The markets have showed renewed strength over the past few weeks after the recent pullback. Our indicators and research demonstrated a resurgence in the broad markets, so we originally gained much exposure quickly by purchasing large positions in 2 broad indexed based ETFs.
We did this so we could gain exposure from our heavy cash position after lightening up on our energy stocks. Selling the energy stocks turned out to be the right move; both profitable and fortuitous, as energy prices have come off considerably and now oil is well under $100/barrel.
Now that we have broad exposure to the trend, we are looking for individual and sector investments to create alpha. This leads me to our 1st investment, a sector play related to the decline in energy. Due to energy prices coming down, the costs of doing business, especially for retailers, has also declined. This means their profit margins will rise.
Hedge funds and institutional money know this and they began buying retailers quickly and early. We saw this on the charts based upon price and volume. Retailers took it especially hard during the pullback but then saw a resurgence.
Therefore we took a position in the SPDR Retail ETF (XRT). As you can see on the chart, XRT is now breaking through previous highs after forming a nice, deep cup as seen in the yellow highlighted area. We have taken out all of the weak hands and there is no overhead supply or resistance.
Economic reports are improving and as long as perceived positive, institutional money will continue to move into the sector. The loose monetary talk by the Global Central Banks doesn’t hurt either. QE is alive and well.
The 2nd investment is Facebook (FB). With FB’s earnings out of the way, so there will be no negative surprises, and their advertising revenue and market share keeps growing. They have figured out how to monetize their platform.
Technically, FB has formed an almost perfect 3 weeks tight pattern. This is one of our favorite patterns at NorAm and often precludes a nice breakout. I have also highlighted the 3 weeks tight pattern on FB.
Both of these, the first a sector play and the other an individual stock play, have strong institutional support and are demonstrating leadership. As always, we buy based upon the fundamentals and technical, but sell only based upon the technical. So if either or both begin the break down, we will be quick to exit.
As always, if you have any questions or comments, please feel free to email me at Dan.Stewart@noramasset.com or simply go to our website www.NorAmAsset.com to view our research. You can also call us at 855-Real Wealth.