Stock Picking vs. Market Trend

by Olivier on January 28, 2011

Today I decided to reduce my overall market exposure. I sold one third of my portfolio. The fact I treated all my positions the same way is a pretty good description of my intention: I am still happy with all my portfolio components, but I wanted to reduce overall risk and portfolio volatility. Now, while everyone believes to be the best stock picker on earth, the truth is, it is very hard to be somewhat diversified and still achieve a performance showing low correlation to the overall market’s performance. Put another way, even if you are the best stock picker around, if the overall market is going down it will most likely ruin even the best long set-ups and great looking stocks will be dragged down along with the indices.

Of course, and that’s a concept I’ve talked about quite extensively in the past, strong stocks obviously do well in up-trending markets and most often also in sideways moving markets. The problem really is down-trending markets. They tend to drag down the best stocks with them. Great performers will show relative strength compared to their peers i.e. they will give back less. The point is, they will retreat as well. To make a long story short. The best performance is obtained when stocks within a sector move up in unison and when the underlying trend of the overall market supports such a move.

The jury is still out as to whether we will see an orderly pullback, a more or less sideways trading market, or if this might be the beginning of a much bigger correction. The problem is, there is no way to tell beforehand. One can only know when all is said and done. As I cannot look into the future I have to manage risk. That’s why I particularly like the quote from Alan Farley, part of my Quotes Section, that specifically applies to the situation at hand:

Experienced traders control risk, inexperienced traders chase gains. – Alan Farley

The essence of successful trading is putting the emphasis on ‘controlling and managing risk’ as opposed to ‘focusing on out-sized gains’. I’ve been there and done that. No more. I’ve learned my lesson. I know I will find the next winners as I run technical scans on a daily basis and do lots of research. The most important part though, is cutting my losses and managing my risk. That being said, my portfolio is down less than 7% from its peak. Nothing to be worried about. Then again it depends on the context. As I’ve written before, I keep track of my portfolio by charting my equity curve and analyzing it like I analyze the chart of a regular stock. My equity curve chart is showing first signs it might be about to roll over. The faster moving averages are about to generate bearish crosses and there is no immediate buying pressure I can identify as it has basically gone nowhere for 2 months. Combined with the fact we have seen an incredible rally and the markets might be vulnerable at this point I decided it was about time to reduce my overall risk. If there is something I have learned in my 13 years of trading then it is the following:

There is never a shortage of opportunities and one can always get back in.

On to my portfolio positions:

  • DNN DML.TO – Denison Mines: Uranium is still the one sector I am most bullish going forward. The 60 minute chart of DNN shows DNN is trapped in a trading range between 3.20 and 3.60. The way I see it, Uranium stocks are gathering steam for a breakout to the upside. How long will it take until they stage a breakout? I have no idea. All I know is that odds are high they will. The U.TO – Uranium Participation chart is unambiguous. Uranium wants to go higher.
  • UEX.TO – UEX Corp.: Sure enough UEX.TO zoomed higher right after I sold part of my position. Do I care? Not really. That’s simply part of the game.
  • LNG – Cheniere Energy: The short squeeze set-up is still in play but the chart needs more time to build up pressure.
  • TMB.TO – Tembec: Ugly price action. Then again we witnessed a huge run-up and my updated public list chart now shows a bullish wedge/flag consolidation pattern. The most recent long tails might be an indication that sellers are getting exhausted. We now need follow through to the upside to validate this assumption.
  • CNL.TO – Continental Gold: Moving up well with the price of gold today. Might act as a hedge if the markets tank and gold bounces from these levels.

I’ve never seen a situation where having money made it worse. – Woody Allen

My public list with all my charts can be viewed here:

Buenas noches!

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