Heading For A Retest?
The
backing and filling continues, and while the market is not yielding any solid
trades, this action might be just what it needs to set up for a sustainable
rally later in the year. Overall,
the major indices are heading lower for what could be a retest of the late
September lows. A successful retest
would create a base for the market to recover from in the months ahead. It takes
a good deal of patience to wait out the pullback, but those who avoid mediocre
trades will be happier for it.
It
is important to know how to identify a turnaround if and when it occurs. A decline to 1000 or lower on the S&P 500, or 1500 or lower on the
Nasdaq, and then a good breadth thrust to the upside would be meaningful. Until we see signs that support is holding with some new leadership
working its way into our new highs/lows lists, we can only watch and learn. We turn to the global markets for clues as to whether the economic
underpinnings of a real rally are falling more firmly into place.Â
The
Asian
(x Japan) and Eastern European markets are holding up, retreating only slightly
off recent highs this past week. In
the global recovery scenario, these are the leading emerging markets so far. There has been some quiet improvement in Latin America as well. Beyond the global stock markets, we also pay close attention to global
commodity prices, bond prices and currencies. Specifically, a breakout in commodity prices, a breakdown in global
bonds, and a breakout in economically sensitive currencies would make for a
broad plurality of messages that a global recovery is really developing.
The
New Zealand dollar and Australian dollar, which are leading economically
sensitive currencies, remain in their trading ranges.Bonds are still range-bound. IF
they fall on good volume below the 98 level, it would confirm that a recovery is
imminent, whereas a move above the 105 level would suggest the opposite.
Economically sensitive commodities, including lumber,
copper and cotton,
are still building bases. Cotton bounced off of the top-end of its range this
week, failing to breakout through the key 42.50 level. Nearby
copper also attempted to breakout through a key level, 75, but
needs more time. Lumber futures are
the furthest along, now holding up after breaking through 275. The recovery scenario will improve if cotton and copper can also
breakout. It doesn’t seem likely
at this time that lumber will fall below 215, copper below 60, or cotton below
30, which would suggest that the recovery is a lot farther away than we hope.
I recommend that investors watch broader commodity gauges as well for
signs of a bottom. The CRB Index (CRBFCOMP
on Bloomberg) has been building a base, which is constructive. A move by the CRB Index above the 198-200 level would mark a
breakout
and would serve to confirm the beginning of global economic recovery.
Top
RS/EPS New Highs registered close to 20 or more each day over the shortened week
(37, 22, 18, 31), but the breakouts were almost nonexistent, totaling seven for the
whole week. With only seven breakouts, the odds are against finding a favorable
trade. Despite the fact that we saw more stocks on our New Highs list than our
New Lows list, the breakdowns more than doubled the breakouts, numbering 17 this
week. Bottom RS/EPS New Lows were
increasing (9, 17, 28, 36) throughout the week as sentiment deteriorated over
accounting concerns. This bucks
last week’s trend, but there were still no close calls either week, short or
long.
To confirm the recovery
scenario, look for Top RS/EPS New Highs to reach 20 or higher CONSISTENTLY, and
more than 100 on at least one day or more than 50 on two or more days.
Conversely, if Bottom RS/EPS New Lows reach these same extremes and there is a
breakdown in the major indices, we would become very bearish. For now, opportunities for solid trades remain few and far between, but
we’re watching closely for the pieces to fall into place for a possible
improvement in leadership.
Our
overall allocation remains DEFENSIVE with 92% in T-bills awaiting new
opportunities. Our model portfolio followed up weekly in this column was up
41% in 1999, up 82% in 2000 and up 16.5% in 2001 — all on a worst drawdown of
around 12%. We’re now up about 0.22% for the year 2002.
Remember, a year’s worth of profit can come in a short period of time,
so patience is key.
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,” course “The Science of Trading” and new video seminar
most of all, where I discuss many new techniques.yes”>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
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 an environment unclear directionally, we also only buy or short stocks
in leading or lagging industries according to our group and subgroup new high
and low lists. 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). We’ve
been effectively defensive ever since.
Upside
breakouts meeting up-fuel criteria (and still open positions) so far this year
are: Ryland Group
(
RYL |
Quote |
Chart |
News |
PowerRating) @64.3 (77.95) w/74 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 and only in leading groups until we get breakouts in
the major indices.Â
On
the short side 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: NONE. 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 that is in a leading
group.
We
continue to advise caution and patience until the market takes a more decisive
stance. We all know that the market
can get ahead of itself, so it is best to wait for confirmation that we are
seeing real economic recovery.Â