9-24-2013 Comments

[Mike]

It should be no surprise that I am a longer term investor than most people on this group. In the last two days I have purchased positions in LNKD and PCLN. And last Thursday I added to TSLA and SSNC. Last Wednesday I added to CBI. Today we had a B5 (Living above the 21-Day Moving Average) buy signal bringing the recommended exposure to 100% long. This is where I am, actually a small bit on margin. The leaders seem to be working better than the overall market. I don't know when this ride will be over but I am onboard until it doesn't work any more.

[MTman]

Could you define a 'Power Trend'? When should you go off margin when the market begins to pullback or consolidate?

Thanks,
Mark

[Mike]

Could you define a 'Power Trend'? When should you go off margin when the market begins to pullback or consolidate?

Thanks,
Mark

Mark, A Power Trend is defined by Bill O'Neil's portfolio managers as a period in the market when the market is in a significant rally, something other than a sloppy sideways movement. It is measured by looking at the 21-day exponential moving average and when it has been above a rising 50 day moving average for at least 5 consecutive days. It will have no closes below the 50-day. The index lows also need to be above the 21-day moving average for at least 10 consecutive days. A power trend, when it is in effect, changes the recommended portfolio exposure level. It is essentially designed to keep O'Neil's portfolio managers in the market on the long side when the market pulls back after a strong upward market move. The market often pulls back after a big upward movement and it is best on average to ride out the pull back with your best performing stocks. We are not in a power trend at the current time. We meet the definition above but there is one other test. When we have had a distribution cluster of at least 4 days of distribution in an 8-day window the power trend switch remains off until there has been a significant pull back with a close below the 50-day. We had this condition on 7/23/13 and subsequently there has not been a significant pull back. Statistically a distribution cluster signifies significant selling by institutions. We have essentially been in a continuous rally since November 2012. All market correction calls since then have been fake-outs.

So, when to go off margin? Essentially when the number of distribution days begins climbing to a serious level. Distribution is defined by an index (usually the NASDAQ) dropping more than 0.2% on volume higher than the day before. This signifies institutions taking money out of the market. In the current era 5 days of distribution in a trailing 25-day window is enough to tell you it is best to get off margin and also raise a little cash. This is done by selling your poorest performing positions. Additional distribution suggests that you raise more cash. Often the way your portfolio stocks or other leading stocks are behaving tells you when and what to sell.

Yesterday was a distribution day, the third day in the 25-day window. So what did I do? I bought SFUN. I currently hold: TSLA, NUS, CBI, NQ, LNKD, SSNC, SFUN and PCLN. TSLA is by far the best performing stock I own, up 80% from my 107 buy point. The rest are all positive but none have over 10% gains. I have not sold anything since 9/11/13, when I sold RH for failing the 50-day.

No one knows what the market is going to do going forward. I pay particular attention to the action of leading stocks. What I see is that they are behaving well. This gave me backbone to buy into yesterday's down move. HTZ, GMCR and QCOR are examples of recent leading stocks that seem to be failing, there just aren't a lot of them yet.