2014 Outlook: The Return of Commodities and Financials


January 1, 2014 (6:00 PM)

Happy New Year!

It’s been just about 12 months since I started posting my trading and investment rationale on this blog. Is there a better time to review my overall strategy than the start of a new year? Let’s start by thinking about last year – the good as well as the bad – and resolving to change those aspects that could make us more successful in the new year.

I highly encourage others to participate in this same exercise. What worked last year? What didn’t? As the well-known proverb states simply: “do more of what worked and less of what didn’t.”

After reviewing my trades over the past year, I added a few trading rules to (hopefully) improve my success rate in 2014.

  • ALWAYS Use Contingent Sell Orders. Place a contingent sell on options orders (or a stop loss if using shares) every single time I enter a trade. This accomplishes two tasks: (a) it completely takes the emotion out of selling a losing trade by making the sale automatic, and (b) it forces me to determine – before I even enter a trade – what level I’d exit a position if it doesn’t follow my expected path.
  • NO Impulsive Trades. Do not enter a position – any position – without a predetermined trading plan with well-defined entry and exit levels. I’ve found that those trades I took impulsively, too quickly, or emotionally turned into losing trades more often than not.
  • Think Longer-Term. A few days ago, Joe Fahmy wrote Everyone’s Becoming Too Short Term. I highly recommend it (don’t worry… it’s short). It made me realize that I need to get back to the basics. For years, I viewed each investment with a much longer-term, multi-month perspective. Only in the last 18 months did I begin trading on the short-term, and then on the extremely short-term (and, occasionally, intra-day). I was somewhat surprised to find that I just about broke even across all of my short-term trades; it was those trades that focused on longer-term trends that accounted for the vast majority of my profits in 2013.
  • BONUS: Stop Focusing On Apple. Even after suffering large losses in Apple through late 2012 and early 2013, I continued to focus on the name until just a few months ago. I continue to love the company, but will only invest in the name opportunistically – and will no longer take outsized positions. It has taken me too long to come to this realization, but there are simply too many great stocks to focus on just one…

2014 OUTLOOK: THE RETURN OF COMMODITIES AND FINANCIALS

A number of commodities, commodity-related names and financials have extremely bullish charts heading into the new year. This gives us two clues as to what the primary themes of 2014 will be:

  • Inflation-Related Stocks will Lead. The Fed’s recent action to slightly taper back on its enormous stimulus operation will ease the downward pressure on inflation. Domestic and global growth is slowly returning; so, while we may not see an immediate rise in inflation, the perception of its eventual return will positively impact inflation-related names. We expect commodities, commodity producers, hotel and gaming operators, and other investments that tend to do well in inflationary environments to outperform.
  • Financials Are Past the 2008 Crisis. During the 2008 financial crisis, many bank stocks fell by over 90%+ from their peak just a year earlier. While most have seen significant recovery’s over the past five years, those financial names that were hit hardest (BAC, C, AIG) continue to trade 75%+ below their peak prices. By no means do we expect them to trade back up to their all time high prices anytime soon (and maybe ever), we do expect that the highly discounted trading multiples assigned to those names will continue to rise as investors become more confident that the woes of the crisis are well beyond these firms.

With those themes in mind, let’s take a look at some charts.

APPLE (AAPL). Let’s get this over with… you know we’re going to show some AAPL charts. Looking at the very long-term charts, it seems like the 2013 under-performance is a direct result of the false breakout in 2012. Based on both fundamental and technical analysis, we do expect shares to return inside this wedge in 2014.

AAPL1

Another look shows two completely different, but unbelievably similar trend lines. One is a log graph, the other is linear. One shows 10-20yr trend lines, the other two five year trend lines. In both cases, however, we see a breakout and re-test of the top trend line in 2012, and firm resistance throughout all of 2013. We’re currently sitting at an important inflection point on both charts; we continue to expect EPS growth (and, more importantly, a shift in perception) to lead to a strong rebound in 2014.

AAPL2

ALUMINUM CORP OF CHINA (ACH). Over the past five years, ACH has formed an enormous triangle. It’s nearing an inflection point here, and has been testing the top trend line for the past three months. An upward breakout of this triangle will likely lead to a surge in price.

ACH

AMERICAN INTERNATIONAL GROUP (AIG). AIG is one of our favorite names for 2014. The chart below shows a complete vacuum of any volume between $52-$200; there was not a single trade between $125-$200 and only FOUR WEEKS worth of trading between $52-$125 over the past TWENTY YEARS. If the shares break $52, there is almost no resistance for quite a ways up.

AIG

AKSTEEL HOLDING CORP (AKS). AKS has broken out of a multi-year triangle with a potential double bottom at $2.50. There is a lot of potential upside in this name.

AKS

AMAZON.COM (AMZN). Since its IPO almost 20 years ago, AMZN has formed a validated trend line. That trend line, which stands $75 below its current lofty level, is likely to be re-tested (even as it continues to climb).

AMZN1

Looking at a linear chart, AMZN has gone absolutely parabolic. As often as this name is discussed as one in which investors “never expect profits”, at some point this will change and we’ll see a significant correction. We’re steering clear.

AMZN2

ARM HOLDINGS (ARMH). ARMH has a very bullish long-term chart. After re-testing it’s all time high price heading into 2013, it was finally able to break out earlier this year and has successfully re-tested that previous high price. The shares have also formed a relatively steep rising trend line and is now forming a bull flag – not only above a recently formed wedge, but also at fresh all time highs.

ARMH

BANK OF AMERICA (BAC). After quickly recovering to the $15-$20 level following the crash, BAC subsequently re-tested its lows in 2011. It took all of 2012-2013 for the shares to get back up to that $15 level. With the financial crisis firmly behind us, we expect shares to continue picking up steam as it rides along the two year uptrend line (green). Above the $16 level, we expect shares to continue up.

BAC

BED BATH & BEYOND (BBBY). Shares of BBBY have formed a very well-defined ascending triangle over the past six months. It’s recent breakout can be expected to continue up through the high $80’s over the coming months.

BBBY

BROADCOM CORP (BRCM). Shares of BRCM have had a rough year. Shares gapped down from $31 (previous support) to $28 (subsequent resistance for the past six months). After the recent breakout above $28, we could see shares continue up to the $31 level, which is likely to put up significant resistance. The 200DMA will likely put up resistance for (potential) a few weeks before breaking through.

BRCM1

If shares of BRCM do continue up to that $31 level, it will have broken out of the fourteen year triangle shown below. This is one we’ll be following closely.

BRCM2

BERKSHIRE HATHAWAY (BRKB). Shares of BRKB recently broke out of a six month consolidation triangle, and also was able to re-take its longer-term rising channel. This is a very bullish medium-term chart.

BRKB1

Looking at the longer-term chart, shares have formed a rising trend line that’s currently sitting at $80. This doesn’t concern us, however, since it has gone many years without testing that trend line in the past. It is currently forming a well-defined bull flag at all time highs after a significant rally.

BRKB2

CITIGROUP (C). The chart of C looks strikingly similar to AIG. Shares dropped through significant support at $100 – a level in which hadn’t seen any volume since 1995 – and formed new resistance $50. Shares are currently forming a bull flag at that firm resistance level. A break above $52.50 or so could bring a multi-year rally to $100.

C

CATERPILLAR (CAT). CAT recently broke out of a two year trend line as well as a long-term resistance level at $89. Shares are now consolidating at another longer-term trend line at $91. If the shares break above this level, there’s little resistance up to $98.

CAT1

On the longer-term, that triangle above looks a lot like a very bullish flag formed after a $90 rally since 2009. The recent break out above the triangle leads us to be very bullish for the longer-term.

CAT2

SPDR DJ INDUSTRIAL AVERAGE (DIA). The DIA has formed a very long-term rising wedge; shares not only broke above the wedge, but also successfully re-tested that level. Needless to say, this bodes well for a bullish continuation of the rally into 2014.

DIA

DRY SHIPS (DRYS). Shares of DRYS recently broke out of a well-defined five year falling wedge. We’re bullish on this name in 2014.

DRYS

EBAY INC (EBAY). EBAY has consolidated just below it’s all time high price and recently re-tested four-year trend line. Above the all-time high price, we’ll enter long-term bullish positions.

EBAY

FORD MOTOR (F). Shares of F recently tested a significant long-term trend line at the $18 level, just as a five-year uptrend line came into play. It broke down below the five year trend line over the past few weeks, meaning that $18 resistance remains firmly in place. It now looks like a bear flag is in the forming.

F

FEDEX (FDX). Shares of FDX look exceedingly bullish here. It recently surged above both its all time high as well as a very long term rising wedge, and is now forming a bull flag at those levels. We’re bullish on the name in the longer-term.

FDX

GENERAL ELECTRIC CO (GE). Shares of GE broke above a long-term rising channel, and re-tested the top trend line successfully. As part of that re-test, it formed a W bottom and has broken through recent highs.

GE1

That W bottom also happened to be a successful re-test of its very long-term trend line that it recently broke. Shares look very bullish in the longer-term as well. This is another of our favorite names for 2014.

GE2

GOLD (GLD). Gold has gotten hit exceptionally hard in the past year. Everyone seems to hate gold here… we can’t even begin to count the number of bearish articles we’ve read in the past few weeks. However, there are two charts that make us very bullish here. The first is that GLD has formed a potential double bottom at exactly the 50% fib level since it began trading.

GLD

The second is that the spot price of gold has formed a very long-term uptrend line over the past 12 years. It is now hitting that long-term support level at exactly the 61.8% fib level. Is it a coincidence that GLD and GOLD are both hitting very significant fib levels at exactly the same time GOLD tests its very long-term support trend line? This is a big one for us in 2014.

GLD2

STARWOOD HOTELS & RESORTS (HOT). Shares of HOT continue to outperform. Rally, consolidate, rally, consolidate. We’ve taken advantage of a number of breakouts this year.

HOT1

While it may look like the rise in HOT may be unsustainable in the short-term, the longer-term chart says just the opposite. Shares have formed new highs every eight years or so, and we’re right on track with that schedule. Shares are now bull flagging at all time highs, as price broke above a two year wedge.

HOT2

INTERNATIONAL BUSINESS MACHINES (IBM). IBM has formed a falling wedge over the past year and just recently broke above the wedge. It has done so on a potential double bottom, which could propel shares higher in the near-term.

IBM1

The recent double bottom just happened to take place exactly on a longer-term trend line, suggesting the current rally is very sustainable.

IBM2

RUSSELL 2000 (IWM). The broader market, as illustrated in the below chart of IWM, is looking very bullish here. Shares have risen above a 15 year rising wedge with a successful re-test. Further, over the past year, we’ve climbed up a fairly steep rising trend line with a number of tests.

IWM1

While that one-year rising trend line may look unsustainable, when taking a closer look, it is formed by a series of small rallies and subsequent consolidation periods. We’re not seeing any parabolic trends here.

IWM2

COCA COLA (KO). Shares of KO have recently broken above a longer-term significant resistance level. The next level of significant resistance is around $42.

KO

The previous all time high price of $34 was recently broken (with a successful re-test) and we’re seeing shares continue higher.

KO2

LAS VEGAS SANDS (LVS). LVS is consolidating at all time highs. It recently broke out of a long-term rising channel, and formed a W bottom as it re-tested the top trend line. It is likely to continue rising the medium-term.

LVS1

In the longer-term, LVS is slowly climbing up a trend line formed over the past five years. It has climbed relatively slowly (compared to many other names in the space) over the past three years and may be primed to continue its bullish run.

LVS2

MARATHON PETROLEUM CORP (MPC). Over the past year, shares of MPC have formed a large “cup” formation. There are two likely scenarios here: (a) shares see a small pullback over the coming weeks and form a handle, or (b) shares break through resistance and continue to all time highs.

MPC

NORDIC AMERICAN TANKER SHIPPING (NAT). Shares of NAT have surged out of a year-long triangle and have formed a bull flag at its previous resistance level. Next stop is likely at the $11.50 level.

NAT

TOKYO NIKKEI AVERAGE (NIKK). This one isn’t directly actionable (it’s an index – not an ETF), but thought it was very interesting to see the Nikkei sitting exactly at the top trend line formed over twenty years. This is clearly an important inflection point.

NIKK

NORTHROP GRUMMAN (NOC). Over the past twenty years, NOC has formed a well-defined rising channel. Earlier this year, shares broke out of the channel and haven’t looked back since. As long as it remains above the green trend line, we’re bullish on the name.

NOC

SINA.COM (SINA). Shares of SINA have formed a fairly well-defined falling wedge, which it has recently broke out of. Additionally, shares have created a long-term rising trend line that was recently re-tested as part of the falling wedge. We expect a strong upward continuation in this name in the near-term.

SINA

SILVER (SLV). Like gold, shares of silver have taken a beating this year. Over the past year, shares have formed a fairly well-defined triangle. Currently, they’re sitting right near the bottom trend line. Will this act as support, or simply the first step before a continued breakdown?

SLV1

The longer-term chart shows the $17.50 level as a fairly significant trend line. This, combined with the fact that shares are resting on the bottom trend line of a larger, longer-term triangle, leads us to believe that this level has a reasonable chance of holding. We’d be confident taking longer-term positions here – but make sure to keep your stops tight. As a side note, it’s also interesting to see the 61.8% fib level put up serious resistance.

SLV2

SANDISK CORP (SNDK). Shares of SNDK have climbed up a five year trend line as it continues to re-test its long-term (15 year) resistance at the $70 level.

SNDK1

A longer-term look at SNDK makes it clear that a break of $71 will be very significant. We’ll be very bullish above that level, but will keep our stops relatively near that level.

SNKD2

NATURAL GAS (UNL). Natural gas has recently broken out of a four year downtrend line and is forming a bull flag above its recent resistance. We’re bullish on the longer-term prospects for this name.

UNL

VALERO ENERGY (VLO). VLO has been climbing up a relatively steep trend line over the past three months and continues to make new highs. It also broke above a year-long trend line with a successful re-test.

VLO1

Over the past twenty years, VLO has formed a relatively well-defined rising trend line. It recently tested this trend line before breaking out of a seven year trend line. We’re bullish the energy sector for the coming year.

VLO

VERIZON COMMUNICATIONS (VZ). The declining trend line in VZ was re-tested on the last trading day of the year before closing above its 200DMA. This trend line, along with its rising longer-term trend line formed a triangle that it recently broke out of. We’re bullish here, but have stops below the 200DMA.

VZ1

On the longer-term, VZ has formed a five year rising wedge and is sitting squarely at long-term support. We’ll continue to be bullish as long as the uptrend line remains in tact.

VZ2

WYNN RESORTS (WYNN). Over the last five years, WYNN has formed a well-defined rising wedge. Shares recently broke out, consolidated, and have since rallied hard into year end. We continue to be bullish this name, and the gaming sector more broadly.

WYNN

US STEEL GROUP (X). This is one of our favorite names for 2014. Shares of X consolidated above its 52 week high before breaking out to fresh highs. It has since consolidated for the past few days and we highly expect a continued run in the medium term.

X1

On a slightly longer time frame, our bullish view on X becomes more clear. Not only did it break a five year trend line that happened to be right at the 50DMA, but it also broke (and successfully re-tested) a ten year trend line. It also bull flagged just above that level.

X3

Going out even further, we can see the significance of those two trend lines. We fully expect shares of X to continue to be bullish through 2014 and have a longer-term target at the blue consolidation level near $40.

X2

EXXON MOBIL (XOM). Shares of XOM have made successive new highs throughout 2014. It recently broke through a trend line that joined all previous highs of the year (with a successful re-test) and continued higher. We continue to be bullish on this name.

XOM1

Over the past twenty years, XOM has formed a well-defined support trend line that currently rests at $85. Shares tested this level three months ago before surging to new all time highs, and above a significant five year trend line.

XOM2

YELP INC (YELP). Shares of YELP rallied strongly for the first three-quarters of the year before spending the last four months consolidating. Shares have since formed a well-defined descending triangle (all triangles are continuation patterns), broke out, and successfully re-tested the pattern. We expect fresh highs over the coming months.

YELP

YAHOO! INC (YHOO). Since its IPO nearly twenty years ago, YHOO formed a massive, twelve year symmetrical triangle and broke out earlier this year. It has rallied $25 from its breakout point. While there has been a massive rally over the past twelve months, the width of the triangle it broke out from is over $120. The next level of resistance is around the $45 level.

YHOO

I wish you a happy – and very profitable – 2014! Thanks for reading, and please leave any questions or comments below.