So back to earnings season, I promise this all ties in.  I’m seeing many names, especially in tech which had exhibited great trends get smacked around.  It will be interesting to see how they stabilize over the coming weeks, or if they lose the trend all together.  Although many leaders are getting hit, earnings across the board in tech have been stellar.  There is a serious secular bull market in the semiconductor space going on, especially around mobile technology.  If you are a long term investor, wait for some consolidation here, and then pick up some of these names, they are going far higher in my mind, this is only the start.  Watch for Intel to fill the gap from earnings, it always does, and then look for relative strength in your favorite names.

On the other side, anything retail or restaurant oriented continues to fly like an F-15.  Earnings have been excellent in the specialty retail and casual dining names, why, I have no clue, but I know I love Chipotle Mexican Grill and so do a lot of other people obviously.  I won’t go into each of the retail stores that is performing well, but just take a look at charts of True Religion Jeans $TRLG or Nordstrom $JWN, these things are flying.  Even beds are on a crazy run for god sake, take a look at $TPX.  Are people really paying 2K for a mattress, I guess so.  Maybe instead of using all that debt to fund the purchase of a house, people are using the same debt to fund things for themselves and inside the house.

On another note, look at the relative performance between big and small biotech.  First look at charts of $AMGN, $GILD, and $GENZ, then look at the smaller names, $DNDN, $HGSI, and some of the others.  Notice something?  The major relative underperformance from the big boys, who are putting out some great earnings reports.  Gilead got cleaned up for almost 10% today breaking all kinds of long term support levels.  I’m not a biotech specialist, and as you guys know I often shy away from holding the smaller biotech names for fear that I could wake up and see my position down 40%.  So I asked some people who are more knowledgeable than I on the subject of why the larger names had been underperforming to such a huge extent.  Derek Hernquist (@derkekhernquist) said, “funny sector…stocks have infinite potential until 1st profits, then spend forever absorbing multiple on real EPS.”  This is a very good insight, and it’s obvious why their stocks underperform once the cash flows are steady.  This begs the question though, why would anyone want to invest in a biotech after the point in time where analyst know what the cash flow will be from a certain drug?  Just a thought.

The market took the express train past the rally highs this week and provided yet another round of excellent swing trading to the long side.  While everyone was buying puts and inverse ETFs to protect profits from an organized pullback, the market marched higher, stopping them out one after another.  Are we seeing a repeat of July here?  It’s completely possible, the two sell offs look very similar, if we surge out of the gate on Monday I would venture to say that it’s likely we repeat the action from July.  Anything can happen on mutual / merger Monday, I almost bought a few very speculative options positions in some oil names just in case, but alas I ate another sandwich and chilled out.

The US Dollar continues to act weak, I’m expecting more of the same next week with major rotation into materials and energy names.  We had the run in tech last week, this week was all about retail, I think next week is energy’s turn.  I still have no exposure in either, but have several names on my list including $DRQ, $BEXP, $XTEX…

I picked up more than 230 basis points of alpha this week with an absolute return of about 3.4%, in other words, I killed it.    Unlike last week where I was disappointed not to have put more points on the board with the market surging, this week was a huge win as my heavy exposure earlier in the week paid off.  I took cash back up to 15%+ on Friday afternoon as I believe we will consolidate and pull back a bit here.  If Monday opens flat and sees strong buying on volume though, I will be a buyer of energy names.

Positions added this week include $VECO $NYB $TSTC and $EVR.  I had been watching $VECO for quite some time while I held $CREE (I added to my position this week), but an excellent entry was give on Tuesday that I could not pass up.  The $TSTC position is very small, 1/4 the normal size, it is a very volatile stock and could open up or down 5% on Monday.  If it opens strong I’ll be looking to add.  I bought $EVR on the large gap off the Goldman Sachs conviction buy list upgrade and the break of its downtrend line.  I love this company and the technicals on the weekly chart set up very well right now.

I did some selling this week as gains were heavy.  I cut my position in $IPXL $ARUN and $INCY in half.  I’ll look to add back to them if the market pulls back.  I sold $RVBD Thrusday and Friday as I had big gains and the position was extended.  $SBUX $HAS and $LUV were also cast off, frankly they all look great here.

Major winners this week include $CMG, which is about 1/2 my original position, $V which I’m heavy in, $VECO, $INCY, $SFSF, $GMCR which is now my biggest position, $MJN, and $PRAA.

There were no large losers this week.

As I said, I’m looking at energy and materials next week.

The dollar / equity correlation continues to fade in and out.  Net short positions in the Euro have reached all time highs, which leads me to believe that a $EURUSD squeeze could be the catalyst that fuels the next run in this market.  The Euro is in a bear market to be sure, trading below all major declining moving averages.  I’ll be looking for a counter trend rally up to the declining 50 day moving average as several momentum divergences are visible, especially in the RSI reading.

It was an excellent week for the momentum portfolio, I picked up a little over 70 basis points of alpha while holding 20%+ cash in a surging market that was up 2.87%.  I struggled to keep myself from selling positions all week, but was able to hold off and enjoy the great momentum.

Major wins this week include $ARUN, $CPLA, and $PCLN which gapped up on earnings and continued to run.  $CREE, $CTXS and $DLM also saw very strong weeks.

The only disappointment this week came on Thursday after hours when $LOPE reported earnings and was smacked around.  I held on as there was no ability to get out after hours on the thin issue and sold out Friday afternoon a few cents above where I entered last week.

I sold 1/3 of my position in $ARUN on Friday afternoon as it surged 15%.  Partial profits were also taken in $DLM on Wednesday as it surged past 12.50.

I’m getting a little bored in $IPXL, another 3 days or so is about all I’m going to give this position to move.  It continues to hold the 20 day moving average and the setup is still strong.

I have zero exposure to the energy and materials sectors and the patterns are too messy right now and the $USDX continues to climb.  The portfolio is still heavily weighted towards technology and service names.

On a low volume pull back early next week I’ll be looking to put some of that 20% cash position to work.

On Monday we saw $RVBD and $CMG surge past breakout levels.  I’m especially happy that I didn’t panic after hours in the $BWLD carnage and dump $CMG.

Tuesday saw the beginning of a major run in $CPLA as earnings were solid and the shorts are now getting squeezed.  $CTRP, a long time portfolio holding also made a move.

And Wednesday saw major wins in $DLM, $RAX, $CPLA,$LOPE and after hours $PCLN which traded as high as 131 or so.

I’ve been vigilant about cutting stocks that weren’t making moves they should have been, such as $MR, and taking profits into extended holdings like $VRX and $DLM.

Having been patient during this recent run and keeping a good deal of cash has helped.  I have the confidence that if the market pulls back here between 1 and 2 % as I believe it will, I’ll start adding to my positions further.  Joe Fahmy makes an excellent point when he says that you have to protect your confidence is market downturns, or markets going against your strategy in either direction.  This can be done in several ways, but for me, holding a little extra cash and fewer high beta names when the market isn’t quite right is how I like to operate.  Yes, the small Chinese issues have made huge moves the past few days, but in a market that hasn’t completely proven itself yet after a considerable smack, I’d rather sit those out in favor of less correlated names in the food service, education, and airline industries.

I still like big cap tech here, but the market needs to pull back and chop around for a few days to work off some short term overbought indicators.  Be patient and watch for a strong bid on the next sell off.  I’ll be looking to put all my chips on the table if that happens.

It also seemed as if the market makers took the week off.  Spreads have been super wide the last few days producing wild intraday swings without the normal liquidity.  It’s possible that this week was just a bear flag, a respite from the selling, and that in the coming weeks we will move back down towards the 200 day exponential moving average and the bottom of last Friday’s hammer candle.  The chart below should be your guide, if we lose the green ascending trend line I’ll be far more negative on the market.

If and when we break through Thursday’s high, 109 is going to be a massive test for this market, it marks the location of the declining 20 day moving average.  I would also be taking off exposure at that point, and wait for more clues.

The $QQQQ had a strong week, tech outperformed by a decent margin.  The Nasdaq sits right under the 20 day moving average and the all important 44 dollar level.  A move above 44 and asset managers who are light on tech could start to panic a little bit that their exposure is too low, a move up towards the highs in a quick fashion would not surprise me.

As for my long only momentum strategy, we had a great week picking up some serious alpha, 175 basis points in fact.  I sold a bunch of my materials exposure on Wednesday brining my cash position up to around 35%.  I added positions into strength on Thursday and early Friday morning.  Cash in now under 24%, and as I said above, I’ll take off some exposure into strength early next week and wait for more clues.  A few days a consolidation above the 20 day moving average would get me all in with tight stops.

Two major losses and one major mistake this week.  I took a position in $SWM Wednesday afternoon without checking for earnings.  $SWM reported Wednesday after the close and got mauled.  The damage was bad, but not catastrophic as I pulled the rip cord Thursday morning for a bad loss.  I took a similar earnings beat down on Thursday afternoon in $BWLD but luckily got stopped out after hours before the damage got too severe.  I almost pulled the plug on $CMG as the food service industry looked real ugly across the board after hours, but decided to hang on and keep my stop where it was.  It paid off as $CMG showed great strength on Friday with a major breakout.

Positions added this week include $RVBD, $IPXL, $MR, and $LOPE.  I also added to my position in $ARUN.  Positions sold include $TIE, $BUCY, $ANR, $BWLD, and $SWM.

I have no financial, energy, or materials exposure at this point in time.  I’ll look to focus on materials if the $USDX shows signs of making a short term top in the next few days.

As I’ve been saying for a few weeks now, bring your positions sizes down and shorten your time frames.  Being flexible in your thinking and willing to change sides in the matter of a few hours is extremely important in this market environment.

Aaaaaand this is where things got interesting.  Materials have been slaughtered during this sell off and there are some monster players out there who still believe in the gold / hyper inflation trade.  It was only a matter of time before the decided to step in and buy what they must see as value.  Gold $GC_F was the first to make the turn having bottomed out in a capitulatory move before noon.  Crude was also down a ton before noon as it failed some important support levels.  After a little bit of churning the volume picked up and major players came after the gold miners $GDX.  Gold Corp. $GG ended the day up greater than 6%.  This was major buying but guys with deep pockets, they sent in orders to the institutional desks and told them to keep buying until the close, it was relentless.  The $SPY closed green and we now have one major hammer candle to think about this weekend.

Is it time to go all in and buy what you perceive as value, no I don’t think so.  The longer term technicals of this market are now quite ugly.  The 20 day moving average has crossed below the 50 for the first time since the March 09 low.  This is a sign that rallies should be sold into until further notice, just as a 20 day moving average trending above the 50 is a sign to buy the dips.  There most likely is a bounce coming though, and it’s possible that we could go into a period of several months where the market does not trend but chops around.  Until the 200 day moving average is broken, I believe you should be playing mean reversion now, do not be buying or shorting breakouts or breakdowns respectively.  Below the 200 day moving average and all bets are off, we could see a complete meltdown, I’m not kidding.  Look for the US Dollar $USDX to pull back in the coming weeks, it’s overbought after breaking through that big bull flag from a few weeks ago.

I stayed above 40% cash for most of the week as I did not trust the rally attempt on Tuesday until that major level of resistance was broken.  I did sell a few things on Thursday at the open but should have sold more in order to pick up more alpha on the downside.  I dipped in Friday afternoon as the market turned, buying positions in $ANR $TIE and $NTCT as well as more $DV.  This is a little bit of style drift for me, $TIE and $ANR are both support plays off very oversold conditions, not momentum moves.  I will most likely be selling into any major strength in these two names over the next week or two but believe there is a nice bounce in store.

Over all I made up some good ground through my large cash position and I’m poised to take advantage of any further strength in the market next week.  It’s very important to be extremely nimble in this environment unless you have chosen to move primarily into cash in order to play for a further sell off.  I think we are going to see some tradable bounces and will be quick to sell into them.

Stocks that I own and still look very nice to the long side with good momentum include $DV $CMG $NTCT $CREE $ALGT $VRX $PEGA.  I will be looking to add to $VRX and $PEGA on any strength next week.

I’m stalking a few other stocks including $PFCB and $GRA for entries.

The food service names have held up amazingly well through this sell off, frankly I have no clue why.  Possibly because of lower commodity prices, but who knows, they still show great momentum and I’m very interested in adding another name or two.

The major theme here is that if the market has found an intermediate term bottom, I don’t believe we are set to rocket back up to the highs.  The market needs to to base out and collect itself.  Wait for stocks to show good basing patterns and give good risk reward entries before you load the boat back up to the long side.  If we fail Friday’s low, run for the hills.