Late And Mild ECB Rate Cut Not Yet Enough, Say The Markets
While
the ECB FINALLY lowered rates by .25 basis points, the market reaction was very clear
— NOT ENOUGH ACTION SOON ENOUGH. The
markets will need more. Expect
another ECB rate cut, and probably another Fed rate cut in September and
October. When the markets finally
begin to respond positively to rate cuts, then we’ll know something significant
is in the making. Until then, good
news is bad news, folks, and that spells BEAR.
Some
global indices have now broken the March-April lows. However,
the U.S. market still looks like a retest. Breadth is not solid on new lows, downside volume, or declines over
advances. So as the old lows get
closer and closer, the market is setting itself up to be in position to at least
bounce off of these lows. The
downside doesn’t YET appear to have the breadth-strength to cut through like a
hot knife through butter. But the
upside is even weaker. Continue to
watch the ECB, the BOJ, and the dollar very closely for clues as to whether
global conditions will lead to a panic break of the March-April lows, or whether
help from abroad will allow for another rally off of the retest.
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Economically
sensitive commodities are still troublesome. Bonds are behaving bullishly, copper is rallying more strongly off of its
lows than it has for many months, but not yet forming any major bottom
formation. Cotton made new lows yet
again this week. Lumber is gyrating
all over the place. Thus,
economically sensitive commodities are not yet clearly anticipating an economic
recovery over the next three months or so. A sharp move down by bonds and up by cotton and copper will tell us that
the markets are finally starting to anticipate a sustained economic recovery. Until we get this, we would be surprised to see a sustainable
up-move in
stocks in general.
A
look at the numbers from our stock lists tells us that the trading-range
environment is getting even duller and less opportunistic. Wait for real indications of breadth one way or another,
which appear absent right now. New
Highs vs. New Lows on our RS/EPS lists were
pathetic in both directions, with fewer than two days above 20 on either new
highs or new lows — showing no strength to the bulls or to the bears. Continue to wait and watch for something real —
like days of new highs or new lows on our lists above 50 daily and above 100 a time or two
each week again before becoming eagerly bullish or eagerly bearish. This week
there was one close call on the pitifully low six breakdowns of bottom RS/EPS new lows
that broke out of
four-plus-week bases, while there were no close calls in the meager six breakouts of bases of top RS/EPS new highs.Our
overall allocation is now DEFENSIVE with 76% 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 8% with a heavy cash position.
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. 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 an environment unclear directionally, we also only buy or short stocks on
leading or lagging industries according to our group and sub-group new high and
new 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). 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: Doral Financial
(
DORL |
Quote |
Chart |
News |
PowerRating) @36.1 — out on 34.75 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.
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: Global Crossing
(
GX |
Quote |
Chart |
News |
PowerRating) @6.05 (4.19) — now use 5.15 ops; Phelps Dodge
(
PD |
Quote |
Chart |
News |
PowerRating) @38.1 (39.36) — now use 41 ops; and Brasil Telecom
(
BRP |
Quote |
Chart |
News |
PowerRating)
@31.69 (28.2) w/31 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. And don’t double up on any industry until you have
a breakeven or better ops in any other short issue in the same industry.
There
continue to be very few trades developing in either direction here as the
retest-trading-range market environment goes on and on and on. But grinding out small gains beats the pants off of getting
whipsawed
back and forth and losing money trading when the odds are not clearly in our
favor. Patience and selection will
continue to pay dividends, although investors should be prepared for some
whipsaws in this environment. I’ll
say it again — it only takes a
couple weeks of good environment to make a year’s worth of profits in these
markets via our strategy. Keep
reminding yourself of this and use your discipline to WAIT. Continue to keep a close eye on Europe, Japan, the Fed, the dollar, and
the markets’ reaction to them. Wait
till you see the whites of their eyes before wasting real allocation bullets.