In Search Of An ETF

I actually can’t believe I am thinking of investing in an ETF.

Except for when I first started out investing, I have never used any type of asset allocation or diversification strategy with my active trading account. Now that I look back, that time frame was really not good for the market over-all and I was extremely disappointed with my mutual funds.

In hindsight, I suppose this experience helped lead me away from investing in diversified managed funds and towards individual investments. But at that time it was not as easy for an individual investor to trade on his or her own.

Once online investment brokers became readily available, I began to think that I could do better as an individual investor. I started out by not investing any real money but rather kept track of stocks I thought were good and followed them to see if I was right.

As time progressed I saw I could at least match or beat the market AND my expertly managed mutual funds. So I took the online individual investor plunge and have never looked back. Over the years I have developed a definite investment style and strategy which is basically looking for well run and managed companies which are “setting up” for a breakout or are undervalued.

I have also noticed that often these companies which reverse or breakout tend to be in sectors which are also experiencing an uptrend. Which usually means this is where the investment money is going.

So when it comes to ETFs, I would ideally want to look for an ETF which follows the money or market trend. It would rebalance based on market conditions.

Unfortunately, finding one that fits this strategy is proving more difficult than I thought. So here is my first call out to the online blogging world.

Does anybody know of any ETF’s which follow this investment strategy?

I would love to hear everyone’s input and suggestions.

Meanwhile, I have gone searching for some ETF’s that just might fit my individual stock investing style.

With the market so top heavy and extended due to the Trump Rally, it was difficult finding ETF’s that I thought still had upside potential. But, I did find a few.

Here is what I have come up with: (in no particular order)

  • Home Construction ETF (ITB)
  • Home Builders ETF (XHB)
  • Infrastructure ETF (IGF)
  • Utilities (XLU)
  • BioTech ETF (IBB)

The housing industry (and related ETFs), even with the likelihood of rising interest rates, is showing remarkable strength and all indications are that the economy is in recovery mode.

If Trump and his administration can actually get an infrastructure bill pushed through congress, the IGF ETF should continue to do well and is not terribly over extended like the rest of the market.

XLU is an interesting choice. It too can benefit from increased infrastructure spending and, like we saw last year, if the market starts reversing, the utilities may play out as a safe haven for investors regardless of the threat of rising interest rates.

IBB is setting up nicely and actually has many strong stocks at or near buy points. And just like many other Trump Tweet stocks( BA, LMT, etc, etc), have rebounded from his last tweeted threat.

Speaking of defense stocks, one might also want to consider the defense and aerospace ETF (ITA). Like the rest of the market, it is quite extended due to the Trump Rally, but has started to pull back and this budgetary increase does seem to have good congressional support.

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Buy USA

The Trump Rally.  We all know it.  We can see it in the charts.  It is based on expectations.

Expectations for:

  • Spending on infrastructure
  • Tax reform
  • Easing of business, environmental and financial regulations

Since November 8th, the markets have been on an absolute tear.

  • S&P + 7.25%
  • DOW + 10.40 %
  • NASDAQ + 8.99%

So, do we all hop on board the rally train?  Is it too late?  With the indexes and many stocks at all-time highs, many folks are beginning to wonder if we are due for a pull back.  The chartists in my investment club certainly think so.

With so many charts looking like this:

multiple-top

It is easy to see why folks are waving the warning flags.

But I believe potential winners can be found in any market.  You just have to know how to look for them.

With this Trump administration doing so many different things, I started thinking about the constraints of my search.

This is what I came up with.

A USA based company that:

  • Does little international business.
  • Exposed to the full USA tax rate. This would also mean benefiting from proposed reductions.
  • Not dependent on international trade or directly impacted by tariffs or immigration or offshoring work.
  • And, since the up and coming economic demographic includes millennials, a company with a good mobile presence or crowd sourcing platform.
  • And was not at all time or 52week highs.

This was my initial screen.

neworder1

Ticker Company Sector Industry
ABAX Abaxis, Inc. Healthcare Medical Laboratories & Research
AMGN Amgen Inc. Healthcare Biotechnology
ANET Arista Networks, Inc. Technology Diversified Computer Systems
BSTC BioSpecifics Technologies Corp. Healthcare Biotechnology
CTSH Cognizant Technology Solutions Corporation Technology Business Software & Services
DORM Dorman Products, Inc. Consumer Goods Auto Parts
ELLI Ellie Mae, Inc. Technology Application Software
EPAM EPAM Systems, Inc. Technology Information Technology Services
EXLS Exlservice Holdings, Inc. Services Business Services
FIZZ National Beverage Corp. Consumer Goods Beverages – Soft Drinks
GRUB GrubHub Inc. Technology Internet Information Providers
ICUI ICU Medical, Inc. Healthcare Medical Instruments & Supplies
ILMN Illumina, Inc. Healthcare Biotechnology
INGN Inogen, Inc. Healthcare Medical Instruments & Supplies
LMAT LeMaitre Vascular, Inc. Healthcare Medical Instruments & Supplies
MEET MeetMe, Inc. Technology Internet Information Providers
NEOG Neogen Corporation Healthcare Diagnostic Substances
PETS PetMed Express, Inc. Healthcare Drug Delivery
REGN Regeneron Pharmaceuticals, Inc. Healthcare Biotechnology
SCMP Sucampo Pharmaceuticals, Inc. Healthcare Drug Manufacturers – Other
SEIC SEI Investments Co. Financial Asset Management
SLP Simulations Plus, Inc. Technology Business Software & Services
SPSC SPS Commerce, Inc. Technology Application Software
SSD Simpson Manufacturing Co., Inc. Industrial Goods Small Tools & Accessories
SYKE Sykes Enterprises, Incorporated Technology Information Technology Services
VEEV Veeva Systems Inc. Technology Healthcare Information Services
WBMD WebMD Health Corp. Technology Healthcare Information Services

Interestingly enough, one of the companies on this list was just mentioned in an IBD feature article which fits the criteria to a tee.

GrubHub (GRUB)

grubhub

The “I-want-it-now” millennials are pushing more services online, and GrubHub has the largest online food ordering platform in the U.S.

It also fits what they call “A Favored Trump Trade” idea.  Here is why.  Nearly all its business is conducted in the U.S.  and, consequently, GrubHub is currently swallowing a tax rate of approximately 40%.

Credit Suisse estimates a 5% reduction in their effective tax rate would drive 10 cents to 12 cents of incremental earnings per share on an annual basis.

Currently the stock is working on the right side of a consolidation pattern and is showing good strength in it’s recovery attempt.

With a quarterly report right around the corner, this is definitely one I am adding to my watch list.

Note: I am not currently invested in nor do I plan on investing in stocks mentioned in this post within the next week.  They are simply ideas for further research. 

What other stocks do you see fitting well into this new world order?

Now What?

“Wow! Now What?” That is what a colleague of mine texted to a group of us early Friday morning when he found out about the Brexit result.

This is an evaluation image and is Copyright Pamela Perry. Do not publish without acquiring a license. Image number: 0515-1103-1504-1337. http://www.acclaimimages.com/_gallery/_pages/0515-1103-1504-1337.html

Over the years, we have formed a kind of virtual water cooler group.

Somebody else texted back that my puts must be really doing well.

Another “Holy Crap”.

Another person sent back a “congratulations” message to me.

I’m not sure why.  For some reason they think I am good at this sort of thing.

Yes I do have some August QQQ puts.  And yes I did place a couple weekly calls last week, which I closed out of all but one which of course expired worthless.  But the calls were placed just to help cover my losses on my puts.  I actually consider myself lucky that I came out ahead throughout the whole (up-down-up-down) pre-Brexit and Brexit event.

I keep telling everyone if I were really good at this sort of thing, I wouldn’t have to work.

But back to the “Now What” question.

My short answer is this . . . What has changed?

As of today, absolutely nothing – except expectations and more uncertainty.

  • Britain is still part of the European Union.
    • It will take months to even start planning the exit and years to execute.
    • If it happens at all.  Google “bregrexit”.
    • The Scotts and Irish are already planning their anti-Brexit referendums to remain.
  • The Fed is still second guessing their rate hike decisions.
  • The economy, both locally and globally, is not firing on all cylinders.
    • Brexit has only fueled concerns within the financial and European markets.
  • There is uncertainty with the coming US elections.
  • And, most importantly, the market hates uncertainty.

Analysts have already set the economic and quarterly reporting bar pretty low.  So low, that certain companies have been able to beat those low expectations.  The problem has been in forecasting.

ADBE is a perfect example.  Last week they beat quarterly report estimates.  Their projections for next quarter were conservatively in-line.  Note, not a bad report.  The price tanked 5%.

Now, with Brexit, companies and the market have one more very real added concern to append to their estimates.

The Brexit vote caught a lot of people and the markets by surprise.  The fact that Brexit will most likely take several years to complete, is reason enough to think that any huge sudden correction is most likely to be an over-reaction to Friday’s result.  I am not sure that the dust has settled yet but at some point it will.  And when it does, I suspect that there will be some good bargains out there.

Now is no time to panic and sell everything or jump all in to inverse ETF’s or Gold.  Though they certainly could be part of your investment strategy or plan.

You should always have a plan.  And your plan should account for changes in market direction and change.  Whether it is to be sufficiently diversified, or to actively maintain trailing stops, or to look for undervalue stocks, your plan should not be to make any sudden changes or to panic.

This is the most important answer to “now what”.

keep calm

Keep calm, stick to your plan.  Keep your watch lists up to date.  Protect your profits and capital.  Look for opportunity.

This much should never change.

Pigs Get Slaughtered

pigs_get_slaughtered

“Pigs Get Slaughtered” is a phrase I’ve seen on many a board regarding stock investing.  It applies to any market.  Bull or Bear.  It deals with one of the seven deadly sins, greed. 

Lately I have been very, VERY, selective with any new individual stock investment.  Mostly I have been playing trends with options on USO, SPY and a little bit with UVXY (which is the inverse of SPY). 

I’ve been ultra conservative or regimented in my rules because I just don’t trust this market.

This time last week all the chart pattern sites were showing all the indexes in a rising triangle pattern, which is bullish.  But all I saw was a lot of resistance and failed breakouts and decreasing leadership with rallies.   I was also counting on some profit taking and tax loss selling at the end of the year.

So I placed Jan 15 198 puts on the SPY last Tuesday December 29th at the close.

I thought I was placing my bets a bit out of the money for only two weeks of trading left but like I said, I just don’t trust the market to hold anything 6 weeks and I usually avoid weekly options.  So I took a chance.

Little did I know that basically I would reach my goal in less than five days.

I hit my target and sold.  Actually, thanks to Monday’s selloff, I surpassed my price point goal and was shocked to see the SPY almost reach the 198 level.  My sell rule kicked in early and I counted my blessings.  I could have cancelled it but I didn’t.  I made a resolution a long time ago to set my rules and live by them.

After all, I made money and that is all we really want to do in the stock market now isn’t it.

I have found when I get greedy, bad things happen. 

Take for instance Obama and Smith & Wesson.

I mentioned in my last weekly post that SWHC usually spikes anytime there is talk of gun control out of Obama’s or Congress’s mouth.  And I was right.  18% later and 200% options later (less than 36 hours) I sold.  This was a classic case of buy the rumor, sell the news.  As soon as Obama stepped up to the podium and gave his speech – SWHC stopped going up.  And yet all the news sites were still saying gun stocks were spiking and people were buying!  Today it dropped over 4%.  Sure, it could go back up.  But this market is too volatile to stay in for any length of time. 

Don’t get greedy. Set your rules, and if they get triggered, count your blessings.  

Above all, be careful. 

The most important rule I set is actually has nothing to do with greed.  I set a stop loss for every trade to protect my capital.  After all, it takes money to make money and the last thing I want to do is lose it all in a trade.

Remember, cash is a position, never risk more than you are willing to lose, and never get greedy.

Until next time.

Happy trading.

What A Difference A Day Makes

Just in case you did not notice, we just celebrated the start of a new year.  And yes it is a celebration.  It almost always is.  People want to celebrate.  We look for reasons to be happy and to have hope.  We celebrate the end of a bad year.  We celebrate after having had a good year.  We celebrate a fresh start.  We celebrate hope of good times to come.

The big question for investors and the stock market is will this celebration carry over to the start of the new investment year?

2015 was a tough year for investors.  We saw lots of big swings in price movement yet basically ended flat.  Investors have seen their multi-year bull market slow down if not stop all together.   And yet, many people look for reasons to celebrate.  They celebrate the end of a “bad” year.  And look for reasons of hope and of good things to come.

They say good things come in threes.  According to Wikipedia . . .

1)      The rule of three is a writing principle that suggests things that come in threes are inherently

  • Funnier
  • more satisfying
  • and more effective than other numbers of things

2)      The reader or audience of this form of text is also thereby more likely to remember the information.  This is because having three entities combines:

  • Brevity
  • Rhythm
  • and the smallest amount of information to create a pattern

3)      It makes the author or speaker appear:

  • Knowledgeable
  • while being both simple
  • and catchy

So I am going to give you three good reasons to celebrate 2016 as an investor.

  1. Statistically, the market, and the price of oil for that matter, goes up after a flat or down year.
  2. Many popular stocks are significantly off of their highs and present a buying opportunity.  “Look at Disney (DIS).  They just released a movie that made a billion dollars in two weeks!  That is a Big Capital B as in Billion ! – and that is not including profits form merchandise or a world wide release to include China!  And yet their stock is, inexplicably, 14% below the all-time high.  Buy Buy Buy!!”  (and that folks, concludes my best Jim Cramer impersonation)
  3. From a chart perspective, the DOW, S&P and NASDAQ are all in Bullish patterns

rising triangle

There now, don’t you feel better already?

Doesn’t this make you want to pull out that check book first thing Monday morning and buy some stocks!

Good.

But before you do that, let me also remind you that there is another saying “bad things come in threes”.

So in my next post I am going to give you three reasons not to celebrate 2016 as an investor.