Downward Bias Gaining In Trading-Range Fake Now

September 22, 2000
Mark Boucher

A
little more than a week after the Naz looked to be on the verge of breaking out
of its trading range to the upside, the market internals on the downside appear
to be gaining the upper hand for a spell. We were stopped out of two longs and
got more than two potential short sales last week. New lows (on our Bottom
RS/EPS New Low List) rose to above 20 4/5 days and busted out above new
highs (on our Top
RS/EPS New High List), while
new highs fell to below 20 again.

Let’s
look at some numbers from the week. New
Highs vs. New Lows on our RS/EPS lists were 52/13, 30/22, 26/37, 18/30
and 19/40, respectively, for the latest week, last Thursday through
Wednesday. There were roughly seven breakouts on the upside with 16 breakdowns on the downside of four-week-plus consolidations on our RS/EPS lists.
In addition, there were four breakdowns that we would consider valid (in Sprint
(
PCS |
Quote |
Chart |
News |
PowerRating), Kmart
(
KM |
Quote |
Chart |
News |
PowerRating), Williams Communications Group
(
WCG |
Quote |
Chart |
News |
PowerRating) and
Unitedglobalcom
(
UCOMA |
Quote |
Chart |
News |
PowerRating)) along with a couple more that were close. All of
a sudden, short opportunities are moving back into gear. The environment is now
more conducive to shorts than longs, but still not one to get aggressive toward
in either direction. We
will continue to advocate a cautious stance, with investors to add no more than
two trades per side in the next week. Another week of more than a handful of
potential valid short opportunities, along with continued new lows on our lists
strongly outnumbering new highs on our lists, will lead us to begin moving away
from caution with regard to shorts.

Our
overall allocation remains somewhat cautious. We
remain around 46% long (including open profits) and 27% short for aggressive
accounts using leverage (23% long and 14% short for unleveraged, more
conservative accounts).Â Last week
our longs rose an average of 1.34% (and with 70% allocation, this added 0.94% to
our overall portfolio), while our shorts fell 12.23% on average (and with 27%
allocation, this added 3.3% to our overall portfolio), giving our overall
portfolio a gain of about 2.36% on the week and leaving us with around a 79.96%
gain on the year (a new equity high!) on a 12% maximum drawdown so
far. Conservative investors not using leverage show about half these gains and
drawdowns. Our snail-slow gains continue.

For
those not familiar with our long/short strategies, we suggest you review my
10-week trading course on TradingMarkets.com, as well as in my book The Hedge
Fund Edge and course “The Science of Trading”.
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.”Â
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
upfuel criteria. Shorts are similarly
taken only in stocks meeting our downfuel criteria that have valid breakdowns of
four-plus-week flags or cup-and-handles on the downside.
We continue to buy new signals and sell short new short signals until our
portfolio is 100% long and 100% short (less aggressive investors could stop at
50% long and 50% short). In early March,
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, and continue to be.

On
the downside, this year we’ve had breakdowns from flags (one can use a down
cup-and-handle here as well) in stocks meeting our downfuel criteria (and still
open positions) in: Corus
Group
(
CGA |
Quote |
Chart |
News |
PowerRating) @ 11.88 w/10 ops; and Blockbuster
(
BBI |
Quote |
Chart |
News |
PowerRating) @8.94 w/10 ops; and
this last week, we had valid pattern breakdowns in stocks meeting our downfuel
criteria (see 10-week trading course) in Kmart
(
KM |
Quote |
Chart |
News |
PowerRating) @6.38 w/7.25 ops; and
Sprint
(
PCS |
Quote |
Chart |
News |
PowerRating) @40.81 — now use 40.25 ops. (We also got lots of close calls
with poor patterns in stocks, like Saks
(
SKS |
Quote |
Chart |
News |
PowerRating), Unitedglobalcom
(
UCOMA |
Quote |
Chart |
News |
PowerRating),
and a valid short — but afeter laready having taken two — in Williams
Communications Group
(
WCG |
Quote |
Chart |
News |
PowerRating), which was tough to borrow). PCS was in the prime
weakest group of Telecom, while KM was joined broadly by SKS, J.C. Penney
(
JCP |
Quote |
Chart |
News |
PowerRating)
and others in this prominent group appearing on our new low list. These shorts are down over
55% from breakdown levels on average
so far this year (before current prices or exits). Continue to watch our
NL list daily and to short any stock meeting our downfuel criteria (see 10-week
trading course) breaking down out of a downward flag or down cup-and-handle.
Here, too, remain cautious by only adding two shorts in a week.

We
need a week of abundant breakdowns that meet our criteria on the downside in order to release our cautious stance toward
shorts. To release our cautious stance toward longs will take a lot more
constructive action. Only when our opportunities grow to become abundant will we
be able to get more excited about moving our long allocation or short allocation
up to more aggressive levels.
Until we can see the whites of their eyes, don’t shoot too much allocation at
these markets. We’re doing quite well this year so far, given the market
environment — so let’s stick religiously with our strategy and let it tell us
how aggressively to allocate and to what vehicles on what side of the market.
Enjoy the ride. Remain defensive and cautious during the week ahead.

Downward Bias Gaining In Trading-Range Fake Now

BUY THE FEAR, SELL THE GREED

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