Pullbacks, Opportunity and Mr. Buffett

What do pullbacks, trading opportunities and Warren Buffett have in common?  Pullbacks themselves very often create trading opportunities and if you trade stocks then no one is better at picking them than Mr. Buffett.  

Consider that the stock markets are in a major bull trend, combine this with TWP strategies being built around trend-trading, and it does not take a genius to realise there are potentially opportunities using our strategies in stocks right now.  Consider also that 2 out of our 3 benchmark trend-following strategies are designed to enter on pullbacks and that the third strategy can be traded on pullbacks when the right conditions align. You start to see why a lot of the team here are trading stocks right now!

The forex markets have also been a bit sluggish of late with the US dollar range bound and major pairs like EURUSD, GBPUSD and USDJPY all quite sideways in recent months. This is not to say that there are not opportunities in forex because there are most certainly. They are just not as plentiful right now as they are in the stock markets.

So, how do we find trades among the plethora of stocks out there?  One quick filter is to pick a stock market that you know and understand. This might be the FTSE 100 or FTSE 350 in the UK  or the ASX200 is Australia, for example. If you are in the US, or if your local stock market is small or illiquid, then you might well look to the S&P 500.   Let’s assume for argument’s sake that you have selected the S&P500 to trade, another filter is to look for trends. While not every S&P 500 stock is trending right now, most of them are so this will reduce the size of your list but only to say 400 stocks.  A favourite filter of ours at TWP is to look for what we call ‘optimal chart structure’ which is too hard to explain fully in words alone, but consists of filtering out at a glance stocks that show signs of being too gap prone and erratic.  For argument’s sake, this might get us to a list of 150-200 stocks. This is still a lot for many people to scan but very doable if you know your strategies well and can skim through 150 charts looking for certain trade setups and ruling charts out very quickly if you are not seeing the things that your strategies require.

One further filter that I have recently experimented a lot with gives me a significantly shortened list. This filter is now set up as a new watch list and it is the Warren Buffett top 15. Why, might you ask, am I looking at Buffett stocks for trading opportunities when he is a long term investor and not a short term trader? Simply because no one on earth is better at picking stocks that outperform the market than the great man himself. My thought process is this… why try to be better than him when I can combine his skills with my own?  In other words, I can take his stock picking prowess and look at the 15 listed stocks into which he has invested the most cash and then look for trading opportunities with the stocks that meet the TWP strategy criteria.

For your information, these are Buffett’s top stock holdings and their symbols or EPICS. I have included the approximate amount he has invested in them for interest’s sake.

1. Wells Fargo (WFC) - $20.85 billion invested
2. Coca-Cola (KO) - $16.26 billion
3. American Express (AXP) - $13.56 billion
4. International Business Machines (IBM) - $12.64 billion
5. Procter & Gamble (P) - $4.25 billion
6. ExxonMobil (XOM) - $4 billion
7. Wal-Mart Stores (WMT) - $3.89 billion
8. US Bancorp (USB) - $3.16 billion
9. DirecTV (DTV) - $2.52 billion
10. DaVita (DVA) -$2.36 billion
11. Goldman Sachs (GS) - $2.31 billion
12. Phillips 66 (PSX) - $2.08 billion
13. Moody’s (MCO) - $1.93 billion
14. General Motors (GM) - $1.64 billion
15. USG (USG) - $1.09 billion

There are some potential opportunities setting up on this shortened Buffett watch list, potentially for as soon as the week ahead.  Those who are familiar with TWP trading principles and strategies might want to take a look at the charts for Coke, American Express, US Bancorp and USG to ascertain if you see anything of interest.

(The US Bancorp weekly chart shown below illustrates a strong weekly trend with price now back in the buyzone. We can start to build a case for a potential trading opportunity setting up long)

None of these stocks are ripe for the picking quite yet but I like the trends and the structure of the charts. For various reasons, I am now patiently watching each to see if a trading opportunity presents itself in the coming days, weeks and months.  I may trade all or none of them, this I do not know quite yet. But what I do know is this:

• The US stock market is trending strongly
• TWP strategies are best suited to strongly trending markets
• Pullbacks within trends create trading opportunities
• We are in the midst of a pullback on stock markets
• No one picks stocks better than Buffett. 

Our strategies at TWP are all about combining multiple reasons for placing trades and this technique takes advantage of that very principle.

By Nick McDonald

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The TWP Team
www.tradewithprecision.com