellectual pursuits that take away from OR completely override the effort to make money.  So many people think they're in the market to make money, but in reality other subconscious motives often take over.

People want to be right.
People want to make great calls.
They want to do things the hard or elaborate way in an effort to show superiority.

Interestingly, these are all reasons why strong trends tend to persist.  Again, these motives are as much subconscious as they are conscious.

These motives DO NOT lead to superior returns.  They just lead to busy work and painful losses.

Here's a short and incomplete list of things you do and don't need to succeed in the markets.

You DO NOT NEED:

to have complex screens, tools or methods

numerous technical indicators all in agreement to take a trade

to spend all day in front of screens


You DO NEED

the ability to quickly adjust opinions

fortitude to quickly accept being wrong

the ability to find confluences of support and resistance and think uniquely about them

quality information


What most people mistakenly believe is that complexity is needed in our INFORMATION INPUT.  

What we really need is complexity in our THOUGHT OUTPUT.

You have to think in markets.  We have to take the simple, key data points and think somewhat deeply about them and make decisions.  It's work most people just don't want to do.  Often times, people just want the complex data and research to do all the decision making for them.

Gosh, that would be nice wouldn't it?  I wish!!

Trade 'em well!

20K

I recently reached 20,000 followers on StockTwits.  Every 10K I update and re-share this list of lessons and things I've learned about social media

I also want to say thanks for all the laughs, generously shared insights and great conversation over the years.  I was glad to finally meet some of you at Stocktoberfest this year!


Social Media Truths and Commandments
  • Be nice and show respect.  
  • Mis-communication is guaranteed.  Don't be judgmental. 
  • The twitter-sphere is an odd way to get a first impression of somebody.  
  • Group think is rampant.  Don't get caught up in the crowd.  You have to think for yourself.
  • There is an insane amount of emotion on twitter streams when markets are open.  Do what you have to to avoid it.  It's hard to completely filter out of your mind.  Manage your follows.  Nobody is doing this intentionally, it's just the nature of the beast.  
  • If you're bringing your emotion into your stream you're sucking value out of it.
  • Better to remain silent and be thought a fool than to speak out and remove all doubt. - Abraham Lincoln.
  • The smartest folks on the stream are generally the quietest about their opinions.  They let their work and words speak for themselves.  
  • It's difficult to see that as many self-anointed experts create an illusion of knowledge by being very 'loud' and constantly cramming their opinions into the streams.
  • The best follows engage in constructive, thoughtful conversation and are open to being wrong.  
  • Everybody is pushing an agenda and that's fine.
  • I've tried to use follows as a marketing tool.  It's pointless.  And annoying.
  • Want people to scratch your back?  Scratch some backs yourself.

Beware of bullshit

There is so much information offered as advice in the twitter-sphere and a lot of it is just bullshit.  This is another nature of the beast problem.  As we're all just out there working our thoughts out in various points in our learning curves, we think we hit on something so we throw the hypothesis out there to see if it works.  No harm, no foul - it is what it is.

Trade ideas are just ideas

So many people want to post trades on social media and make calls and be right.  Who cares.  What matters is the idea flow.  We're all different people with different trading styles.  There is no use in following someone into a trade and expecting them to get you out of a trade.  If they're consistently good at what they do, they wouldn't be posting it all real time for free.

All of this free information doesn't mean you don't need guidance

I used to think since there was a vast amount of data out there for free, why would you need to pay for any trading services?  To this day, I've subscribed to only one trading service.  Honestly, that was probably a mistake.  It's a VERY LONG process putting all of the pieces together, and having guidance from seasoned traders can definitely help smooth out the learning curve.

Build your network

There are so many smart people to follow in various parts of the finance industry (or in general).  All with different points of view.  It's easy to follow a bunch of people that think like you or trade like you do, but the best value is in building that diversified idea network.

Finally ...

Stocktwits shared their sentiment data by hours of the day


My immediate take-away from this data

Judging by the dips at 9 AM and 4 PM, trolls come out when news comes out and put their negative spin on everything without properly vetting the data.  Just like the media.  Ignore them!


Trade 'em well!  
- Aaron

Dealing with Dissonance

One of the loudest and largest positions I've ever held was the Gold Miners in September.  With that, comes new challenges.  As traders, we face a lot of the same issues over and over again.  Using more size magnifies the intensity of any psychological hurdles.  After reviewing my tweets and thoughts on Gold and the Miners over the last two months, I recognized notable dissonance.

Barry Ritholtz explains Cognitive Dissonance.


Before I entered the gold miner trade, my main target was the 200 day moving average.  As you can see, price topped below it.


I was highly aware of that late October sloppy toppy price action and subsequent breakdown.  I was actually looking for short setups(although there were few to none other in the market).  However, I couldn't put myself in a position mentally to accept that and take that short trade.  

What's clear is I didn't have an unbiased view - which is okay.  What's not okay is not being mindful of that.  

One blanket solution many trading coaches recommend is a check list.  Check lists can be fantastic tools.  They are also worthless if you can't assess things honestly.  Well cognitive dissonance is a challenge where one struggle to assess things honestly, let's move on.

So what can you do?  Simply acknowledging your bias goes a long way.  It's difficult for most, myself included, to remain open-minded.  Verbalizing your true beliefs and thoughtful discussion with people you respect take things to a new level.

It's amazing how you unclothe the different thoughts in your head when you discuss them with many people.  Stocktwits and Twitter are a great tool for discussion, but verbalizing takes our breakthroughs to a new level.  

It's also important to remember that markets change constantly.  Ideas and opinions can stale quickly.  Being long gold miners made one look brilliant in the first half of October.  Then like a switch flip, the trade was over.  Risk happens fast.

Trade 'em well!

Reminder:

All ideas shown on this blog represent the authors opinion based on the data available.