2014 Theme. Large Cap Fueld Rotation.

Right now the theme I am looking for for the foreseeable future is that the largest market play4ers are going to rotate into the asset class of stocks in the long run, which will fuel a rotation. The way it works is the mid caps and larger will rally and those in that stock will want to keep exposure in that industry so they will take advantage of the premium and rotate into some mid and smaller cap stocks fueling some explosive moves.

As such, I am working on different ways to slice the market up and identify the rotation.

I am using finviz custom export function to come up with some of my own formulas.
Basically I want all of the $2B+ companies that have moved over 10% in the last year that are contracting in volatility (I sort and take the top 100 names with greatest difference between weekly volatility and monthly.). THEN, I take those names and manually view those undergoing consolidation that look decent for a setup. The explosive move is not the rotation into the largest cap names but instead the small, so now I have to take the list of about 10 names total and break down the individual industry. I will then be looking for the names that are setting up in a consolidation that haven't moved. Ideally from these 10 or so names I will find an industry where ALL names are setting up together because that confirms that a LOT of money is ready to buy anything and everything related. However, through my understanding of the liquidity and risk cycle I can also try to identify what is "next" up to bat and in the deck and find a good location to buy one of those names.

To be more specific, the large cap names that have rallied HAVE to have received large inflows of capital to drive the price higher. With a stock that big there is a huge market so it has to be driven by a big buyer to take out the supply at the current price and move the stock higher. Given stock has consolidated means that there is a battle between bulls and bears. Eventually you will see the supply consumed (or the demand stops) and the stock will then tend to make a big explosive move.  The consolidation (basically regardless of if the money continues to flow into the big cap name or not) means that someone is getting ready to move a lot of money and even if they sell it, with the stock up 10%+ on the year, they have gains in which they can rotate into some smaller cap names if they wish while the big buyer is likely to continue to drive up the price.

So I started with these 10 names. You will notice some are duplicate industries (a handful of biotech). This is actually really good because it potentially suggests a bull market in that industry already.

txt,apol,avgo,axll,gild,athn,mtg,yndx,thrx,regn,

Now I will look at each industry seperately for ideaas.
http://finviz.com/screener.ashx?v=111&f=ind_semiconductorbroadline
http://finviz.com/screener.ashx?v=111&f=ind_propertycasualtyinsurance
http://finviz.com/screener.ashx?v=111&f=ind_internetinformationproviders
http://finviz.com/screener.ashx?v=111&f=ind_educationtrainingservices
http://finviz.com/screener.ashx?v=111&f=ind_businessservices
http://finviz.com/screener.ashx?v=111&f=ind_biotechnology
http://finviz.com/screener.ashx?v=111&f=ind_aerospacedefensemajordiversified
http://finviz.com/screener.ashx?v=111&f=ind_synthetics
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Now I can figure out what range of market cap the liquidity cycle is in... For example if all the 10+B companies have moved, but then you start to get in the 2-10B range and you start to see more laggards, but you see some of the midcap names in the sector leading, you probably will be seeing a rotation into those names sooner.

Then I might sort by RSI (relative strength index) or % off highs and try to slice things up that way to really see which specific stocks are next. Finally I look for the highest short interest names and see if we have seen a lot of short squeezes or not. This helps me to quickly assess where we are in the risk rotation cycle and within those groups I should be able to spot opportunity.

The fact that I start with mid cap, large cap or mega cap that has at least begun to consolidate means we probably have already seen at least the mega cap move from in cycle to out of cycle. That's good because I am looking for the NEXT move.

So for example the property casualty insurance group has seen moves and a lot of them are near their highs. With such a wide range I have to wonder how many "laggards" are left. But as I get into the $8B and less range some laggards start to appear more frequently. This tells me the liquidity cycle has hit all the companies over $10B and is moving down from there. As I sort from those off of 52week highs it is not until I get to a few pages in that I really see those lagging. Then I begin to see a lot of trashy names too. I check the "high float short" names and really don't see many names near highs and of those that are, I don't see any real rip above previous ranges since the last cycle around JULY 2012. So that tells me that we are probably still in the "laggards" part of the cycle and the shrot squeezes won't start to heat up until we see more of the laggards rip. So, that really narrows the field down I am looking for a name in the sector under $10B but probably over $1B as that is when you start to see too many names that have drastic sell offs that haven' found support. Within that group you want a name consolidating off of its highs and having a high float short interest isn't really all that necessary. I have limited the names from 80 to about 5.

property casualty insurance group: re,y,wrb,mtg,ffg
Then I can determine personal preference from there. I usually scan the charts more in depth looking at the 5 year charts and the 10 year charts as well as the short term to see if I can see anything I really like. I probably would go with MTG because it hasn't had as sharp of moves downwards over the last few days, and has a huge volume profile above on the 10yr chart giving you the opportunity for much larger than anticipated gains if you let your winners run beyond your target and just manage it afterwards looking for signs of it weakening.
pick:MTG

semiconductor broadline group: Mid caps are lagging again. The small caps are doing decent which is fine since they represent greater risk so it actually is good for the group, but makes things a bit more difficult to anticipate a rotation into the mid caps. In this case, the mid caps actually look a bit too ugly so you may want to see some more mid caps doing well first. I'd like to see at least one or two mid caps ripping to new highs or consolidating off highs.  I don't really like many of these names, I could take a smaller cap name since they are moving well but I only like ATNY. AFOP and MLNX are also "okay"

pick:ATNY

internetinformation providers group
This space is impressive. Lots of great setups which is usually a very good thing as it means the setup is not some "fake out" and is less likely of being "fooled by randomness" (failed setup). There are actually a few large caps that aren't working out and many that are working well and setting up for another move upwards. There are plenty of mid caps but when you get under $2B there suddenly are a lot of poor charts mixed in with some really good ones which means the liquidity cycle for the most part is not yet ready to have an appetite for them but be ready to look for that group setting up in the future AFTER some of the mid caps go. Since the group is so strong overall, I am not concerned too much with a handful of names between 1 and 2B not setting up well and may even be inclined to look for setups under $2B ANYWAYS because I already have enough confirmation that the group is undergoing a rotation. Nevertheless, if I want to try to time the sector with more precision and higher probability as opposed to going for the smaller cap which tends to make larger moves, I would stay away from the under $2B group until you start to see some of those over $2B that are set up break out, THEN you may want to buy under $2B and eventually sell your over $2B and then rotate that capital to some MORE names under $2B in the space. I want to just use this to illustrate that all of the ways I slice up a market are only used as filters by which to interpret the market. Since in this example I have already a ton of confidence in the group and like the way the group is filled with big moves on the breakouts, I won't necessarily hesitate to trade the smaller setups too... however in terms of timing, if I am to use options or have an expectation of when the move will ork THEN I have to be sure that I buy more time with those under $2B because the timing should be more hit or miss until some of the larger cap goes.  Now the risk cycle certainly also plays a role here. You have plenty of names already at or near new highs and then you start to have some laggards still showing up that are just off of the highs but consolidating (BCOR,WWWW,OPEN,TRIP,AKAM,MOVE,BITA). Then you start to get a bit farther away from the highs and the names aren't quite ready for prime time yet and not only that but this is confirmed by the quality of the setups declining and those farther off highs are not consolidating and providing the right type of set up as frequently at this time. You could also slice this up by looking at USA vs China names to see which setups are better but that's for another time.  Short squeezes? Only YY and YOKU (both China names) are really "in phase" of a short squeeze although a few have moved and have paused and are now ready for another leg up. So I like a name like OPEN,TRIP,BCOR which is not only a laggard, but a short squeeze candidate and around the market cap of what's next in line to be in favor. The reason being that I can hold for a bit longer and get the rotation from two potential cycles as well as position myself in case I am interpreting the timing a bit off, where as if I went with just a laggard without short interest and it simply wasn't moving because there was a reason no one wanted it that once it cycles out of favor it could really get hit. If the space continues to heat up you could see a major short squeeze where the high short positions go simply because the shorts are under pressure and the bulls know they are in a position where they may have to cover at the market so they can attack.

picks:OPEN,TRIP,BCOR

I will not continue the process today for time constraints, but I will get to the other groups later perhaps.