Attempted Bottom Still Forming
Since
the Fed’s rate cut, the dollar has moved to new lows, lumber and gold have moved
to new lows, while bonds are forming a mini head-and-shoulders top and the
Nasdaq is forming a mini head-and-shoulders bottom. Rate spreads are still cautious, and the
three-month/10-year yield curve is
still flat to inverted. The yield
curve will have to move before the economy begins to recover seriously. However, the small head-and-shoulders forming in both the bonds on a
topping basis and the QQQs/Naz on a bottoming basis, make it look like at
least a short-term rally will develop off of these lows. Watch carefully for a decent follow-through day on this rally
to see
what kind of breadth occurs on it. Strong
breadth and volume on this anticipated brief rally will give more evidence that
it will be more than fleeting. We
suspect an intermediate-term bottom is forming, at least. But a continued lower
dollar and continued lower lumber prices argue for
an economy that is not yet turning around, and until these trends at least
stall, the rally in stocks is not likely to have much teeth on a continuing
basis. So we continue to advise
waiting for breakouts to grow, waiting for breadth to show up on the upside, and
waiting for volume on the upside to become substantial.
Â
Let’s
look at some numbers from the week. New
Highs versus New Lows on our RS/EPS lists were 25/2, 10/6,
14/13 and 12/6. In other words, a
dismal picture for longs, and a dismal picture for shorts! We will look for New
High dominance similar to what we had two weeks ago before getting excited
about the long side. There
were roughly 13 breakouts on the upside with two 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
upfuel stocks (AVNT was the closest, but its prior-quarter earnings growth was
just a shade low), and no valid breakdowns on the downside in downfuel stocks. If the Fed rate cut takes this market into a new bull move, we will soon
get a substantial increase in valid breakouts of leading stocks meeting our
upfuel criteria on our Top RS/EPS New Highs List. Until that develops, let the market back-and-fill and fool with bottom
pickers. Wait for the low fruit. Don’t fight the Fed and don’t fight the tape
— so wait for breadth a
volume to come in before moving.
Our
overall allocation is now 100% in T-bills awaiting new opportunities for the
first time since 1998. Last
week our lone long Downey Financial
(
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PowerRating) fell to our trailing stop at 49.75, and we took profits on
it. For
year 2001, we are now down about 2%, with a full cash position. Conservative investors not using leverage show about half these gains and
drawdowns.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 “upfuel,” 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 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 upfuel criteria (and still open positions) so far this year
are:Â Downey Financial
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PowerRating)
@45.25 — out on 49.75 ops; and last
week we had no valid pattern breakouts up in stocks meeting our upfuel 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 downfuel criteria (and still
open positions) in:Â no open
positions at the moment;Â and
this last week we had no valid pattern breakdowns in stocks meeting our downfuel 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.Â
Let’s
hope that we get an intermediate-term bottom that has at least as much teeth as
the May-August bear market rally last year. We suspect that a major strong
up-leg will not develop until it is clearer
that the economy is responding to rate cuts and reaccelerating. But our suspicions don’t effect our trading. When such
opportunities become abundant, pounce with both hands. Until
then, tread cautiously. Even
if this is just another bear-market rally, we should get some trading
opportunities soon.