Fed Rate Cut Leads To New Attempted Bottom

Remember
that our strategy does not strive to catch market bottoms. It waits until valid breakouts develop in leading stocks and catches up
to market gains and surpasses market strength by trading these breakouts. Wait for the breakouts. 

Let’s
look at some numbers from the week. New
Highs vs. New Lows on our RS/EPS lists were 110/17, 77/10,
8/28 and 19/30. This last week started out with a strong new-high-list breadth showing
(110 and 77), but then new highs fell to below 20 on our list. Not the type of consistent dominance we are looking for, but VASTLY
improved from the days before Christmas. There
were roughly 17 breakouts on the upside with 0 breakdowns on the downside of
four-week-plus consolidations on our RS/EPS lists.
However, most importantly, there were no valid breakouts on the upside in
upfuel stocks and no valid breakdowns on the downside in downfuel stocks. Close calls on the upside were seen in
Smithfield Foods
(
SFD |
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PowerRating) (not leading group), Federal Agricultural Mortgage
(
AGM |
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PowerRating)
(breakout not on strong volume), and Equitable Resources
(
EQT |
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News |
PowerRating) (handle in lower half of range).  
If the Fed rate cut takes this market into a new bull move, we will soon
get a substantial increase in valid breakouts of leading stocks meeting our
upfuel criteria on our Top RS/EPS New Highs List. Until that develops, let the market back-and-fill and fool with bottom
pickers. Wait for the low fruit. 

Our
overall allocation continues super low. We
are now around 10% long (including open profits) and 0% short for aggressive
accounts using leverage (5% long and 0% short for unleveraged, more conservative
accounts). Last week our lone long,
Downey Financial
(
DSL |
Quote |
Chart |
News |
PowerRating), fell by 6% (and with 10% allocation, this subtracted 0.6% from our overall
portfolio), while we had no shorts, giving our overall portfolio a loss of
around 0.6% on the week. 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 2001, we are now
down about 1.2% with microscopic allocation to either the long or the short
side. Conservative investors not
using leverage show about half these gains and drawdowns. Investors should be ecstatic with this type of performance.
We have kept our gains, avoided the carnage, and continue to slowly step
up to higher profits in one of the most difficult environments in decades. Remember
the year 2000 when we inevitably go through a period of market
underperformance some day. Managing
to avoid both the bloodshed and the volatility many other strategies have shown
here is actually even more important than cleaning up from the big moves up. We hope and believe that in the coming year we can continue to generate
25%+ annual growth rates with this strategy.

 

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 “upfuel,” as well as rigorous criteria for potential short
stocks that we call “downfuel.”  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 downfuel criteria that have valid
breakdowns of four-week-plus 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
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 upfuel criteria (and still open positions) so far this year
are:  Downey Financial [DSL|DSL]
@45.25 w/49.75 ops; and last week we had no valid pattern breakouts up in
stocks meeting our upfuel 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 downfuel 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 downfuel 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.When
you don’t get killed by the bear moves, you can wait patiently until it is SAFE
to enter before getting in. DON’T
WORRY ABOUT MISSING THE BULL MOVE. If
it develops, we will be late, but will catch up by selecting the leaders that are
breaking out of solid patterns. The
name of the game is to make money and defend gains, not to pick bottoms and
tops. Therefore, remember to
let market action 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. Let’s stick
religiously with our strategy and let it tell us how aggressively or defensively
to allocate and to what vehicles on what side of the market, since the strategy
is doing so well in this market environment.