Market Still Swaying
Last
week we talked about a market unsure of the economic outlook and the
volatile mess this environment makes of the market.
This type of volatile action may continue until a plurality of earnings
and economic reports point in a particular direction.top
RS/EPS New Highs list begins to expand sharply.
We’re STILL not yet there.
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Economically
sensitive commodities may still be able to help us spot a meaningful shift in
expectations toward recovery. Lumber, copper
and cotton continue to base-build, while bonds are consolidating.
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 could 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 NZD for a move above .46 or
below .39 to confirm the recovery/recession scenario.
Note that the Canadian dollar (also an economically sensitive currency)
has broken to new lows while the NZD and AUD have remained in their trading
ranges.
The
breadth and leadership numbers for this week remain flat, unbiased in either
direction, and unexciting. Neither Top
RS/EPS New Highs nor Bottom
RS/EPS New Lows moved above 20 — with highs averaging around 14 and lows
averaging around 12 per day. Look for Top
RS/EPS New Highs to reach 20 or higher CONSISTENTLY
in 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 remain
pathetic with only about one breakout or breakdown a day on average, and no
close calls or trades on the week. This
clearly isn’t giving us tons of opportunities to choose from!
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 up about 0.85% and currently recovering from a drawdown
of nearly 4% off of last week’s lows (-2.75% now).
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 (13.76) w/12.45 ops; Ryland
Group
(
RYL |
Quote |
Chart |
News |
PowerRating) @64.3 (69.8) w/65 ops; and
Direct Focus
(
DFXI |
Quote |
Chart |
News |
PowerRating) @35.09 (36.9) w/31.5 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.
We
continue to advise caution and patience. Remember
what a good market is like — multiple percentage gains each week.
Those days will return, but until they do, investors must remain
disciplined and vigilant, keeping profits close to the vest.