Market Summary

Economic data, oil price rises, geopolitical uncertainty and profit warnings with little countervailing good news combined to bring the markets lower this week. A stronger than expected private sector job growth report on Wednesday provoked a sell-off as investors feared the economy was sufficiently strong that the Fed would not be constrained in raising interest rates further. This increased interest in Friday's employment report from the Department of Labor which delivered a hoped-for contrary result showing the economy created far-fewer jobs in June than was expected. This positive result was offset, however, as the report also showed that inflationary pressure was increased by rising wages which raised the specter of weakening growth accompanied by rising inflation - the feared 'stagflation' scenario. The market's mood was not helped by increasing international tensions following North Korea's celebration of July 4th with multiple missile launches, which drove up oil prices, and revelations of further terrorist threats.

For the week, the DJI lost 0.53%, the NASDAQ slid 1.94% and the S&P 500 lost 0.37%. There were three distribution days with Friday's marking the fifth in fifteen days for the NASDAQ. If our market model was not already at 'exit' for that index, then it would have become so. The market's behavior this week confirms our cautious attitude towards new investments at this time and we restrict ourselves to relatively low-risk investments selected for our TradeWatch 'Best Return' list. As the chart below shows, the NASDAQ has now given up most of its gains since the follow-through day of June 29. The prior resistance level at 2152.56 offered support on Thursday but that was broken on Friday. Unless there is an unexpected recovery on Monday, the PSAR (the dotted line on the chart) will go to a short position and the next support level will be just below 2100.

The number of successful breakouts fell to 10 this week and although there were some intra-day gains to be made averaging 4.6%, all closed the week below their pivot points.

Although the number of TradeWatch 'Best Return' selections has fallen off in the last two months. returns continue to very good with an average return on closed positions of 7.2% with an average hold period of 28 days giving an annualized return of 107.3%. Recent successes were KNOT (5.6%), CRAYD (14.3%), IMCO (23.41%), EMIS (42%) and ZOLT (149.8%).

Position Sizing and Risk Management

Last week we described how to use BaseWatch to find stocks building their bases which prompted one newsletter reader to say "The basewatch screen in this weeks newsletter looks like one of your best. What I like is that these stocks can be bought using a meaningful stop placed just below the previous low of the last 4 weeks."

He reminded me of a topic we have not yet covered on the site which is the importance of position sizing and its relationship to risk management and overall portfolio returns. He was also kind enough to provide a spreadsheet that allows the calculation of position size once you have set your overall portfolio size and risk per position. You can download a copy of the spreadsheet here.

To use the spreadsheet:

1. Set your desired overall portfolio size in cell D1.
2. Set your risk per position in cell D2.
3. Enter your initial stock conditions in 'Initial Conditions' columns. The appropriate position size will be calculated and shown in the 'Calculate Number of Shares to Buy' column.
4. You can continue to buy shares until your maximum portfolio size is reached.
5. Update the latest price and trailing stop in the Current Status columns and gain/loss and overall risk or 'heat' will be calculated.
6. As you add positions, you will need to copy down the formulae from the line above.

Here is a link to an excellent explanation of risk and risk management by Ed Seykota.

Investment Advisors Using our Service

TradeRight Securities, located in a suburb of Chicago, is a full services investment management company and broker/dealer. They have been a subscriber, and user, of BreakoutWatch.com for some time now. They practice CANTATA and use Breakoutwatch.com as a “research analyst”. You can learn more about TradeRight Securities at: www.traderightsecurities.com. If you’re interested in speaking to a representative, simply call them toll-free at 1-800-308-3938 or e-mail gdragel@traderightsecurities.com.

PivotPoint Advisors, LLC takes a technical approach to investment planning and management. A breakoutwatch.com subscriber since May, 2004, they use breakouts, market signals, and now TradeWatch to enhance returns for their clients. Learn more at http://pivotpointadvisors.net or contact John Norquay at 608-826-0840 or by email at john.norquay@pivotpointadvisors.net.

Note to advisors: If you would like to be listed here, please contact us. As a service to those who subscribe to us, there is no additional charge to be listed here.