Energy

The energy space is very intriguing as we head into 2016.  Why?  The psyche in this trade got very interesting in December.  Let's use OPEC as an example

From February:  They were absurdly optimistic long term.  Common rhetoric since oil peaked in 2014 was 'we are close to the bottom'

From late December: Their latest outlook suggests prices will decline next year

Who knows if that sentiment leads to a major long term bottom, or just the short term trading low we've seen.  That's a major change of opinion though..

Other pieces to the puzzle are there as well:

• High yield pessimism recently reached an extreme(the focus was squarely on energy)
• What countries are investors most bearish on?  You guessed it, Brazil and Russia
• This month's climax bottoms have happened on massive volume featuring the beautiful combination of fear and forced selling.
• Massive bursts on this recent rebound.  Yes, strong moves occur in bear market rallies.  However, every important low starts as a bear market rally.

Really, what else do we need?

More Psychology: what type of rhetoric do we want to hear if this trade starts working well?

A dummie thesis you want to hear:  The Fed is raising rates, the dollar strength will continue (actually that's already priced in).

Also, sharp moves off bottoms tend to create anxiety that sounds something like 'we're already up so much, how can you buy here'

If we rally and we hear things like that, it's a good sign.

On top of that, we've got people traveling, partying and dicking around in general during the holidays who are missing all these lows.  It'll be easy for them to be slow to react and apathetic to any move.

To sum up my beliefs: the conditions are in place for an intermediate term trading low in energy and energy stocks.  

It's easy to get married to an idea or position.  You can't do that when trying to time a bottom.  Let the market tell you what it wants.  Only marry your position if it treats you well.

Trade 'em well

Be uncommon

Shane Parrish at Farnam Street wrote about a key concept that really jumped out to me.

"In a nutshell, when everyone learns the same lessons, applying them to the point of religious devotion, there can be opportunity in the opposite. If everyone is thinking the same thing, no one is really thinking."

The post referred to Peter Thiel and the tenets of the private markets.  This principle shows up numerous ways in the public markets as well: 

This is very apparent in common rules found in trading books.  Certain ideas have a tendency to get really popular because they are easy to digest.  When that happens, the rules don't work.

This ties in nicely with a post I wrote recently on the mental approach to trading.

Mass market psychology.  If everybody has the same experiences, feelings and fears; it pays to be different.  

During the 2011-2014 rally, market participants as a whole got very jittery and negative on every buyable dip.  That particular of fear drawn from two recent stock market crashes played out time and again.  Market participants thought they were acting rationally, but they weren't.

Market Tactics Edges trading the markets are often moving targets.  Sometimes they are constant.  A certain setup works, certain moving average, signal etc.  When that's the case, it just means few people notice them and we should use them until they don't work.

After enough people figure the edge out, new edges eventually develop while old edges become worthless.

Farnam Street with the full post

Trade 'em well

The Third Dimension

The risk-reward ratio is one of those things every trader and investor acknowledges and talks about.  A third aspect that gets very little love is probabilities.  Not only do we want a good risk-reward, we need above average probabilities to place a trade.

Why do most avoid talking about the underlying probabilities?  I have a few guesses

1)  They are rarely clear and difficult to explain

2)  Most folks want easy answers

3)  That is where trading edges lie

Don't get me wrong, i'm all for keeping an open mind once in a position.  However, one of the hallmarks of underperformance is striking out on trades even though you get the market right.

How do you improve your probabilities?  Make use of your tools:

• Technical tools
• Bollinger Bands are just one example of an invaluable tool if you know how to use them. 
• Common Sense/Critical Thinking - Know where and why buyers/sellers show up
• A stock sells off on earnings or news that doesn't affect the larger thesis - that's a situation where investors would step in.
• It's not that simple though, what catalysts are coming in the near future?  Is there more risk(uncertainty) on the horizon in the short term?
• Is there emotion in the market?
• Follow Options Activity 
• Big market players making big bets in front month options tend to tip their hand.  
• If you see a stock at or near a buy point with action coming in, odds are increased that your stock will move soon

It takes a lot of refinement to adequately understand and improve probabilities in trading...A ton.  That said, focusing on this third dimension will increase your learning curve over time.

Trade 'em well

What's up with retail?

The holdings in the SPDR Retail ETF (XRT) are largely acting horribly.  Traditional retail just continues to get wrecked.

With that in mind, I took a look at the best charts and companies in the space.

The bullish argument for retail is e-commerce is winning by a landslide.  Of course it is.  At this point, everyone and their mother knows that bullish argument for Amazon.  It's mostly if not completely priced in.

Amazon is a must watch chart.  The 2015 rally was amazing.  Everybody wanted to show a large position in Amazon at the end of the year.  Can it continue to lead?  The trend is clearly still up on each timeframe for now.

Expedia's chart is really struggling right now.  The bear thesis of a slowly eroding global economy (therefore leading to less business travel) certainly is NOT refuted by this price action.

Ulta Salon is an amazing retailer with amazing management.  All systems are still go technically.  Can it continue to power higher?  My question is, what's stopping them outside of a recession?

Netflix has really lacked buyers in December.  It's really struggling to find a bid.  With severely waning momentum on the weekly, it's very risky to own these days.

NFLX weekly

Under Armour started discounting aggressively last spring.  Their management is WAY ahead of the competition.  80 has proven to be a solid support level and the stock's momentum has reset.  That's a big level to watch as a tell for the group moving forward.  

Remember, even the best companies throughout history have dropped 50%+ from their highs in meaningful corrections.

Finally, the SPDR Retail Index chart is stuck between the fall bottom and downtrends of numerous timeframes.  Resolution will be a major tell.  

Perhaps the most concerning fact about consumer discretionary stocks is the fact oil and gas prices have cratered in the last 18 months.  They haven't helped consumers at all.  THAT seems like a silent alarm going off.  It makes me wary of the sector until further notice.  

Trade 'em well

Good Reads

As many of you may know, for the past year I've written 'Top Trading Links' for See It Market. Unfortunately, things change and the linkfest will be housed here for the foreseeable future.  

Changes are coming to make this weekly post even better. I'd appreciate it if you let me know what you think about these linkfests on twitter or stocktwits @ATMcharts.

Now on to the Good Reads!

2015 was an odd year, as it was a year that nothing worked - @PensionPulse

@RyanDetrick explains how this was one of the worst years for diversified investors in recent memory.

@PeterLBrandt tells us why the major U.S. stock indices aren’t making head and shoulders topping patterns.

@hedgopia - Is the housing slowdown foretelling a consumer spending slowdown in 2016?

Howard Marks was interviewed by Finanz und Wirtschaft

“Investors are not doing what they want to do. They’re doing what they have to do. They are like “handcuff volunteers”. Today, if you want to make a decent return you have to take risks.”

China’s Hang Seng Index is at a critical juncture - @KimbleCharting

Dividend cuts are coming at a pace that suggests economic contraction via Political Calculations

10 Economic Questions for 2016 via @CalculatedRisk

The Pros and Cons of a sideways market via @awealthofcs

A dozen things @trengriffin learned from Michael Milken about finance

@BartsCharts looks at buyable levels in Sam Adams shares

@TrinityAssetMan shares his surprises of 2015

@psacosta notes flat market years have generally been followed by significant gains.

Trading Insights:

Experienced traders can relate to @AnneMarieTrades discussion of the turning point of her trading career:

“…..the pivot point was the real embracing of the pain, and fear associated with trading losses that redirected my behavior to put me on the path of consistent successful trading”

The root cause of traders’ emotional problems via @steenbab

“The core problem, however, is the need to fit markets into a style of trading rather than finding ways to trade that fit with market behavior.”

Gatis Roze shares how he stays the course in his trading process

News, Stats and Ideas:

A cash free future is coming fast in Sweden via @nytimes

Passive funds are increasingly popular these days @business - This is a major shift for industry. Of course flows to passive management kept rising in 2015 even though elite active managers won the year and we saw a massive volatility shock in August. The catalysts that might end this trend are a cyclical bear market in equities, or a new bear market in treasuries. We'll see if they comes in 2016.

Global M&A surpassed 5 trillion dollars in 2015 via @Dealogic and @businessinsider

15 Startups to watch in 2016 via @venturebeat

@techtraderdaily shares some analyst color on next week’s Consumer Electronics Show

Thanks for reading!  Happy New Year