Parsing the Fund into Technical Buckets

I like to look weekly at the top 20-30 holdings to see how their technical picture is shaping up, and see what to reduce or increase. With my limited staff of 1, I should be doing it for the entire portfolio more often but it just takes a lot of time. After all my fake fund is powered by a gerbil running on a treadmill so our computer and trading systems are a bit behind Wall Street's mavens....

So I decided to look at all the holdings and put them into buckets. Generally what I like to do, is buy stocks in uptrends that have pulled back to a major support, 20 day moving average or preferably the 50 day moving average. Now the drawback with that method is there is an extremely thin line between a stock pulling back to the 50 day moving average and breaking down below it and trashing the technical setup. So if a stock doesn't adhere to its support level and crashes through I quickly turn around and lighten up on the position, until things improve.

For a great example, let's use NII Holdings (NIHD) which I mentioned today; it broke through its 50 day moving average of $79 yesterday. It opened weak today and I mentioned it in a morning post, so I lightened up around $77. The stock has promptly fallen to $70 within hours (10%!) and now has bounced back to $73. Now generally this does not happen this quickly but its a perfect example, in concise time frame. Hence this is why you see 'a lot of trading' around positions - the technical set up can go from bad to good quickly in this type of market.

However in an environment such as this (hear no evil, see no evil) sometimes you have to just try to enter stocks as they pull back to their 20 day moving average (i.e. like my buy of Mosaic (MOS) yesterday) since asking for a pullback to the 50 day is a lot. Or one can layer in - buying a portion as a stock pulls back to its 20 day and then a larger portion as it pulls back to its 50 day average. I like this method myself.

Many traders/investors just like buying the strongest stocks and riding them no matter the valuation - this is pure momentum trading/investing. It's hard to really complain about it too much, because in many environments it is effective. However when the tide turns, these stocks are the ones that fall the hardest as they are the 'farthest' from a good technical support area.

This method taken to the extreme are the Chinese stocks now, that go up 40%, people buy, and then they go up 40% the next day. And it keeps working in Ponzi scheme manner until one day it no longer works. And then someone is left holding the bag.

With more normal stocks, some people use either a 5 day or 13 day moving average and as long as the stock doesn't violate below that trend line you don't sell. Again, these are basic technical analysis 101 - there are 100s of variations and schemes. I am using just the most basic of basic technical analysis to 'better' time entry/exists into stocks I like fundamentally.

So with that said, let's look at the buckets for about half the portfolio (will take a look at the rest later)

Bucket 1: Strong uptrend, no real pullbacks, hovering constantly around 5 day moving average (pure momentum guys will prefer these names)

1. Apple (AAPL)
2. Aluminum Corp of China (ACH)
3. Allegheny Technology (ATI)
4. General Cable (BGC)
5. BlackRock (BKC)
6. Peabody Energy (BTU)
7. Core Laboratories (CLB) - could be heading to bucket 2 shortly
   
8. CME Group (CME)
9. Cummins Engine (CMI)
10. Crocs (CROX)
11. Ctrip (CTRP) - could be headed to bucket 2 shortly
12. New Oriental Education (EDU) - could he headed to bucket 2 shortly
13. iShares Malaysia (EWM)
14. iShares Signapore (EWS)
15. Freeport-McMoran Copper & Gold (FCX)
16. FMC Technology (FTI) - could be headed to bucket 2 shortly
    
17. Foster Wheeler (FWLT)
18. Gmarket (GMKT)
19. Google (GOOG)
    

Bucket 2: Strong uptrend, but stock has pulled back to 20 day moving average (I have been buying many of these names)

1. Blue Coat Systems (BCSI)
2. Broadcom (BRCM)
3. CF Industries (CF)
4. CNH Global (CNH) - could be heading to bucket 3 soon
5. Consol Energy (CNX)
6. Diamond Offshore (DO)
7. iShares Hong Kong (EWH) - not quite in this bucket but 1 more day of weakness will get it here
8. GlobalSantaFe (GSF)
   

Bucket 3: Uptrend, but stock has fallen back to 50 day moving average (this is the best place to buy IF the uptrend stays in tact; if it is broken you want to turn bearish until things improve)

Bucket 4: Below 50 day but above 200 day moving average (have to analyze case by case but in general its sort of no man's land technically, and generally not a great place to be)

1. Frontier Oil (FTO)
2. Garmin (GRMN)
   

Bucket 5: Below 200 day moving average (generally bearish)

1. Diamond Hill Investment Group (DHIL)
   

Bucket 6: Outliers that don't go into any other bucket

1. Bolt Technology (BTJ) - it appears this small cap stock went through a hedge fund liquidation as it drops from upper $30s to $31 when all other oil service stocks were ramping, than promptly rose from $31 to $43 in a matter of 5 days - 39%! Definitely shook me out of my position on its technical breakdown. Ouch.
2. Ciena (CIEN) - this name went from Bucket 3 to Bucket 1 overnight

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Takeaway: So as you can see, there is nothing in this group in my favorite bucket (Bucket 3) which are stocks that have pulled back to meaningful support but still are in a good uptrend. Hence it is hard to find buying opportunities. I've taken to Bucket 2 instead, as I am 'forced' into performance chasing (i.e. bringing a keg to Bernanke's party). If I were a pure momentum trader I'd be loving things as you can see the huge proportion of stocks in Bucket 1 - I'd be buying high and selling higher. But I consider that chasing at this time so I don't want to keep increasing those positions - in fact the contrarian in me wants to sell some of those but until they break down, in theory, you don't sell.

On the flipside when I look at this list, I feel content that I have chosen wisely in terms of... when the market stunk in August I was in most of these names, and as the market returned to normal - the stocks I chose for the most part are acting extremely well. With that said, my underweight long position, overweight cash, and exposure to short ETFs worked against me post Fed cut. But the stock picking has been sound if not 'weight' of the stocks in the fund.

Of course if the market goes through an extreme move down, all these charts get jumbled and useless as we saw in August, but for the other 95% of the time the market is neutral or relatively sane they come in handy.