Some Of The Better Bets For Double-Digit Gains In 2003
We’re
back in that no man’s land of trading-range behavior. There are
reasons for expecting a decent rally to develop, but there are huge geopolitical
uncertainties and all of our accumulation indicators show that while there isn’t
much selling pressure, there’s almost no aggressive buying either. A break of
the 865 level in the S&P would lead to a test of the October lows and possibly a
new leg down. The weekly chart looks terrible, with a steep downtrend channel
connecting the September 2000 highs with the Feb 2002 highs and 200-day MA
resistance that the market will have a tough time penetrating without better
geopolitical news. Earnings are rising slowly, but only in response to cost
cutting and not top-line growth yet.
Some regional banks are
outperforming. Gold is making new highs while the dollar plummets to new lows
(though it is approaching support from the 1999 lows vs. the Euro and SF
soon). Resources and industrial commodities remain a dominant theme likely to do
well in 2003. Commodity currencies are also taking off vs. the dollar. A feeble
global economic recovery is underway, but psychologically it will be difficult
for investors to sink their teeth into it with huge risks abounding and the pain
of the last three years clear in mind.
The latest intelligence shows a
huge breakdown in support for the war effort. Turkey, a mandatory ally, is now
negotiating for a bigger share of the oil pie in post-Saddam Iraq, along with
limits on Kurdish power. Germany and France are making statements against the
war even before Blix releases his UN statement on the 27th. The President will
have to go it with fewer allies or else continue an environment of uncertainty
that won’t be good for global markets at all. The wild card is not helping
markets now.
The equity investor may be well
advised to diversify some into foreign currencies, base and precious metals, and
particularly commodity funds and indexes like the CRB, with a portion of capital
as reflation is emerging as a dominant theme. Broad commodity indexes with a
smaller allocation to oil, like the CRB, are likely to be one of the better bets
for double-digit gains in 2003.
However, we also expect a more
decent performance year out of our strategy this year. Once war jitters recede
and the outlook is less risk-prone, we believe the market can launch a strong
move that will give us some catchable long opportunities before returning to the
secular downtrend. But we still need to watch and wait for volume, breadth,
leadership and follow-through to emerge before we can allocate enough to
make much money. Caution is still advised. It is frustrating to be on the
sidelines so long and so heavily, but that’s better than getting chewed up in
the markets in a not-very-positive market environment. It’s better to have
indicators that tell when the environment isn’t very good.
Since
March 2000, the world index is down over 45%, the S&P over 48%, the
IBD mutual fund index is down over 62%, and the Nasdaq has
crashed over 76%. Meanwhile, since March 2000, the long/short strategy we
summarize and follow-up each week in this column has made more than 39% on a
worst drawdown of under 6%. While
this performance is certainly underperforming our long-term growth rate, and it
is hardly thrilling to have been so heavily in cash since March of 2000, we have
managed to eke out gains with very low risk in a very dangerous market
environment where 9 out of 10 traders have been big losers.
Our official model portfolio
overall allocation remains VERY DEFENSIVE. We’re now 84% in T-bills awaiting new
opportunities, with one sole long position. Our model
portfolio followed up weekly in this column was up 41% in 1999, up 82% in 2000,
up 16.5% in 2001, and up 7.58% in 2002, an average annual gain of over 36% — all
on a worst drawdown of around 12%. We’re now up 0.6% for the year
2003. And we’ve emphasized defense as much as making money.
Unbelievably
Top RS/EPS New Highs have still mustered up just ONE solid week of
consistent +20 or higher readings since the 7/24 lows. And this past week, new
highs on our lists dropped below new lows for the first time since the October
low. Even the upward bias is removed. We had readings of 20, 10, 10 and 9 new
highs on our Top RS/EPS New Highs list with a pathetic ONE breakout on the
upside. The prior week saw two close calls in Group 1
Software
(
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PowerRating) and Oriental Financial
Group
(
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PowerRating), but this week saw none. Bottom RS/EPS New lows have
expanded with readings of 2, 6, 14 and 17, but remain below 20 consistently,
accompanied by seven breakdowns and a close call this week. So, we remain
heavily on the sidelines, yet hopeful — and my guess remains that this will
continue to be the case until there is some clarity in the Iraqi situation.
For those not familiar with our
long/short strategies, we suggest you review my book
The Hedge Fund Edge, my course “The Science of Trading,”
my video seminar, where I discuss many new techniques, and my latest
educational product, an
interactive training module. Basically, we have rigorous criteria for
potential long stocks that we call “up-fuel,” as well as rigorous criteria for
potential short stocks that we call “down-fuel.” Each day we review the list of
new highs on our “Top RS and EPS New High List” published on TradingMarkets.com
for breakouts of four-week or longer flags, or of valid cup-and-handles of more
than four weeks. Buy trades are taken only on valid breakouts of stocks that
also meet our up-fuel criteria. Shorts are similarly taken only in stocks
meeting our down-fuel criteria that have valid breakdowns of four-plus-week
flags or cup and handles on the downside. In the U.S. market, continue to only
buy or short stocks in leading or lagging industries according to our group and
sub-group new high and low lists. We continue to buy new signals and sell short
new short signals until our portfolio is 100% long and 100% short (less
aggressive investors stop at 50% long and 50% short). In early March of 2000, we
took half-profits on nearly all positions and lightened up considerably as a sea
change in the new-economy/old-economy theme appeared to be upon us. We’ve been
effectively defensive ever since.
Upside breakouts meeting
up-fuel criteria (and still open positions) so far this year are:
Port Financial
(
PORT |
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PowerRating) @40.99 (47.3) w/43
ops to lock in profits, and WebMed
(
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PowerRating) @9.44 (9.34) w/an 8 ops. Continue to watch our NH list and buy flags
or cup-and-handle breakouts in NH’s meeting our up-fuel criteria — but be sure
to only add names that are in leading groups, and now only add two trades per
week once again until leadership and follow-through improve.
On the short side this year,
we’ve had breakdowns from flags (one can use a down cup-and-handle here as well)
in stocks meeting our down-fuel criteria (and still open positions) in
NONE. Continue to watch our NL list daily and to short any stock meeting our
down-fuel criteria breaking down
out of a downward flag or down cup-and-handle that is in a leading group to the
downside, but only add up to two in any week (and only in the weakest groups)
until we get better breadth numbers on the downside and better leadership.
Breadth and demand are
deteriorating as investors get tired of waiting to see what the outcome of the
major geopolitical uncertainties will be. Selling pressure is increasing only
slightly, but it is the absence of accumulation that is hurting this
market. There IS slow economic evidence of a pick up developing in US and global
growth. But it is not yet solid enough to catch the imagination of investors,
who are justly concerned with major risks. We’ve got enough monetary and fiscal
stimulus in the bag to fuel growth for much of the year. Yet international war
could alter this scenario in a heartbeat.
Strong trends seem to be
developing in foreign currencies, gold, commodities and commodity currencies,
and aggressive investors should not miss these moves. But tread lightly in any
avenue, as there are almost no investments that a surprise Iraq development
won’t effect.
In the US market, WE MUST
CONTINUE TO LET THE MARKETS CONFIRM THAT THERE IS ENOUGH STRENGTH TO SAFELY
PARTICIPATE IN EITHER A RALLY OR NEW WAVE DOWN. And that still requires stronger
evidence of clear new group leadership on the upside or downside, substantially
more breakouts or breakdowns of close-calls or stocks meeting our criteria long
or short, better and more consistent follow-through by those close calls and
criteria stocks that do breakout or breakdown, and substantially more breadth of
new highs or new lows and breakouts or breakdowns on our list. Watch and wait
for opportunities to improve. Don’t forget that profits can come VERY QUICKLY
when things all line up correctly — like the nearly 50% gain we took from the
late ’99-early 2000 three months. But patience is required to not give our big
gains back in a less than optimal period. Set your sights, but don’t pull the
trigger yet.