Much Ado About Nothing W/A Bullish Bias

September 8, 2000
Mark Boucher

Last week
continued to build evidence on the bullish side and continued to show
deterioration on the short side. We had another week with every day showing more
than 20 new highs on our Top
RS/EPS New High List and consistently (<10) weak new low numbers on our Bottom
RS/EPS New Low List. Again, the action is overwhelmingly biased toward
longs, but there are still few valid breakouts of stocks meeting our upfuel
criteria (none, actually). Until we get handfuls of valid breakouts in upfuel
stocks, the environment remains one to be cautious of on both the long and short
side, although the long side is looking gradually more positive. Our timing
models are creeping toward a more bullish stance slowly, as well — and we got
stopped out of one out of three of shorts via trailing stops this week, showing
that the days of profitable shorts are waning further.

Let’s look at some numbers from the
week. New Highs vs. New Lows on our RS/EPS lists were 67/4, 66/7, 47/6 and
42/5, respectively for the latest week, last Thursday through Wednesday. There
were roughly 27 breakouts on the upside, with only two breakdowns on the
downside of 4-week-plus consolidations on our RS/EPS lists. The problem remains
that all of these upside breakouts were in stocks that in some way failed to
meet our upfuel-plus-valid-breakout criteria. We thus had a lot to look at, but
nothing to do as far as new trades are concerned on the week. The environment is
more conducive to longs than shorts, but not one to get aggressive toward in
either direction. We will continue to advocate a cautious stance, with investors
to add no more than two trades per side in the next week. Our best guess is that
if this market can get through October without a nasty spill, then most of the
major averages will be set to make new all-time highs, but that the really will
not be a wonderful one for finding the type of stocks we favor.

Our overall allocation remains
somewhat cautious. We remain around 62% long (including open profits) and 13%
short for aggressive accounts using leverage (31% long and 7% short for
unleveraged, more conservative accounts). Last week, our longs rose and average
of 1.22% (and with 62% allocation, this added 0.75% to our overall portfolio),
while our shorts rose 4.71% on average (and with 21% starting allocation, this
subtracted 0.99% from our overall portfolio), giving our overall portfolio a
loss of about 0.24% on the week and leaving us with around a 76% gain on the
year (2.7% off of new-equity highs) on a 12% maximum drawdown so far.
Conservative investors not using leverage show about half of these gains and
drawdowns.

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 and course The Science of Trading. 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 upfuel criteria.
Shorts are similarly taken only in stocks meeting our downfuel criteria that
have valid breakdowns of four-week-plus flags or cup-and-handles on the downside.
We continue to buy new signals and sell short new short signals until our
portfolio is 100% long and 100% short (less aggressive investors could stop at
50% long and 50% short). In early March, 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, and continue to be.Â

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 downfuel criteria (and still
open positions) in: Corus
Group
(
CGA |
Quote |
Chart |
News |
PowerRating) @ 11.88 w/11.13 ops; British Telecom
(
BTY |
Quote |
Chart |
News |
PowerRating) @125.19 out at
131.63 on 130 ops; and Blockbuster
(
BBI |
Quote |
Chart |
News |
PowerRating) @8.94 w/10.5 ops These shorts are down over
39% from breakdown levels on average
so far this year (before current prices or exits). Continue to watch our
NL list daily and to short any stock meeting our downfuel criteria (see 10-week
trading course) breaking down out of a downward flag or down cup-and-handle.
Here, too, remain cautious by adding only two shorts a week.

We
continue to lean closer and closer toward releasing our cautious stance in
regard to new long-side trades. What we need to put us over the top is a week
with a handful of stocks meeting our upfuel criteria and breaking out of valid
patterns. Only when our opportunities grow to become abundant will we
be able to get more excited about moving our long allocation up to higher levels.
Until we can see the whites of their eyes, don’t shoot too much allocation at
these markets. We’re doing quite well this year so far, given the market
environment — so let’s stick religiously with our strategy and let it tell us
how aggressively to allocate and to what vehicles on what side of the market.
Enjoy the ride. Remain defensive and cautious during the week ahead.

Much Ado About Nothing W/A Bullish Bias

BUY THE FEAR, SELL THE GREED

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