Author: Michael Arold
Covestor model: Technical Swing
My Technical Swing model gained 1.5% in the month of July. Throughout the month, headlines were disconnected from price action: negative news from Europe, China and U.S. companies dominated, while various stocks and sectors were moving in stable uptrends. As usual, the speculator had to ignore headlines and instead focus on reading the markets.
Most of my trades were therefore positioned on the long side and the few shorts in my portfolio (Deutsche Bank, Spain ETF, Silver) initially benefited from the developments in Europe.
In the second half of July, however, I began increasing the long side because certain stocks experienced low volatility pullbacks with underlying uptrending conditions on longer time frames, thus creating my "bread and butter” trading setup. Stocks in this category included Walt Disney (DIS), Wells Fargo (WFC), Gap (GPS), Sherwin Williams (SHW) and Simon Property Grou (SPG).
I added one short after the company reported quarterly earnings: Facebook (FB). The stock headed down after a disappointing report and continued weakness triggered this trading setup.
Overall, investors seem to be forgetting that stocks have been doing great in 2012 so far. As of the end of July, the S&P 500 is up around 10% and the Dow is just about 3% away from a multi-year high. I explained the reason in an earlier report: equities are always discounting and should start to rally before QE3 might happen. So far, I'm seeing the exact same pattern like in 2010, when stocks rallied two months before the Fed announced QE2 in November of that year.
Strength in the last week of July was attributed to comments from Mario Draghi to "do whatever it takes to save the Euro." The comment was not a surprise to me. Months ago, I argued that the Europeans will manage to further kick the can down the road. They hadn't even started to engage in U.S.-type money printing and it was just a question of time when they would. When politicians have the choice between printing money and not getting re-elected, guess what they choose?
As a result, I added a long position in gold (GLD). Technically, the metal did not manage to break down from the bearish long-term topping pattern. Instead, prices broke out to the upside and therefore triggered this trade.
In summary, I remain bullish for stocks for the next months and plan to use pullbacks to add to the long side.