Market Overly Sensitive To Any News
When
traders and investors are not very sure in their outlook for the
economy and the market, news has a magnified effect on the directional movement
of the market on any given day in which a relatively significant news event is
revealed. And any news considered
significant has an overly magnified effect on the market.
When some important company comes out with more positive earnings than
expected, the market begins to discount that the entire market is experiencing
an earnings turnaround.
This
type of volatile mess is likely to continue until a plurality of earnings and
economic reports point in a particular direction.
We may well get a lot of more positive-than-expected news in the first
quarter as inventory re-accumulation is ongoing and as comparisons with the
dismal post-Sept. 11 fourth quarter look particularly positive.
The market may overreact on the upside if this develops and then get
disappointed thereafter when it becomes clear that this recovery is not likely
to be a swift affair.
In
the meantime, we may also have to brace ourselves for the last of the negative
news, though most of it is probably behind us. This
kind of emotional, uncertain market can wreak havoc on short-term traders.
Investors should keep their eye on the ball — don’t significantly
increase allocation until the breadth of breakouts on our Top
RS/EPS New Highs list begins to expand sharply.
We’re getting closer, but are not yet there.
Continue
to watch economically sensitive commodities, which may help to alert us to a
more decisive shift in expectations of recovery. The markets would be
clearly discounting imminent recovery if nearby lumber futures could move
strongly above the 275 level, AND nearby copper
could move strongly above the 75 level, AND nearby
cotton could move strongly above the 42.50 level, AND
nearby bonds fall on good volume below the 98 level.
Conversely,
the recovery scenario would be in serious jeopardy if lumber fell below 215,
copper fell below 60, cotton fell below 30, and bonds rose above the 105 level,
although such a reversal in these markets currently appears unlikely.
We also suggest watching the commodity currencies in their apparent
base-building process. Watch the Aussie
dollar for a move above .55 or below .48 and the New Zealand dollar for a move
above .46 or below .39 to confirm the recovery/recession scenario.Â
The
breadth and leadership numbers for this week were neutral for the first time
since the end of September. New lows
gained ground more than they have since then, too.yes”> Top
RS/EPS New Highs vs. Bottom
RS/EPS New Lows for the latest week were 12/3, 11/5, 10/7, 15/8 and 11/11.
We still have NOT seen a full week of 20 or
greater new highs each day, let alone the 100 or more new highs in one day we
would really hope for in a solid bull move. Breadth and leadership for new lows
has moved from being totally non-existent to being sub-standard.
Look for Top RS/EPS New Highs to reach 20 or higher CONSISTENTLY
on a week and over 100 on at least one day (or 50+ on two or more days) before
becoming very bullish.
Breakouts
vs. breakdowns of four-plus-week consolidations on our lists for the week were
pathetic again at 0/1, 1/1, 0/0, 2/2 and 1/2 — the first week where new low
breakdowns of consolidations exceeded breakouts of new highs.
No close calls either. Clearly we
still need substantially more breakouts by leading stocks in groups with good
relative strength in order to participate in the next leg of the market without
accepting too much risk.
Our
overall allocation remains DEFENSIVE with 76% 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 with
a worst drawdown of around 12%. For
year 2002, we’re now down about 0.4% and currently undergoing a drawdown of
nearly 4%.
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
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. We’ve been effectively defensive ever since.
Upside
breakouts meeting up-fuel criteria (and still open positions) so far this year
are: Central European Distribution
(
CEDC |
Quote |
Chart |
News |
PowerRating) @10.3 (13.41) w/11.9 ops; Ryland
Group
(
RYL |
Quote |
Chart |
News |
PowerRating) @64.3 (67.9) w/65 ops; Urban Outfitters
(
URBN |
Quote |
Chart |
News |
PowerRating) @21.9 — out
with a small profit on 23 trailing stop (We will look to re-enter this if we can
get a valid breakout of a four-plus-week consolidation to new highs.); and
Direct Focus
(
DFXI |
Quote |
Chart |
News |
PowerRating) @35.09 (33.67) w/29 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 S&P and Dow. If
two or more of our breadth criteria for the overall market develop (described in
detail in previous columns), we’ll drop the two per week only advice on longs —
but until that happens, we’ll sit tight and let the market give us more
decisively bullish signals than we have seen to date.
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.
One
of our biggest pieces of advice to investors for year 2002 is this — take some
Dramamine! It would not surprise us at
all to see some pretty wild volatility in both directions.
That means discipline and waiting for real opportunities, as well as
defensive use of stop-losses and trailing stops in both directions are likely to
be key. Opportunity will probably be
better than last year, but treacherously earned.
Â