Backing And Filling, But Gaining Strength
While
many traders must be slightly frustrated with recent market action,
underneath it all, the market is gaining steam in minor ways, which is
encouraging for a better market environment later this year.
Last
week I talked about a real retest of the September lows.
I will confess that a decline to 1000 or lower on the S&P 500 and
then a good breadth-thrust turnaround upside would make me more optimistic
toward the market than I have been for some time.
But of course, markets rarely give EXACTLY
what you want — and we’ll have to do the best we can with what they do give
now. While psychology is now making
investors rethink the PE premium given to firms with audit problems, the
economic underpinnings of a real rally are falling more firmly into place.Â
As we discussed
weeks ago, Asia (x Japan) and Eastern Europe are where the global recovery is
first starting to bite and where markets are leading.
So far, despite a pretty decent correction in U.S. and Western European
stock markets, Asia and Eastern Europe seem to be consolidating at high levels
and not backing off significantly at all. This
is very constructive for envisioning a global recovery of sorts — IF
IT CAN CONTINUE.
One of the most
important rules in reading the markets is looking at what the PLURALITY
of markets are telling you. That’s why
we talk about global markets, about global commodity prices, about global bond
prices and about currencies. And a broad plurality of
opinion across markets will give us a RELIABLE
strong trend to exploit. So we continue
to advise investors to watch a broad plurality of markets at this point.
Watch Asian and
Eastern European stock prices. As long as
they hold up, the global recovery scenario is moving ahead.
Watch the NZD and AUD currencies — these leading economically sensitive
currencies are still in trading ranges, which is constructive.
IF they can breakout above AUD .55 (or below
.48 on the downside), and above NZD .46 (or below .39 on the downside), this
will be a really strong confirmation to the global recovery scenario (downside
breakouts obviously would suggest more recession).
Watch economically
sensitive commodities. Economically sensitive commodities still appear to be
shifting toward expecting recovery. Lumber,
copper and cotton are all at various stages in the base-building process, while
bonds are range-bound. As we’ve been
repeating, the markets would be clearly discounting imminent recovery if nearby
lumber futures could move strongly above the 275 level, AND
nearby copper could move strongly above the 75 level, AND
nearby cotton could move strongly above the 42.50 level, AND
nearby bonds fall on good volume below the 98 level. Only one of these has
occurred: lumber has broken out. If
lumber can hold up and the others follow suit, the recovery scenario is a bit
brighter. However, the recovery scenario would be in serious jeopardy if lumber
falls below 215, copper below 60, cotton below 30 and bonds climb above the 105
level. Such a reversal in these markets currently appears unlikely.
Finally, I suggest
investors now begin to watch even broader commodity gauges for signs of a bottom,
such as the CRB index and the Goldman Sachs Commodity Index.
Investors should note that bases are being created in both, which is
constructive. A move by the CRB index
above the 198-200 level will be especially constructive in confirming the
beginning of global economic recovery. A
move by the Goldman Sachs Commodity Index above the 188-190 level will be even
more constructive along this theme. Now
is the time to watch EVERYTHING for clues.
The breadth and
leadership numbers for this week shifted nicely to the upside, and Top
RS/EPS New Highs actually registered 20 or more each day this past week for
the first time in months. Unfortunately,
breakout numbers have not yet expanded to a level to get excited about, but
perhaps we’re on a start. Top RS/EPS
New Highs were 20, 21, 32, 34 and 39, but breakouts on the week remained scarce
with 17 total upside breakouts and no real close calls even.
Bottom
RS/EPS New Lows deteriorated sharply throughout the week (22, 9, 7, 10, 6),
and the number of downside breakdowns fell to just five on the week, again with
no real close calls. Look for Top RS/EPS
New Highs to not only reach 20 or higher CONSISTENTLY
on a week, but also 100+ on at least one day or 50+ on two or more days before
becoming very bullish; or conversely for Bottom RS/EPS New Lows to reach 20+
consistently with a couple of days over 50 or a day over 100 before becoming
very bearish. Right now, opportunities
remain very scarce for highly reliable trades, but we’re starting to see some
glimpses of better action possible later this year.
Our overall
allocation remains DEFENSIVE with 92% in T-bills
awaiting new opportunities. Our model portfolio followed up weekly in this
column was up 41% in 1999, up 82% in 2000 and up 16.5% in 2001 — all on a
worst drawdown of around 12%. We’re
now up about 0.38% for the year 2002. Remember
that a few good weeks can give us a year’s worth of profit, and be patient!
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” course “The Science of Trading,” and new
video seminar most of all, where I discuss many new techniques.
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 week flags or cup-and-handles on the downside.
In an environment
unclear directionally, we also only buy or short stocks in leading or lagging
industries according to our group and sub-group new high and low lists.
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: Ryland
Group
(
RYL |
Quote |
Chart |
News |
PowerRating) @64.3 (80.12) w/74 ops. 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 and only in leading groups until we get breakouts in
the S&P and Dow.Â
On the short side
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: NONE. 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
that is in a leading group.
We continue to
advise caution and patience until the market takes a more decisive stance.
We all know that the market can get ahead of itself, so it is best to
wait for confirmation that we are seeing real economic recovery.Â
Â