Author: Steve Beamer
Model: High Earnings Momentum
Disclosure: Long NBR, MPEL, OPEN
The High Earnings Momentum Model started out well in January and moved up pretty smartly until an earnings disappointment in FFIV took away most of the model gains achieved in the first eight weeks of the model. On a positive note, the exit strategy has kept the original capital whole while I look to re-enter the market with some new stocks.
General Market
The long term trend is upward, with indexes making new highs. The three month outlook is also upwards with many stocks in the major indices trading above their 200-day moving averages. Market action has been fairly volatile in the past few weeks, which could be early indication of a pullback, so I am exercising some caution on entering positions and keeping stops tight. (Note that the Covestor replication process does not support stop losses.)
Of particular concern to me is that while major indexes were moving up on Jan 19 and 20th, many of the leading stocks were moving down and money seemed to be flowing into the safer Dow stocks. The NFLX earnings surprise seemed to turn that around and leading stocks began moving upwards, but again on Friday Jan 28 the markets moved down fairly sharply. While this is not necessarily bearish, I am using a bit more caution than usual until I see confirmation that strength has returned to the market.
Recently Closed Trades (Note that the Covestor replication process does not support stop losses.)
AGU – Agrium moved up nicely in early January and then retraced. Our stop followed the movement up and was hit on January 20 for a small profit.
ARUN – Aruba recovered nicely from the holiday droop and ran up to about 26 early in January, then declined sharply when F5 Networks had an earnings disappointment and we were stopped out for a small loss.
FFIV – F5 Networks – Disappointing earnings announced after the close on Jan 19, resulted in a $26 gap down on the open. This was the biggest loss in the portfolio and resulted in the sharp decline seen on the performance graph. Stops did take us out with no further losses.
MIPS – MIPS Technologies – I entered this trade on 12/8 after a strong up move and a rest (consolidation). The stock moved up quickly and has drifted down over the holidays on very low volume and moved up nicely after the New Year. It reacted to the F5 news but managed to hold up well for several days and then moved down and hit the stops for a small loss.
PDE – Pride International is a drilling contractor being fueled by the increasing oil prices and tensions in Egypt. This was a classic cup and handle breakout. Shortly after breaking out, prices fell back into the consolidation range of the handle and the position was closed for a small loss. This stock will remain on the watch list for a potential trade. Another oil services sector stock in the portfolio, NBR, is still doing well.
SLW – Silver Wheaton is the sector leader in silver mining, which tracks pretty closely with gold. It moved up nicely and then reversed and stopped out for a small loss.
TQQQ – is the Proshares Ultrapro QQQ. This is an Exchange Traded Fund (ETF) which attempts to return 3x the return of the NASDAQ 100. I have allocated much of the cash in the portfolio here as a way to keep money in the market during the uptrend until I find individual stocks to trade. I sold out of these near the top in order to have cash available for individual stocks during the earnings period beginning in mid January. The gains in TQQQ covered the several small losses on individual stocks.
Open Trades
MPEL – Melco PBL Entertainment Ltd (Macau) is a casino stock which had a nice move up similar to WYNN, earlier in the year. It had a 6-week pullback in November and early December and broke out decisively with significant volume right before Christmas. I bought on 12/20 with a close stop.
NBR – Nabors Industries is a drilling contractor. The oil services sector has picked up with crude prices moving up again. This stock was purchased after a move up and a consolidation followed by a breakout of the consolidation area.
OPEN – Open Table is a restaurant reservation service which allows patrons on the internet to find restaurants in their area and book open tables (www.opentable.com). In addition to being a good stock, it’s a great service. The stock has been trending up nicely and the company founders are still holding a large percentage of the stock.
In February, I will be looking for confirmation of the continued move up of the market and will continue to fill the portfolio with good stocks. I am disappointed with the setback caused by FFIV, but the strategy has left my capital intact and ready to invest in quality stocks.
All data via Yahoo Finance
