Another Volatile Week Ahead
Last
week was both up and down and very volatile.
We suggest investors might have to get used to this sort of
volatile market environment with an upward bias, for many weeks.
Last week we removed our cautious constraints on making new trades — but
it had very little effect on what developed. We
had one new valid long trade in
(
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PowerRating) (another in a stock in the same
group later, Nordic American Tanker Shipping
(
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PowerRating), that we didn’t take
because we had risk exposure in ACLNF already), one valid short trade in
(
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and not much else happened. Kansas City Southern
(
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it was not in a leading group and it had poor volume on the breakout, giving it
two strikes against it.
Going
forward, we’re going to pull back a bit on our aggressiveness from last week,
after this week’s questionable action. Take
trades only meeting all of our strict criteria for the next week ahead, but do
not limit yourself to the first two.This stance still erases our defensive
posture established in early March, but pulls back on how aggressively we want
to add to our long exposure.
Last
week, Top RS and EPS New Highs
numbered 20 or more on several
days (but not every day, as we would like to see in a very strong market)
while Bottom RS/EPS New Lows
grew some on average, but continued at very low levels.
Our interpretation of this action continues to be that the environment is
pretty good for longs and pretty poor for shorts, but that it is not excellent
on either side.
Let’s
take a brief look at our one valid long trade for the week, A.C.L.N. Limited
(
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PowerRating).Â
ACLNF
broke out on a Thrust with good volume on 7/14 with a new closing high at 30
1/2. It was a breakout of our
favorite pattern, a flag pattern started on May 31 and lasting 6 1/2 weeks.
ACLNF had a PE of only 14, a long-term growth rate of 40%, the last two
quarters earnings up 93% and 26% respectively, and earning up the last four
years in a row — meeting our “consistent grower” criteria.Â
EPS was 99 and RS was 94. Notice
how low the PE was in relation to long-term growth, the last two quarter’s
earnings growth, and next years estimates of earnings growth (55%) – making this
a good investment. The only minor problem
with ACLNF is no institutional sponsorship — not surprising considering the low
PE in relation to growth. This stock will
only really move when institutions discover it — which as of yet they haven’t.
Transportation-shipping group is ranked 19th (in the top 40) according to
IBD, and group RS is 90. The
company has no debt. It met all our
criteria and we bought it on the close of the breakout day with an initial ops
of 26.
Let’s
also take a look at our one valid short sale, Airborne
Freight
(
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PowerRating).Â
On
July 12 ABF broke down from a valid downside cup-and-handle on decent volume –
up from the prior day and well above the 50-day average volume on a thrust
pattern, where we shorted on the close of 17 w/ an initial ops of 20.Â
The last two quarters showed declining earnings of 29% and 63%
respectively with estimates for a 17% decline in earnings this year.
Transportation-Air Freight is ranked in the bottom 40 according to IBD
and group RS was 19. Â Funds hold 40%
of this stock, earnings are due 7/26, and debt is 37%.Â
Estimates have been dropping for the stock.
RS is 16 and EPS rank is 49 (barely below 50).
Our
overall allocation remains low. We are
now around 50% long (including open profits) and 13% short for aggressive
accounts using leverage (25% long and 7% short for unleveraged, more
conservative accounts). Last week our
longs gained an average of 5.3%
(and with 50% on the week this added 2.6% to our overall portfolio), while our
shorts fell an average of 3.8% (and with 14% allocation this added 0.53% to our
overall portfolio), giving our overall portfolio a gain of about 3.1% on the
week, and leaving us with around a 76.6% gain on the year (another new equity
high) on a 12% maximum drawdown so far. Conservative
investors not using leverage show about half these gains and drawdowns.
For
those not familiar with our long/short strategies, we suggest you review my 10-week
Trading Course on
TradingMarkets.com. 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+ 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.Upside
breakouts meeting fuel criteria (and still open positions) so far this year are:
PC Connection
[PCCC|PCCC] (@26.46) w/ 49.25 ops; Alliance Capital
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(@44) w/ 44.5 ops; Keithley Instruments
(
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Elantec Semiconductor
(
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Varian
(
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and GBC Bancorp
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@30.38 w/Â 30 ops;Â
and this last week we one valid pattern breakout up in stocks meeting our
up-fuel criteria (see 10 week trading course): in ACLNF @30.5 — now use 27 ops
in. The average
gain in these stocks from breakout points of entry to Wednesday’s close is 73%,
substantially outperforming the NASDAQ, DOW, and S&P for the year to date.
Continue to watch our NH list and buy flags or cup-and-handle
breakouts in NH’s meeting our up-fuel criteria.
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: Ciber
(
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PowerRating)(
ABF |
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PowerRating) @17 — now use 18 ops.These shorts are down over 46% from
breakdown levels on average so far this year (before current
prices or exits). Continue to watch our NH 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.Â
The
trend of the market is clearly upward biased, but continues to disappoint, in
fits and starts, its strength. Now wait
for valid breakouts in leading groups that meet all of our criteria.
In this way, we’ll continue to let the market action determine our
allocation and posture.