Another Intermediate-Term Bottom Attempt
This
past week the Dow and S&P hit some Fibonacci support levels on
Fibonacci turning points in time and the market has moved higher off of these
lows in another attempt at forming an intermediate-term bottom.
Whether this will mark the lows for these indexes prior to a decent rally
or not, we cannot yet be sure. Forget
about picking the bottom, which is at best, an academic exercise. That means
we must remain defensive and await more reliable opportunities in stocks
breaking out of valid patterns that meet our fuel criteria in either direction.
Continue to have a “show-me” attitude toward the market for
now.
May
Lumber did not make a new low this week and has rallied strongly.
If it can surpass the 242 level on a TBBLBG in subsequent weeks, this
will be a very encouraging sign that the economy is beginning to respond to the
Fed stimulus in some way. Copper may also
be behaving better, and here a close above the 86 level would be the first
encouraging sign economically. More
troubling, the bond market is still flirting with all-time highs and appears to
doubt any economic recovery is on the way. Continue
to monitor these three leading economic indicators closely.
Let’s
look at some numbers from the week. New
Highs versus New
Lows on our RS/EPS lists were 10/49, 32/12,Â
22/22, 21/10 and 26/14. There is
still no marked dominance on either the long or short side, although new highs
gained some breadth on the week slightly. The
market is still behaving like a downward-trending trading range.
Value stocks and some small-cap indexes may have indeed bottomed for this
cycle, but until the broad breadth of the market joins the party, investors are
advised to tread cautiously. There were
roughly eight breakouts on the upside (a good environment will show 50 times
this number or more) with nine breakdowns on the downside of four-week-plus
consolidations on our RS/EPS lists. We
had a close call on the upside (COBR, but volume was a tad weak on the breakout
day) and a close call on the downside (CHU, where trading volume and price
action was a little too thin to make a viable short).
Close calls are not gaining the upper hand in either direction, nor are
they encouraging for future trends. 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 year 2001, we are now down about 1.3%, with a full cash position.     Â
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 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 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.
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.Our
strategy remains cautious and simple:Â 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. Continue to wait
and watch for solid and clear group leadership, which remains fairly absent.
Our goal remains to make consistently better than market returns with
relatively less risk. Until
then, we must tread cautiously to avoid getting chewed up.