Downward Bias Trading Range Still Oversold
The
market continues to fall in response to weaker earnings announcements and the
beginning of a disinflation in valuations in the Nasdaq 100 tech stocks, which
have been valued at historically outrageous levels for about six years. of our oscillators
are signaling oversold, while the bulk of negative earnings surprises (which are
typically announced early on in the earnings announcement season) should be
passed by the end of this week. Money
supply continues to be boosted for the pre-election period, and the major
indexes continue to drift toward support areas.yes”> The mid-cap indexes and areas seems to be the strongest, and
Mid-Cap 400
(
MDY |
Quote |
Chart |
News |
PowerRating) may be a good way to participate broadly and quickly.
If we break through the May
lows, then this market is in pretty big trouble.
So far there has not been convincing breadth in either direction.Â
Let’s
look at some numbers from the week. New
Highs vs. New Lows on our RS/EPS lists were
56/21, 50/13, 42/22, 35/32
and 11/22 (notice new lows not expanding during this decline), respectively, for the latest week, last Thursday through
Wednesday. There were roughly seven breakouts on the upside with seven breakdowns on the downside of four-week-plus consolidations on our RS/EPS lists.
There really was only one breakdown that we would consider valid (in Xerox
(
XRX |
Quote |
Chart |
News |
PowerRating)). There
were no stop-outs long or short, and we remain with only one long position (it
must be about time for a bottom!). However, neither long opportunities
nor short opportunities are developing in anything remotely resembling full
gear. We will continue to advocate a cautious stance, with investors to add no
more than two trades per side in the next week.
Our
overall allocation remains quite cautious. We
remain around 7% long (including open profits) and 34% short for aggressive
accounts using leverage (4% long and 17% short for unleveraged, more
conservative accounts). Last week
our longs rose an average of 3.6% (and with 7% allocation, this added 0.25% to
our overall portfolio), while our shorts rose 2.36% on average (and with 34%
allocation, this added 0.8% to our overall portfolio), giving our overall
portfolio a loss of about 0.55% on the week and leaving us with around a 77.7%
gain on the year (2.3% below new-equity highs) on a 12% maximum drawdown so
far. Conservative investors not using leverage show about half these gains and
drawdowns. Our snail-slow gains with
relatively low volatility in our total account continue, but we have managed to
keep our gains and avoid the bloodshed, which is actually even more important
than cleaning up from the big moves up.
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
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 could 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.
We’ve been effectively defensive ever since, and continue to be.
Upside
breakouts meeting fuel criteria (and still open positions) so far this year
are:Â Key Production
(
KP |
Quote |
Chart |
News |
PowerRating) @21 w/19.75 ops; and this last week we had no valid pattern breakouts up in
stocks meeting our upfuel criteria (see 10-week trading course). The average gain in these stocks from
breakout points of entry to Wednesday’s close is 63%, substantially
outperforming the NASDAQ, DOW and S&P for the year to date. Continue to
watch our NH list and buy flags or cup-and-handle breakouts in NH’s meeting our
upfuel 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: Corus
Group
(
CGA |
Quote |
Chart |
News |
PowerRating) @ 11.88 w/8.63 ops; Blockbuster
(
BBI |
Quote |
Chart |
News |
PowerRating) @8.94 w/10 ops; Kmart
(
KM |
Quote |
Chart |
News |
PowerRating) @6.38
w/6.38 ops;
Sprint
(
PCS |
Quote |
Chart |
News |
PowerRating) @40.81 w/38 ops; and
this last week, we had valid pattern breakdowns in stocks meeting our downfuel
criteria (see 10-week trading course) in Xerox
(
XRX |
Quote |
Chart |
News |
PowerRating) @11.38 — now use 13.25
ops. These shorts are down over 61% from breakdown levels on average
so far this year (before current prices or exits). Continue to watch our
NL list daily and to short any stock meeting our downfuel 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.
We
need a couple of weeks of abundant breakdowns that meet our downfuel criteria on the downside in order to release our cautious stance toward
shorts, and we need a couple of weeks of abundant breakouts that meet our upfuel
criteria to release our cautious stance toward longs. I still suspect that if we
can get through October without a breakdown below the May lows, we’ll get a
normal seasonal rally from November to January. We may be near the lows now, as
many oscillators are pointing toward oversold conditions, and the breadth of the
decline is not impressive. If this rally unfolds, let’s watch breadth and groups
and numbers of Top
RS/EPS New Highs closely to see if it has enough teeth to push these markets
to one more new high and to pull out a decent set of long-side opportunities.
Remember to let the market be your guide. Only when our opportunities grow to become abundant will we
be able to get more excited about moving our long allocation or short allocation
up to more aggressive levels.
Until we can see the whites of their eyes, don’t shoot too much allocation at
these markets. We’re doing quite well this year so far, given the market
environment — so let’s stick religiously with our strategy and let it tell us
how aggressively to allocate and to what vehicles on what side of the market.
Enjoy the ride — on both offense and defense. Remain defensive and cautious during the week ahead.
Â