Markets May Need Evidence Of Turnaround For Retest To Hold

Market
action around the globe
continues to show a drift lower. While the dollar got a huge boost from yesterday’s NAPM report which
showed new orders rising, global markets got only a partial day up-move with no
follow-through. Many global indices
have now broken the March-April lows. The
U.S. market still looks like a retest — but we suspect some sort of evidence of
an economic turnaround will be required for the retest of the March lows to
hold, particularly in the tech-heavy indexes where new lows are starting to look
more and more likely. Breadth is
improving on the downside some this week, but is not anywhere near solidly
bearish levels yet. However, 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.



Economically
sensitive commodities are still troublesome. Bonds are still close to their recent highs, despite a big reaction down
off of the NAPM report news. Copper
has turned down again off what appears to be a failed rally attempt, and is set
to retest its contract lows. Same
with cotton. Lumber continues its
wild directionless gyrations at relatively high levels. 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 off of a major topping formation, and sharp up-moves by cotton and copper off of major basing formations 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.

Our
stock list numbers for this week remain relatively action-less, although some
bearish breadth improvement developed. 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 upside and a handful of close calls
on the downside, with one short sale in SBA Communications
(
SBAC |
Quote |
Chart |
News |
PowerRating)
. Remember that sometimes one can get loaded up on shorts on a retest just
prior to a rally — so remain cautious and tiptoe through these dangerous markets. 


Our
overall allocation is now DEFENSIVE with 68% 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 9.4%, 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: NONE. 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 (3.51) — now use 4.45 ops; Phelps Dodge
(
PD |
Quote |
Chart |
News |
PowerRating)
@38.1 (39.92) — now use 41 ops; Brasil Telecom
(
BRP |
Quote |
Chart |
News |
PowerRating)

@31.69 (27.6) w/30 ops; and SBA Communications
(
SBAC |
Quote |
Chart |
News |
PowerRating)
@12 (12) w/14 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.


This
week, SBAC broke down out of a nice reverse cup-and-handle pattern to the
downside on a high-volume-thrust breakdown. Earnings were negative the last two quarters, as losses continue to mount
and expectations of future losses grow. Its
RS
rank is 8, while its EPS rank is 5. Fund
holdings are very high at over 45%. The
telecom sector has consistently been among the weakest in this market and the
most frequent on our bottom RS new low list, and now that GX is at a breakeven
stop, we could add to the group. 
 


Though
we’re getting a few trades, overall there continues to be a very small number of
new trading opportunities via our methodology, which has kept us mostly on the
sidelines since March of 2000.  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. Remember, remember, remember
 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,
economically sensitive commodities, and the markets’ reaction to them. Wait till you see the whites of their eyes before wasting real allocation
bullets.Â