For Our Purpose, This Is A Bullish Bias Trading Range Market
Although we did get a
bounce off of last Thursday’s lows from Fibonacci support in one
index, we suspect the correction from the May 21 highs is ongoing. From an
internal breadth viewpoint, as far as our strategy is concerned, this market
looks more like a bullish-biased trading range than a new raging bull. We’ll
need far more breakouts to new highs in leading stocks more consistently to get
really excited about this market. Until then, we’re likely to remain less than
fully invested. Realize that we’re beating the market return even with this puny
allocation and patiently wait for broker participation along with more concrete
evidence that the rate cuts have teeth economically.
A look at economically sensitive commodities
continues to give a mixed picture, with copper and cotton making new lows in the
latest week, despite lumber’s volatile explosion, which looks to have stalled.
Bonds are also in a contra-trend rally mode, leading us to suspect that economic
growth is not on the verge of exploding.
Let’s
look at some numbers from the week. New
Highs vs. New Lows on our RS/EPS lists were
22/6, 27/6, 41/6 24/3 and 39/5 — all right, new highs are again above 20
consistently, but are not swamping new lows as we would suspect early on in a
bull market. Oh, for the days of new highs on our lists above 50 daily and above 100 a time or
two each week again! There
were 20 breakouts on the upside to new highs of stocks on our Top RS/EPS
New Highs list (such an incredibly small number of valid breakouts and close
calls remains troubling), with only two breakdowns on the downside of
four-week-plus consolidations on our Bottom RS/EPS New Lows list, including no close
calls.
Close calls are stocks almost meeting our criteria that broke out of sound
bases. The environment thus remains not yet
nearly optimum on the long side or the short side.
Our
overall allocation is still relatively DEFENSIVE with 8% short and 32% long and the
remaining 60% 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 5.7%, with a mostly cash position, though the last few weeks,
where we actually had some exposure, has given us some slight gains in our
portfolio for the year.
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 out on 42 ops for a 50%Â profit trade; International Game Tech
(
IGT |
Quote |
Chart |
News |
PowerRating) @57.95 (65.31) w/59 ops; and TRC
(
TRR |
Quote |
Chart |
News |
PowerRating) @36.32 (51.31) w/45.5 ops;
and new this week we added Wet Seal
(
WTSLA |
Quote |
Chart |
News |
PowerRating) @37.02 (34) w/31 ops. We now
have booked profits on one of our longs and locked in profits via trailing stops
on two out of three posistions.
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 and only in leading
groups.
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: DuetscheTelekom
(
DT |
Quote |
Chart |
News |
PowerRating) @20.3 (19.5) w/21.5 ops.
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.
Last year we managed to pull profits out of the
March-September rally without a significant drawdown by mildly allocating to the
few valid breakouts and using trailing stops as we appear to be doing with this
rally. If this develops into a broader scale bull market, we’ll eventually get
more signals. 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 some profits without getting faked out. Remember that our goal is to
make safe, low-risk, reliable profits consistently, not to buy bottoms or short
tops. So we’ll continue to wait for a clearer environment from a breadth basis
before pouncing on opportunities. Right now opportunities exist, but they are
not abundant. There is some ripe fruit on the tree, but if we wait for the ripe
fruit to be falling off the tree, it will be a better time to load up our
basket. And loading up your basket with fruit that isn’t ripe yet, and then
eating that fruit, can make you sick to your stomach. Patience! Pouncing on
reliable opportunities when they develop with abundance before committing much
capital is key.