Bear Pressure And Uncertainty Rule For Now
As
we suggested in last week’s column, the market opened down in the
5%-10% range, and despite Herculean efforts to talk the market up and prevent
panic, after a few days of trading, the U.S. market is playing catch up with the
declines in Europe. European markets as a
weighted whole are off about 13%-14% since the terrorist attack, while global
market indexes that exclude the U.S. are off in the 15%-16% range during this
period. So far, the S&P is off 9%,
the Naz is off 12%, and the Dow is off 11% since the attacks.The
first thing the bulls have to look for is a good follow-through day on the
upside. The
problem is that as one begins to assess the potential of a war on terrorism, the
outcomes differ strongly and uncertainty is huge.
That leads me to suspect that although an intermediate-term rally — Ã
la April-July of this year or May-Sept. of last year — could erupt at any time,
a sustained rally is unlikely until economic growth is more assured and the
uncertainty over the response to the attack is more clear.Â
The
best intelligence we can gather at this point suggests that a two- to three-year
campaign/war is being formulated, with expected further terrorist acts against
the U.S. being waged back and forth over that period at a minimum.
The current thesis in the intelligence agencies seems to be that the
attack was a joint venture between bin Laden’s globally diversified 12,000
nut-case terrorists and the Iraqi intelligence and military.It
will also be extreme irony since the U.S. backed Saddam Hussein militarily and
financially in Iraq’s war with Iran in the 80s, and similarly backed the Mujahadin (including bin Laden) in Afghanistan’s war against the USSR.
It is also ironic payback since Bush Sr. attacked Iraq and tried to kill
Saddam, but missed, while Clinton sent cruise missiles into Afghanistan to try
and kill bin Laden in 1998, killing family, but missing the mark as well.
However,
the bottom-line appears to be that this is going to be a long protracted war,
and last Tuesday was likely just the first strike. are still at large in the U.S.
Beyond our borders, it gets even more messy.yes”> Nonetheless, these are all speculations based upon the best
information we can find as of today.
It
remains way too soon to grasp the full scale of implications from the terrorist
attack or from the “War on Terrorism” that is likely to follow.
We will watch the news and the markets’ reaction to it carefully and make
reasoned judgments whenever we can. The
likelihood of a deeper recession, but then stronger recovery quicker is
developing due to globally concerted rate cuts and fiscal stimulus.
Watch economically sensitive commodities for the first sign of a
turnaround before expecting a resumption of economic growth.
Right
now economically sensitive commodities are bearish.
Lumber is limit down and has broken out of a huge double top, bonds are
close to their highs, and cotton and copper are making new lows. We suspect a sustainable rally in
stocks will not develop until we get clear bottom formations and upside
breakouts in copper, lumber and cotton, and U.S. bonds begin to top-out and
breakdown. Right now these markets are
discounting further economic weakness.
New
lows exploded after the markets opened on Monday, swamping new highs on our
lists by as much as 114 to 1! Since
Monday, the NH/NL’s appearing on our Top RS/EPS New
High List vs. Bottom RS/EPS New
Low List were 8/189, 5/134 and 2/227. Breakdowns
also swamped breakouts 4/48, 0/17 and 2/24. However,
the quality of breakdowns was not great and there were no trades, since the
leadership changed markedly following implications from last Tuesday’s attack.
Risk of entry to ops were huge on gaps down as well.
So with few of the lagging groups before the crisis breaking down out of
valid patterns, we stood aside. Nonetheless,
the bear case has gained ground greatly in terms of breadth since Monday, and
the short side looks like the only side until we get some follow-through days on
the upside, as well as the other breadth criteria we’ve been enumerating and
waiting for since March of 2000. Don’t
hold your breath.
Our
overall allocation is now DEFENSIVE with 68% in T-bills awaiting new
opportunities.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 up about 11.4%, with a heavy 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,” 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 four-plus-week flags or cup-and-handles on the downside.
In an environment unclear directionally, we also only buy or short stocks on
leading or lagging industries according to our group and sub-group new high and
new 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: NONE. 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.
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: Global Crossing
(
GX |
Quote |
Chart |
News |
PowerRating) @6.05 (3.67) — now use 4.45 ops; Phelps Dodge
(
PD |
Quote |
Chart |
News |
PowerRating) @38.1 (32.5) — now use 38 ops; Brasil Telecom
(
BRP |
Quote |
Chart |
News |
PowerRating)
@31.69 (22.95) w/27 ops; and SBA Communications
(
SBAC |
Quote |
Chart |
News |
PowerRating) @12 (12.97) w/14 ops. 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 it in a leading group. Although breadth has
increased dramatically on the downside, the oversold nature of the market leads
us to suggest that investors remain cautious by only adding two shorts in a week.
The problem is that with VIX and TRIN signaling very oversold levels, we can get
short-covering rallies that stop us out of everything very quickly. Aggressive
traders can add more aggressively to shorts, but those wanting to build capital
with minimal risks should remain cautious. Don’t double up on any industry until you have
a breakeven or better ops in any other short issue in the same industry.
We
still suspect that either new lows or a retest of recent lows will develop over
the next 10-20 weeks until solid evidence of recovery begins to emerge.
But let’s let the market show us with follow-through days and other
breadth measures if a really playable rally can materialize off of this fall’s
lows. Until we get a couple
follow-through days, the benefit of the doubt belongs to the bears and to being
cautious. America and global capitalism
will overcome this disaster just as it has much worse disasters throughout
American history. Economies will ebb and
flow, but head higher over the long-term as mankind’s progress marches forward.
But we suggest patience and caution in the short-term until we can better
assess how to find opportunities in this new era that is now upon us.