Bullish-Bias Market Still Warrants Some Caution
The Fed is PUSHING hard
on monetary strings. And the Dow and S&P have responded with
breakouts, while the Naz is still waiting. this market absolutely has a bullish
bias. Leading indicators are mostly bullish now, but not unanimous. Bonds have
broken down and lumber is exploding. But copper and cotton continue to languish
at new lows, giving a mixed, but bullish-biased opinion of leading economic
markets.
I know that many investors are overanxious for a
new bull market. And this certainly looks like a bull move is underway. However,
I believe investors should continue to tread a little cautiously and with a
little less enthusiasm and bullish allocation than would be normal in a bull
market. There are still some technical concerns in this market. While the A/D
line is moving up bullishly and consistently now, the net difference between
daily new highs and daily new lows is not yet showing very strong bullish
breadth. Our top strong breadth indicators have not flashed very many
signals so far, with follow-through days making the only real consistent
appearance.
Investor’s bullishness has popped up off of
barely overdone levels so fast as to suggest that extreme pessimism was never
really reached. If this is a new bull market, it is launching from the highest
valuations of any bull market in history; actually, from valuation levels that
have marked most market tops, not bottoms. Finally, our own Top RS/EPS New Highs
list has broadened, but is still not showing very bullish breadth. The number of
breakouts in almost-fuel stocks remains positive, but not wildly bullish. From a
breadth basis so far, this market is acting like a mini-bull move, not a raging
bull market.
Economically, there are questions, too. Will any
amount of Fed easing really relieve what appears to be a US/global overcapacity
glut, or will this take significant time to unwind, as it has in Asia? Asia’s
emergence from their capacity glut of 1998 has given investors a relatively
profitless recovery. Will it be the same in the US?
Investors should calm down and realize that
IFÂ this is indeed a new bull market, the average bull market since 1880
has lasted over two years. That means we can wait and ease into this one until
breadth improves and our caution becomes less warranted. One positive sign has
been the emergence of new leadership in groups like energy, housing, gaming,
pollution control, and selected retail groups. Investors are advised to watch
these leading groups very carefully — for if they begin to break down, the
market will again be in trouble; whereas as long as these groups continue moving
higher, the environment for trading longs should be decent. I would be surprised
to see the Naz return to new all-time highs in quick fashion , unless breadth
improves markedly.
And we might be in for mini-moves, bullish and
bearish, compared to the bull market moves since 1982, as the economy takes long
enough to digest the excesses of the wild 1999-2000 overcapacity glut, similar
to the environment that developed from 1965-1982. Let’s call this a bullish-bias
market for now and go with the trades we get in leading groups on the upside.
But I still suggest investor not get too carried away until breadth improves and
earnings start turning for real. It would be helpful, too, if some other
international markets followed the US market higher as well, adding global
breadth.
Let’s
look at some numbers from the week. New
Highs vs. New Lows on our RS/EPS lists were
28/1, 23/5, 23/6 35/3 and 50/6 — new highs are certainly dominating, but they
are not soaring as we would expect in a new bull market with numbers above 50
daily. The bull side offers more opportunities certainly, this this is not a
slam-dunk easy-money environment yet. Lows remain almost non-existent. There
were roughly 17 breakouts on the upside to new highs of stocks on our Top RS/EPS
New Highs list, with only four close calls this week, and only two breakdowns on the downside of
four-week-plus consolidations on our Bottom RS/EPS New Lows list, with one close
call.
Of course, a truly good environment would show five or more times this number
of breakouts with dozens of close-calls or stocks actually meeting our criteria
breaking out. So while long opportunities grow, the environment is not yet
nearly optimum.
Our
overall allocation is still relatively DEFENSIVE with 0% short and 27% long and the
remaining 73% 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 1.4%, with a mostly cash position.  Â
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.“Â
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. 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: Atlas Pipeline
(
APL |
Quote |
Chart |
News |
PowerRating) @28 (38.15) w/31.5 ops; and International Game Tech
(
IGT |
Quote |
Chart |
News |
PowerRating) @57.95 (55.55) w/52 ops; and TRC
(
TRR |
Quote |
Chart |
News |
PowerRating) @36.32 (40.65) w/35
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.Â
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.
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, until we get
more consistency in the number of downside breakouts in a given week off of our
Bottom RS/EPS New Lows lists.
When valid breakout of up-fuel or down-fuel
stocks become abundant again, we’ll pounce with both hands — for now we’ll
gently ease in unless the environment begins to improve. If this is a REAL bull
market, breadth will improve, new highs meeting fuel criteria will broaden, and
we’ll catch up to the averages easily by buying quality breakouts. If this is
not a real bull market, we’ll get a situation like we had last year from March
through September — where we make some money with some allocation to longs, but
the bull never really takes off, and we are able to lock in profits without
getting faked out. One of the toughest things for traders and investors to do is
to not worry about missing a bottom. Bottom-picking is not the path to reliable
and consistent strong gains! What is the path is pouncing on reliable
opportunities when they develop and waiting for reliability before committing
much capital.