Finger On The Trigger
Trade With Your Finger On The
Exit Trigger
We’ve been commenting for some time on the
volatile and risky nature of the current market environment. Now more than
at any time for over a decade, market participants are focused on three key
markets:Â bonds, oil, and the dollar.
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As long as the dollar does not rally strongly, bonds do not
weaken below their recent lows or show sharp declines, and oil does not rally
strongly or take out June 1’s highs, the market should show some resilience and
the ability to rally MILDLY. Weakness in the dollar combined with strength in
bonds and weaker oil could fuel stronger rallies.
Investors therefore need to watch these three critical
markets like a hawk — and keep their finger on the exit trigger on any long
oriented trades they are in to exploit the potential relief rally. Remember
that the SHOCK RISK is bigger from now through November than it has ever been.Â
Terrorist actions in Saudi Arabia, Europe (Italy next?) and the US and UK are
not only increasingly likely from intelligence sources, but strategically
likely. Al Qaeda has changed the outcome of the Spanish election, and this
should only spur terrorists to try and influence other elections coming up.
Therefore we continue to advise investors to tread
cautiously and utilize lighter than normal positions in this dangerous period,
even though we believe that a rally of sorts is likely to continue to unfold.
Consistent with our advice of caution, our US long/short
model has been relatively inactive during 2004, and we continue to suggest
investors use some caution until stocks meeting our criteria expand in breakout
breadth. This week we DID have a valid signal on the long side in CETV. And we
do still advise investors to continue to cautiously add stock exposure as trade
signals are generated that meet our strict criteria, as well as allocate to our
favorite segments on breakouts and signals as advised above. With our model
portfolio having been essentially in cash since November, it has been
frustrating for many — but market environments like March, April and May make
this position seem wise. These are tough markets and traders must be nimble and
willing to wait for good odds to risk capital.
Our model portfolio
followed in TradingMarkets.com with specific entry/exit/ops levels from 1999
through May of 2003 was up 41% in 1999, 82% in 2000, 16.5% in 2001, 7.58% in
2002, and we stopped specific recommendations up around 5% in May 2003 (strict
following of our US only methodologies should have had portfolios up 17% for the
year 2003) — all on worst drawdown of under 7%.  This did not include our
foreign stock recommendations that had spectacular performance in 2003.Â
This week in our Top
RS/EPS New Highs list published on TradingMarkets.com, we had readings of 35,
29, 69, 62, and 52 with 38 breakouts of 4+ week ranges, one valid trade in CETV
and no close calls. Upside breadth is continuing to improve, and we are now
eagerly awaiting trades that meet our criteria. Position in valid 4+ week
trading range breakouts on stocks meeting our criteria or in close calls that
are in clearly leading industries, in a diversified fashion. This week, our
bottom RS/EPS New Lows sunk back to bull market territory, registering readings
of 7, 5, 0, 1, and 8 with no breakdowns of 4+ week ranges, no valid trades and
no close calls.
For those not familiar
with our long/short strategies, we suggest you review my book
The Hedge
Fund Edge,
my course “The Science of Trading,”
my video
seminar,
where I discuss many new techniques, and my latest educational product, the
interactive training module.
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
the U.S. market, continue to only buy or short stocks in leading or lagging
industries according to our group and sub-group new high and low lists. We
continue to buy new long 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 of change in the
new-economy/old-economy theme appeared to be upon us. We’ve been effectively
defensive ever since, and did not get to a fully allocated long exposure even
during the 2003 rally.
The idea of profitable
investing is that you only invest significantly when the odds are heavily in
your favor — the rest of the time you abstain from risking precious capital.Â
Traders, in their desire for action, often fail badly in knowing when to just
stand aside. For most of investment capital, we continue to believe that
standing aside remains the best policy. Great opportunities will develop in the
future, just as they have in the past — the key is having your full capital
available to exploit them when they develop. And sometimes that means sitting
on your hands and not doing anything until better odds situations develop.Â