Action Deterioration Needs To Stop Quickly
While
the week prior to this last one did show substantial sub-surface improvement,
this week’s action deteriorated from last week’s.
We had some close calls on the long side, and even more close calls on
the short side, but no trades that fit all of our criteria just right.
Therefore, our finger remains on the trigger, ready to pounce on any real
opportunities, but the market needs to continue to build better action in the
weeks ahead before we can get excited about a good environment.
Bonds
look to be carving out a potential secondary top, a plus for stocks at this
stage. Crude Oil is backing off from
resistance levels and is not racing to new highs.
But Lumber has made new lows, and though it may form a double bottom off
of these levels, it has not yet made a major bottoming formation that would
indicate that the economy was starting to reverse its deceleration process.
Continue to watch the interaction of these three commodity futures
markets carefully for clues of the economic contraction easing up (lumber and
bonds) and of a lessening of pressure on profits (crude).
The
bottom line is that we continue to advise WAITING FOR A LARGER NUMBER OF VALID
BREAKOUTS IN STOCKS MEETING OR VERY CLOSE TO MEETING ALL OF OUR FUEL CRITERIA,
AS WELL AS CLEAR LEADERSHIP BY SOME GROUPS CONSISTENTLY ON OUR DAILY TOP RS/EPS
NEW HIGH LIST BEFORE BUYING WITH BOTH HANDS IN THIS MARKET.
Keep your finger on the trigger, but don’t shoot until you see an
abundance of valid breakouts of upfuel stocks. We’re
getting close, but we’re not quite there.
look at some numbers from the week. New
Highs vs. New
Lows on our RS/EPS lists were
23/6, 14/8, 28/5, 34/7 and 19/11.
There were roughly 17 breakouts on the upside (a good environment will
show 5 times this number or more) with 10 breakdowns on the downside of four-week-plus
consolidations on our RS/EPS lists. However,
most importantly, there were no valid breakouts on the upside in up-fuel stocks,
and no valid breakdowns on the downside in down-fuel stocks.
This week did show an increase in the number of breakouts that were CLOSE
to meeting our up-fuel criteria and even closer to meeting our down-fuel
criteria. Remember that many close calls
in either direction is a plus and the fact that they both occurred in tandem
this week does not detract from the longside case in any way.(
FRED |
Quote |
Chart |
News |
PowerRating) (volume too low on breakout
and funds too high), and Penn Engineering & Manufacturing
(
PNN |
Quote |
Chart |
News |
PowerRating) (not a
consistent grower or turnaround and funds too high).
On the downside we had a much expanded list of close calls — more than
we’ve had for many months, such as in Brookham
(
BKHM |
Quote |
Chart |
News |
PowerRating) (the pattern was not a flag because it was too wide); Deutsche Telekom
(
DT |
Quote |
Chart |
News |
PowerRating) (questionable
pattern and volume on breakout); Webex
(
WEBX |
Quote |
Chart |
News |
PowerRating) (not enough volume on
breakout); Metricom
(
MCOM |
Quote |
Chart |
News |
PowerRating) (handle was in top half of range); and Bank of
Tokyo
(
MBK |
Quote |
Chart |
News |
PowerRating) (questionable pattern and not enough volume on breakdown).
More expansion in close trades on the short side next week will be a
negative sign for the market environment. Continue
to wait patiently for highly reliable trades to show up.
We’re just not quite there yet on either the long or the short side, so
let’s let the impatient traders get whipsawed while we wait for real
opportunities.
Our
overall allocation is now 100% in T-bills awaiting new opportunities for the
first time since 1998. Our model
portfolio followed up weekly in this column ended 2000 with about an 82% gain on
a 12% maximum drawdown, following a gain of around 41% the prior year.
For the year 2001, we are now down about 1.54%, with a full cash
position.
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.”
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 4-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 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.Upside
breakouts meeting up-fuel criteria (and still open positions) so far this year
are: none; and last week we had no valid
pattern breakouts up in stocks meeting our up-fuel criteria (see 10-week trading
course). Continue to watch our NH list
and buy flags or cup-and-handle breakouts in NH’s meeting our up-fuel criteria —
but continue to add just two per week.
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 down-fuel criteria (and still
open positions) in: no open positions at
the moment; and this last week we had no
valid pattern breakdowns in stocks meeting our down-fuel criteria (see 10-week
trading course). Continue to watch our NL
list daily and to short any stock meeting our down-fuel 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.At
this point our strategy is simple: protect against whipsaws by waiting patiently
for real low-risk highly reliable trades that meet ALL of our criteria or until
it is clear that the environment is very biased directionally.
Our goal remains to make consistently better-than-market returns with
relatively less risk. When valid
breakouts of up-fuel or down-fuel stocks become abundant again, we’ll pounce
with both hands. Until then, we must
tread cautiously to avoid getting chewed up.