A Few Winners, Losers and Swing Trade Opportunities

Bio-Techs

We wrote a note a few weeks ago saying that we were moving into the bio-tech space for a few reasons, seasonality and favorable chart patterns the two main reasons (Biotech's Getting Ready to Break-Out).

This past week we saw the bio-tech ETF (IBB) break above $300 and we decided to build a position. We decided to buy Direxion Daily S&P Biotech Bull 3X ETF (LABU) @ $56.55. We are sitting on 27% profits and will hold to see a pull-back and support. Any support above $55 will entice us to further increase our position.

From Business Insider, “The Nasdaq Biotechnology Index (NBI) surged 9.2% over the five days, its biggest increase since the week of the election. Portola Pharmaceuticals and Clovis Oncology led the charge for the 162-company gauge, both climbing more than 55%.

In addition, an exchange-traded fund tracking the gauge absorbed more than $700 million during the three days ended Friday, the biggest inflow since early November for a period of that length.”

“While a significant portion of post-election stock market gains have resulted from optimism around proposed political policies, biotech drove returns the old-fashioned way: by getting good news.

According to recent reports from Kaiser Health News and Politico, the Trump administration is preparing an   executive order that's shaping up to be favorable to drug companies. On Tuesday, The New York Times reported on the contents of a draft of the executive order, reaffirming the administration's likely more relaxed, industry-friendly stance on drug pricing.

That marks a stark departure from the anti-drugmaker rhetoric floated by Donald Trump in recent months, with the president even going as far as to say back in January that biotech companies are "getting away with murder."

It's the latest twist and turn for biotech stocks, which have been taken for a wild ride since the election. The NBI rose a whopping 12% in the week following November 8 amid expectations that Trump would have a positive effect on the group, which was blasted by Hillary Clinton on multiple occasions on the campaign trail.

But it wasn't that simple, as Trump made comments over time that led investors to believe that he too was targeting drugmakers. For instance, on March 21 said that he wanted to slip drug pricing into the GOP Obamacare replacement plan. The NBI dropped 2.8% that day.

While the future for drugmakers may have looked bleak at times, the recent surge in index was actually foreshadowed by options traders. As of May 18, they were paying the lowest premium since October 2013 to protect against losses in the NBI, relative to hedges on the S&P 500, Bloomberg data show. That's an extremely bullish signal. 

Now that things have been looking up for biotech, investors are starting to pay a higher premium to protect gains.”

“Beyond the recent news flow, investors may also be buying biotech shares in preparation for the earnings recovery the sector is expected to enjoy in the second half of the year.

Drugmakers will grow profits by 5.7% in the fourth quarter, lifting its full-year 2017 earnings expansion to 4.8%, according to estimates compiled by Bloomberg. While that will lag the broader S&P 500, it's a welcome sign for an industry just finding its legs again after some turbulence.”

Energy

Back in May we decided to take a few positions in the Energy sector. This trade turned out to be a mess with oil prices entering bear market conditions and energy names suffering greatly because of it (Looking at a Few Trades in the Energy Sector).

Brent crude prices are approaching the 50% Fibonacci retracement from the early 2016 lows. The green shaded area in the chart below could act as some support.

That said, we do not have high hopes of this sector rebounding anytime soon and we’ll probably cut our losses if XLE breaks $62.50 to the downside.

From Business Insider, “There aren't enough buyers for the oil available in the world.

Last November, the Organization of Petroleum Exporting Countries tried to solve this by agreeing to lower production. But this was not enough, and Libya, Nigeria and Iran — three members that weren't part of the agreement — have raised their production.

So have US shale-oil producers, who this week extended a record-long streak of adding drilling rigs.

And so, the supply side failed to avert a 4% slide in oil prices this week to the cheapest levels since OPEC agreed to cut output in November.

Strategists at Bank of America Merrill Lynch are skeptical that higher demand would be the solution.

"It is hard not to notice some cyclical red flags" that risk counteracting higher oil prices, said Sabine Schels, a commodity strategist, in a note with colleagues on Friday. 

"While most investors blame supply for today's low oil prices, demand has also failed to improve at the speed required to rebalance the global oil market. Looking into 2H17, we now doubt that demand growth will accelerate sufficiently and see downside risks to our forecasts of 1.3 million b/d in both 2H17 and 2018. In the absence of a mirroring supply response, softer consumption could push 2018 balances into surplus. Put differently, demand will not break the current downward price momentum for now."

Any takers? 

Oil demand in the first quarter slowed and was weaker than expected, Schels said, after examining demand growth by region.

The strategists initially pointed to a number of temporary factors like a warmer-than-usual winter in the US and India's decision to void the highest denominations of its currency. But as demand weakness extended into the second quarter, it became clear that these weren't the only reasons. 

Worse still, Schels said, is that the demand weakness is spreading to markets that are usually strong including the US and China. "This suggests that cyclical, rather than solely transient, factors are perhaps also at play here."” 

“Beyond that, the global economic picture doesn't suggest that countries are going to be demanding more oil soon.

"Clearly, the uncertainty around tax reform has started to dampen sentiment and confidence, with negative consequences for investment and hiring decisions," Schels said. "In Asia Pacific and Japan, economic data and inflation has also started to roll over. In Latin America, the situation in Brazil is u nstable leading us to halve our GDP growth expectations for next year to 1 .5 %."

China provides the clearest example of a cyclical slowdown, Schels said, amid a softening in industrial production and electricity generation. 

BofAML forecasts a slowdown in China's economic growth and thinks that could lead to a slowdown in imports of crude oil.”

“Central banks could also be complicit in keeping oil demand by forging ahead with raising interest rates. Schels noted that it becomes harder to finance consumption of oil when interest rates rise. Also, if higher rates lead to a stronger dollar, emerging-market countries that are big consumers of energy products could face higher costs. 

"Tighter money at a time of weaker activity poses deflationary risks and spillover to the real economy," Schels wrote. “

Gasoline

Gasoline prices are rolling over. The commodity broke through support near $1.45 on higher volume. The next level of support looks to be near $1.28. This represents another 10% to the downside. United States Gasoline (UGA) ETF is thinly traded but offers an opportunity to capitalize on the weakness. I’m not sure if there is an opportunity to short this ETF but I noticed that it does trade options. I may pull the trigger and purchase some put options if there is adequate liquidity.

I’m not sure yet how to participate to the downside (as I don’t trade gasoline futures) but I’ll be doing some research this coming week to see if there’s a way to make money with this trade. Preferably we’d like to see a bit of strength in the commodity and a failure to recapture support.

Defensive Sector Trades

Defensive sectors appear to be in play. The chart below depicts the PowerShares S&P 500 High Beta ETF (SPHB) against the PowerShares S&P 500 Low Volatility ETF (SPLV). The trend clearly favors lower volatility defensive stocks. The high beta portfolio is trading below its 50-day EMA while the low vol ETF is solidly above its 50-day EMA.

Since the Trump rally started to lose steam back in February/March we are seeing trends that the market is taking a more cautionary stance towards the economy.

We’re seeing additional evidence of this skepticism with the aggressive flattening of the yield curve of late. The steepening of the yield curve that happened post-election has now retraced back to where it was prior to President Trump being elected. As long as this economic skepticism remains in place, we will expect the low volatility defensive stocks to outperform the higher beta names.

Health Care has exploded this week. This is good for us as we build a value position in the sector (XLV) back in November in the $68 range. Like the bio-tech trade, we’ll wait for a pull-back and see where support settles in and most likely add to our positions.

Consumer Staples

The consumer staples sector is not cheap by any means but we believe it could offer a nice shorter-term swing trade opportunity. From the chart below we are seeing a solid bullish trend in the sector as depicted by several of its exponential moving averages. The Consumer Staples Select Sector SPDR ETF (XLP) has dropped to its 50-day moving average that provided support earlier in the year. It is also sitting near support from its breakout point.

Also note that the RSI (30) has consistently remained above 50 for the year and the RSI (5) is under 30 (oversold). This oversold situation in a larger uptrend has offered several short-term trading opportunities in the past.

Since 1998, there have been only been roughly 50 trading opportunities out of over 4600 observations (1.7% of the time) where the RSI (30) was above 50 and the RSI (5) was below 30. The two, three, four and five day returns upon this occurrence have been exceptional, offering annualized returns in excess of 30% vs. roughly 5% when this condition is not in place. These swing trades have been profitable nearly 70% of the time.

For those looking for a swing trade opportunity this is as good a set-up that we can find in these market conditions.

In the graphic below, I have provided the near-term return profile for XLP when this RSI condition has been met. All-in-all I like the risk/reward profile of this trade.

Utilities

Another defensive sector that had broken out is the utilities sector. Similar to the consumer staples sector, it too has an RSI (30) above 50 and an RSI (5) below 30. This is a rare occurrence and has led to near-term sector outperformance. While I ran the back test for return results, I’m just not a buyer of utilities now and rather keep assets deployed in the health care, bio-tech and consumer staples sectors.

Joseph S. Kalinowski, CFA

Email: joe@squaredconcept.net

Twitter: @jskalinowski

Facebook: https://www.facebook.com/JoeKalinowskiCFA/
Blog: http://squaredconcept.blogspot.com/
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No part of this report may be reproduced in any manner without the expressed written permission of Squared Concept Asset Management, LLC.  Any information presented in this report is for informational purposes only.  All opinions expressed in this report are subject to change without notice.  Squared Concept Asset Management, LLC is a Registered Investment Advisory and consulting company. These entities may have had in the past or may have in the present or future long or short positions, or own options on the companies discussed.  In some cases, these positions may have been established prior to the writing of the report. 

The above information should not be construed as a solicitation to buy or sell the securities discussed herein.  The publisher of this report cannot verify the accuracy of this information.  The owners of Squared Concept Asset Management, LLC and its affiliated companies may also be conducting trades based on the firm’s research ideas.  They also may hold positions contrary to the ideas presented in the research as market conditions may warrant.

This analysis should not be considered investment advice and may not be suitable for the readers’ portfolio. This analysis has been written without consideration to the readers’ risk and return profile nor has the readers’ liquidity needs, time horizon, tax circumstances or unique preferences been considered. Any purchase or sale activity in any securities or other instrument should be based upon the readers’ own analysis and conclusions. Past performance is not indicative of future results.  

Alpha Prime Trade Journal for the Week Ended 6/23/16

After a challenging two-week period, this week turned out to be the best week since we launched the Alpha Prime initiate. It started out a bit shaky on Monday morning though, when I woke to the news that EQT was purchasing Rice Energy. We were short RICE going into this news and ended up with a $20k loss in the position.

From Reuters, “June 19 (Reuters) - EQT Corp was set to leapfrog Exxon Mobil as the largest U.S. natural gas producer after saying on Monday it agreed to a deal to buy fellow Appalachian gas and oil firm Rice Energy for $6.7 billion.

The tie-up would join two of the largest players in the Marcellus and Utica Shale formations, which stretch across much of Pennsylvania and Ohio and are ideally situated to supply gas throughout the U.S. Northeast.”

Aside from that the portfolio did quite well with short positions throughout the Energy sector and long positions within the Biotech space. Many of the momentum plays that we positioned in during the “tech-wreck” week paid off handsomely as well.

Portfolio Metrics

Detailed Portfolio Metrics

Closed Long Positions

Closed Short Positions

Joseph S. Kalinowski, CFA

Email: joe@squaredconcept.net

Twitter: @jskalinowski

Facebook: https://www.facebook.com/JoeKalinowskiCFA/

Blog: http://squaredconcept.blogspot.com/

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No part of this report may be reproduced in any manner without the expressed written permission of Squared Concept Asset Management, LLC.  Any information presented in this report is for informational purposes only.  All opinions expressed in this report are subject to change without notice.  Squared Concept Asset Management, LLC is a Registered Investment Advisory and consulting company. These entities may have had in the past or may have in the present or future long or short positions, or own options on the companies discussed.  In some cases, these positions may have been established prior to the writing of the report. 

The above information should not be construed as a solicitation to buy or sell the securities discussed herein.  The publisher of this report cannot verify the accuracy of this information.  The owners of Squared Concept Asset Management, LLC and its affiliated companies may also be conducting trades based on the firm’s research ideas.  They also may hold positions contrary to the ideas presented in the research as market conditions may warrant.

This analysis should not be considered investment advice and may not be suitable for the readers’ portfolio. This analysis has been written without consideration to the readers’ risk and return profile nor has the readers’ liquidity needs, time horizon, tax circumstances or unique preferences been considered. Any purchase or sale activity in any securities or other instrument should be based upon the readers’ own analysis and conclusions. Past performance is not indicative of future results.  

Alpha Prime Trade Journal for the Week Ended 6/16/17

Another challenging week for trading. The portfolio was up for the week but the Amazon/Whole Foods acquisition was clearly a disruptor deal for the market and for our portfolio.

Unfortunately, we were long Whole Foods (WFM) in the portfolio but sold it the day before the acquisition announcement. We were also long several food-based companies that suffered because of the news. In total, we were stopped out of Hershey (HSY), Kraft, Heinz (KHC), US Foods (USFD) and Mondelez (MDLZ).

What seemed like a brilliant move into consumer staples stocks early in the week turned out to be a poor tactical move.

Amazon to buy Whole Foods for $13.7 billion, wielding online might in brick-and-mortar world

(Reuters) - Amazon.com Inc said on Friday it would buy Whole Foods Market Inc for $13.7 billion, in an embrace of brick-and-mortar stores that could turn the high-end grocer into a mass-market merchant and upend the already struggling U.S. retail industry.

Amazon used aggressive pricing to become an e-commerce retail juggernaut and has recently been experimenting with brick-and-mortar outlets. It will take over a natural and organic grocer pioneer with 456 stores, a mecca for young, high-end shoppers, that has been struggling to rein in prices and integrate technology.

The deal represents a dramatic turn in strategy for Amazon, which has offered food delivery through its Fresh service for a decade but has not made a major dent in the $700 billion grocery market.

“The ramifications for all of retail are seismic – not just retailers that sell grocery, but for everyone,” Gordon Haskett analyst Chuck Grom said.

Shares of dozens of supermarkets, food producers, payment processors and shopping malls collectively lost at least $35 billion in U.S. market value on Friday as the news reverberated across financial markets.

Shares of grocer Kroger Co swooned 9.2 percent, while Wal-Mart Stores Inc fell 4.7 percent, signaling fears that Amazon could broaden Whole Foods' product mix and cut prices.

Amazon's shares rose 2.4 percent to $987.71, adding $11 billion to its market capitalization, which in one sense makes the acquisition nearly free for Amazon shareholders.

"Supermarkets will now have to contend with not only competition with each other and non-traditional grocers like Wal-Mart Stores Inc and Target Corp, but with a retailer like Amazon which has the financial capacity to price aggressively," said Mickey Chadha, vice president and senior credit officer at Moody's Investors Service.

Amazon agreed to pay $42 per share in cash for Whole Foods, a 27 percent premium on the Austin, Texas-based grocer's closing share price on Thursday.

But in a sign that investors believe a rival bid is likely, Whole Foods shares rose above the offer price to close at $42.68.

NO VALUE IN STATUS QUO

A former grocery expert at Amazon predicted that the chain, nicknamed "Whole Paycheck", would add a selection of discounted food and build out non-grocery areas within stores, particularly for pharmacy and Amazon devices.

"There’s no value in Amazon keeping the status quo at Whole Foods. Whole Foods was losing market share to Kroger," said Brittain Ladd, who until earlier this year was a senior manager working to roll out AmazonFresh globally.

"It’s pharmacy. It’s having the ability to put stores that are similar to Apple stores inside Whole Foods," he said.

Amazon has been looking at shop layouts that could allow traditional in-store purchase, online ordering with on-site pickup, and home delivery, using store warehouse space as a distribution point, Ladd said.

Despite Amazon's reputation for harnessing technology, a prototype store inside its corporate office in Seattle, called Amazon Go, which uses sensors and tech-savvy cameras to detect shoppers' selections and then charge their Amazon accounts, has rolled out more slowly than planned, a person familiar with the matter said.

And while some analysts expect Amazon to bring vast buying power to Whole Foods, Amazon's heft in the food market is far smaller than in other areas, and high demand for organic products gives farmers unusual bargaining power.

Amazon spokesman Drew Herdener said plans do not include reducing jobs as the result of the deal and that the company does not plan to automate Whole Foods cashiers jobs with Amazon Go technology.

WHOLE FOODS WAS UNDER PRESSURE

The deal unfolded after Jeff Bezos, Amazon's chief executive officer, approached Whole Foods CEO John Mackey about a month ago and received an eager response from Mackey, two people familiar with the matter said.

The grocer will continue to operate stores under the Whole Foods Market brand, and Mackey will remain CEO, the companies said.

Whole Foods has posted seven straight quarterly sales declines at established stores and recently overhauled its board of directors in the face of pressure from activist hedge fund Jana Partners LLC.

Jana, which disclosed an 8.3 percent stake in Whole Foods in April and is the company's second biggest shareholder, stands to make roughly $300 million from the sale to Amazon.

The deal is for $13.4 billion in cash and the remainder in debt. The acquisition price implies a trailing 12-month price-to-earnings multiple for Whole Foods of 31 times, versus a 14.4 average for the S&P 500 Food Retail index.

Amazon and Whole Foods expect to close the deal during the second half of 2017.

EYES ON GROCERY SHOPPERS

Amazon, started in Seattle in 1994 by Bezos, a former hedge fund manager, has grown into the world's biggest diversified online retailer, with a market capitalization of nearly $500 billion. It has expanded from a book seller into a merchant of nearly all consumer products, as well as producing videos.

Both Amazon and Whole Foods cater to younger consumers including millennials as well as the affluent.

"Amazon could bring technology to all Whole Foods locations, or it could absorb Whole Foods into AmazonFresh. Either way, it's good for consumers like myself," said Di Wu, a New York resident in her early 30s who is a member of Amazon's Prime fast-shipping club and who shops at Whole Foods at least twice a week.

"Amazon is known to drive down prices and make the shopping experience more efficient," Wu said.

Goldman Sachs Group Inc advised Amazon on the deal and provided bridge financing. Bank of America Corp also provided financing to Amazon, while Evercore Partners Inc advised Whole Foods.

Portfolio Metrics

Detailed Metrics

Closed Long Positions

Closed Short Positions

Joseph S. Kalinowski, CFA

Email: joe@squaredconcept.net

Twitter: @jskalinowski

Facebook: https://www.facebook.com/JoeKalinowskiCFA/

Blog: http://squaredconcept.blogspot.com/

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No part of this report may be reproduced in any manner without the expressed written permission of Squared Concept Asset Management, LLC.  Any information presented in this report is for informational purposes only.  All opinions expressed in this report are subject to change without notice.  Squared Concept Asset Management, LLC is a Registered Investment Advisory and consulting company. These entities may have had in the past or may have in the present or future long or short positions, or own options on the companies discussed.  In some cases, these positions may have been established prior to the writing of the report. 

The above information should not be construed as a solicitation to buy or sell the securities discussed herein.  The publisher of this report cannot verify the accuracy of this information.  The owners of Squared Concept Asset Management, LLC and its affiliated companies may also be conducting trades based on the firm’s research ideas.  They also may hold positions contrary to the ideas presented in the research as market conditions may warrant.

This analysis should not be considered investment advice and may not be suitable for the readers’ portfolio. This analysis has been written without consideration to the readers’ risk and return profile nor has the readers’ liquidity needs, time horizon, tax circumstances or unique preferences been considered. Any purchase or sale activity in any securities or other instrument should be based upon the readers’ own analysis and conclusions. Past performance is not indicative of future results.  

Alpha Prime Trade Journal Week Ended 6/9/17

This week represents the largest drawdown in the portfolio to date. The unlevered portfolio was down 0.4% vs. a drop of 0.3% for the S&P 500. On a levered basis, we were down roughly 2%.

This is largely a trend following system so the tech sector, which was previously a market leader prior to Friday’s “tech-wreck” is heavily represented in the portfolio so we suffered a bit from the sectors underperformance. Additionally, the retail sector has been quite weak and constitutes several short positions in the portfolio. With the announcement of the possible privatization of Nordstrom’s (JWN) all the retail stocks seemed to gather some wind in their sales on Friday. These two items affected the portfolio results in the most extreme way. We were partially short JWN into the announcement so it certainly left a mark in the portfolio.

I made a few adjustments to the tracking pages to help me better understand the portfolio dynamics. I have changed the average gain and loss calculations to reflect monetary gain and losses as opposed to percentage gains and losses.

The percentage gains and losses were not adequately adjusting for position size and could be misleading and unhelpful in the analysis of the trades.

One item that I need to correct in the portfolio is the maximum loss that I’m willing to get stopped out with. I had it set to $5000 per trade but that was too liberal judging from my average wins to loss metrics. I am also noticing too, that I’m inclined to get out of a trade earlier than the $5000 loss as it’s not that difficult to see within a short period of time that the trade isn’t going to work. For the most part, to keep the integrity of the experiment in good standing I have been adhering to the $5000 stop loss even though I’m unhappy with the trade prior to that mark.

I’d like to keep my position sizing the same but reduce the amount I’m willing to lose per trade. I have altered the position size and stop loss parameters as follows and started using these parameters on Friday (6/9/17).

I have lowered my maximum loss allowance to $3000 and to compensate for position size, I increased sell point to ½ standard deviation of the past 90 days for each security. I will continue to track the aggregate portfolio but will also isolate these trades starting Friday and watch for improvements in the portfolio risk/reward dynamics.

Closed Long Positions

Closed Short Positions

Joseph S. Kalinowski, CFA

Email: joe@squaredconcept.net

Twitter: @jskalinowski

Facebook: https://www.facebook.com/JoeKalinowskiCFA/

Blog: http://squaredconcept.blogspot.com/

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No part of this report may be reproduced in any manner without the expressed written permission of Squared Concept Asset Management, LLC.  Any information presented in this report is for informational purposes only.  All opinions expressed in this report are subject to change without notice.  Squared Concept Asset Management, LLC is a Registered Investment Advisory and consulting company. These entities may have had in the past or may have in the present or future long or short positions, or own options on the companies discussed.  In some cases, these positions may have been established prior to the writing of the report. 

The above information should not be construed as a solicitation to buy or sell the securities discussed herein.  The publisher of this report cannot verify the accuracy of this information.  The owners of Squared Concept Asset Management, LLC and its affiliated companies may also be conducting trades based on the firm’s research ideas.  They also may hold positions contrary to the ideas presented in the research as market conditions may warrant.

This analysis should not be considered investment advice and may not be suitable for the readers’ portfolio. This analysis has been written without consideration to the readers’ risk and return profile nor has the readers’ liquidity needs, time horizon, tax circumstances or unique preferences been considered. Any purchase or sale activity in any securities or other instrument should be based upon the readers’ own analysis and conclusions. Past performance is not indicative of future results.  

Alpha Prime Trade Journal Week Ended 6/2/17

Portfolio Metrics

Detailed Metrics

Closed Long Positions

Closed Short Positions

Joseph S. Kalinowski, CFA

Email: joe@squaredconcept.net
Twitter: @jskalinowski
Facebook: https://www.facebook.com/JoeKalinowskiCFA/
Blog: http://squaredconcept.blogspot.com/
Tumblr: trader-rants

No part of this report may be reproduced in any manner without the expressed written permission of Squared Concept Asset Management, LLC.  Any information presented in this report is for informational purposes only.  All opinions expressed in this report are subject to change without notice.  Squared Concept Asset Management, LLC is a Registered Investment Advisory and consulting company. These entities may have had in the past or may have in the present or future long or short positions, or own options on the companies discussed.  In some cases, these positions may have been established prior to the writing of the report. 

The above information should not be construed as a solicitation to buy or sell the securities discussed herein.  The publisher of this report cannot verify the accuracy of this information.  The owners of Squared Concept Asset Management, LLC and its affiliated companies may also be conducting trades based on the firm’s research ideas.  They also may hold positions contrary to the ideas presented in the research as market conditions may warrant.

This analysis should not be considered investment advice and may not be suitable for the readers’ portfolio. This analysis has been written without consideration to the readers’ risk and return profile nor has the readers’ liquidity needs, time horizon, tax circumstances or unique preferences been considered. Any purchase or sale activity in any securities or other instrument should be based upon the readers’ own analysis and conclusions. Past performance is not indicative of future results.