Review of Our Trading Plan (including video with the charts)


In December 2012, Scott and I co-authored: Our followers know that we consistently make the effort to measure the market's composure and identify areas to capitalize on with the over and underperformers. We combine our fundamental and technical disciplines and also turn to the options market to make the most educated, complete recommendations. Now that we are in the back half of earnings, let's take a look at how things have played out.

As of Friday February 8, 68% of the S&P 500 companies have reported fourth-quarter results, and earnings growth is up 6.5%, and revenue growth is up 2.2%. Of course, the trajectory of fourth quarter estimates had been sharply negative leading into the reporting season, enabling companies to beat a lowered bar...but the beat in what was considered a difficult environment. Balance sheets are as healthy as they have ever been, sporting lots of cash and management teams eager to unlock shareholder value. We continue to expect the U.S. economic progress this year, the Federal Reserve will continue its aggressive monetary policy measures for a while longer, and as interest rates remain at historical lows, equities continue to be a more attractive investment than fixed income. In addition, Correlation is at attractive levels which means that stocks overall are NOT moving together and it's a fabulous time to go stock picking.

High correlation among stocks makes traditional methods of analysis (fundamental and technical) less relevant, and leaves investors less control over their portfolios. It's not just value investors who can expect to be frustrated: every investor who seeks to reduce their risk through a diversified portfolio is implicitly making a bet that their stocks won't all follow the same path down in a crisis. That is why a low correlation environment that we are in now is exciting to us.

I get asked a lot what measurement are you looking at to determine correlation and levels to watch. CBOE S&P 500 Implied Correlation Indexes are the first widely disseminated, market-based estimate of the average correlation of the stocks that comprise the SPX. Using SPX options prices, together with the prices of options on the 50 largest stocks in the S&P 500 Index, the CBOE S&P 500 Implied Correlation Indexes offers insight into the relative cost of SPX options compared to the price of options on individual stocks that comprise the S&P 500. Ticker symbols are JCJ, KCJ and ICJ are "rotated" as time elapses. The implied correlation index typically stays between 50 and 70. The KCJ is at 64 now and the JCJ is at 57.

So why has it not been the happiest time for momentum traders? Volatility and trading volumes! While, they may be plummeting on a daily basis, that doesn't mean opportunities can't be unearthed. We all want volatility to return to a level that makes active trading worthwhile, and it will...just not yet. In the interim, be creative, quick on your feet (or keyboard) and willing to think outside the box in your hunt for trading we said it is a fabulous time to go stock picking fundamentally and on a technical basis. This is the time to identify the out and underperformers so there is something there for everyone. Our best suggestion is that you review your current holdings and your overall trading process in a dispassionate manner. If you are bulled-up beyond belief, force yourself to see the other side of your trade/investment. Going short is always connected with "bad" and that is simply not the case.

Many of the ideas that Scott and I spoke about in December still remain my favorite picks as the composure of the market has not shifted that much and many of my theses are long-term in nature. From a macro perspective, Industrial Select Sector SPDR (XLI) and iShares MSCI Emerging Markets Index  (EEM) performed incredibly well capitalizing on the capex spend and emerging market exposure that we expect to be tailwinds in 2013. Barron's agrees too. Check out author Jack Hough's thoughts on Cashing in on Capex. He believes as companies increase capital expenditures, makers of industrial machinery, engineering and construction firms, and select tech companies will benefit.

On Options Profits individual equity/options trades included TD Ameritrade (AMTD), AutoNation (AN) and MasterCard (MA). It's rare I will go unhedged and buy straight calls but I did it on all three names, successful each time. Currently, I have a May call spread on AMTD for more defined risk/reward since the name has had an impressive run. I still expect AMTD and AN to act well in their respective sectors over. Investors are hungry to invest and we see that in record asset numbers with the brokers which will trigger higher daily trading volumes in 2013, blowing away a relatively easy 2012 comp as levels were depressed. AMTD remains my top pick within the group because of its attractive valuation, healthiest margins in relative to peer and the 2% dividend yield....Not to mention it is trading significantly above all its key moving averages.

AN revenue and earnings both saw double-digit growth rates in Q3, with sales rising 15%. And at 19 times trailing earnings it still represents attractive valuation. I think the auto names across the board will continue to do well on the strength of the consumer, particularly in the emerging markets (China).

Trades that we are looking at now (And,'s NOT all about Apple (AAPL)...there are much better opportunities from multiple perspectives than focusing all of your time on the AAPL debate):

Even though Scott and I recommended EEM at lower levels in December and made a quick, nice profit it is a position that we will look to be involved with for the long term or hop in out out of as entry points represent good opportunities to capture the overall exposure to the emerging markets. It is important to note that while areas like the BRIC countries represent fantastic growth plays, there is more risk political, headline and otherwise associated with individual names so having an ETF such as this one lends for more diversification to compliment the equities. EEM is up more than 18% over the past six months, while the S&P 500 is up just 10%. After underperforming for a few years, China is back in a big way, and when China is firing on all cylinders, emerging markets as a whole are working. According to the Institute of International Finance, the global association of more than 470 financial institutions, forecast a continued rise in investment flow to emerging markets, given low interest rates in developed markets and strong growth in emerging economies.

Which takes me to the next sector, technology...particularly services and analytics IBM (IBM), CA Technologies (CA), Oracle (ORCL) and semis Lam Research (LRCX), Cisco (CSCO). These two groups have significant emerging market exposure and will benefit from capex spend (as IBM stated on the earnings confernece call). Back to EEM for a moment... the ETF has $52 billion in assets under management, top three being Samsung Electronics, Taiwan Semiconductor Manufacturing, and China Mobile.

We have traded many of the following tech names successfully on OP as have Cramer and Stephanie in the Action Alerts Plus portfolio...IBM will always be a favorite core portfolio holding of mine. even when it does consolidate and pullback a bit, the healthy dividend rewards you for being patient and the company has cornered the services and analytics markets which are very high barrier to entry. That innovation and vision 10 years ago with the strategy shift is why is on a totally different playing field from the likes of Dell (ticker), Hewlett-Packard (HPQ), Intel (INTC)....and we saw that happen when it reported earnings. IBM proved once again why it is a leader and set the bar very high for tech earnings. LRCX is an outperformer in the semis.

LRCX's acquisition of Novellus is already bearing fruit with its first new award from INTC that the company announced on its conference call. Also, shipment guidance of 10% was stronger than we expected and will lead to better visibility to earnings. Yes, it has had a nice run but the spending environment is pleasantly surprising the market and volatility on the name is insanely cheap which represents a nice opportunity to get long and continue to nibble away.

So if we are going to talk capex spend and the global story, we have to circle back to XLI, another call spread recommended in our December webinar. And just like EEM, I am going to keep an XLI position on as a mini hedge because it is a very stock picking environment which increases the risk/reward profile in the portfolio and I want macro exposure and balance for that reason. XLI is one of the most popular on the market, with over $4.5 billion in assets and an average daily volume just over nine million. In addition, ISI's allocation survey said it's encouraging that despite the net position in Industrials went up since the last survey, the group is the most UNDER-OWNED among the major sectors vs their historical average net position among institutional investors. Individual names I will look at...Caterpillar (CAT), Fluor (FLR).

And, let's will round it with the is the sector I talk about the most and there is much more room for the group to run. Mosaic (MOS) was my pick for 2012 and the momentum will continue in 2013. I expected choppiness in 2012 with a strong finish at the end of the year and believe that momentum will continue through Q1 and into Q2 which is a seasonally strong time of year for the group. Overall, the combination of drought conditions (weather being the biggest variable), low per acre yields and forward-looking projections suggest that the industry is well positioned for the next several years. This is what needs to happen to keep the story back on the bullish track: 1) signed contracts with China and India will not necessarily translate into upward earnings in 2013, but they may lead to a sharper decline in inventory drawdowns which could limit further price declines; in addition, the contracts could be viewed as a sign that the bottom has been reached; and 2) farmers opting to fully maximize potash applications despite soil tests that might indicate otherwise.

Every major agricultural company is projecting another solid spring planting season in the U.S. this year. With less and less arable land available around the world, increasing yields from existing plots will become increasingly important to keep up with expected population growth.

Here is our complete video, including chart work and some other ideas:

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At the time of publication, Jill Malandrino had no positions in the stocks or issues mentioned, while Scott Redler held positions in SPY, GE, BAC, TBT, MSFT, C.

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