Bear Trying Another Weak Leg Down
The
action this week was bearish, but not strongly so.
The Naz and S&P are pushing at new lows, while the Dow and some value
stocks are hanging in there reasonably well, despite selling pressure. But
bonds are near new highs, while lumber and copper made new lows this week,
meaning that no advance signals are yet suggesting a turnaround in the economy.
For the Naz in particular, some evidence of a turn in the economy is
likely to be necessary before the bearish pressure begins to let up.
The Naz and S&P still trade at outlandish valuations, especially
considering that a recession is becoming more and more plausible.
We
are now getting a larger number of close-calls on the short side, but few have
volume strong on breakdowns, and few are in downward leading groups.
Thus, our strategy is keeping us consistently on the sidelines, and
frankly, this still looks like the right place to be.Â
We
may get some long and short opportunities with small allocation in the months
ahead, but it will likely take some evidence of economic recovery before the
broad market environment turns positive enough to warrant risking our hard-won
gains in force. Remember that when others
are getting killed, waiting quietly and patiently means your buying power only
expands compared to everyone else. Don’t
worry, BE happy! We just missed
being heavily exposed during a new down-leg in the bear market!!!Â
Let’s
look at some numbers from the week. New
Highs vs. New
Lows on our RS/EPS lists were 7/41, 1/35, 13/7,
15/11 and 10/35. There is no dominance
here in either side. Yes, it’s a bear
market, but it still behaves more like a downward trending trading range than a
real blood bath. And so no strong breadth
is developing on either side enough to warrant strong exposure.
There was one breakout on the upside (a good environment will show 50
times this number or more) with 10 breakdowns on the downside of four-week-plus
consolidations on our RS/EPS lists. Potential
shorts remain only mildly in the driver’s seat again.
However, most importantly, there were no valid breakouts on the upside in
up-fuel stocks, and no valid breakdowns on the downside in down-fuel stocks.
This week showed another decrease in the number of breakouts that were
CLOSE to meeting our up-fuel criteria, but an increase in breakouts close to
meeting our down-fuel criteria. Remember
that many close calls in either direction is a plus and is the first indication
that a better trading environment is returning. 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 1.2%, 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.”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
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.
We’ve been effectively defensive ever since, and are now as defensive as
possible.
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.Â
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. When valid
breakouts of up-fuel or down-fuel stocks become abundant again, we’ll pounce
with both hands. Until then, we must
tread cautiously to avoid getting chewed up.