Nothing Ado About Nothing
As
lumber makes new lows, the economy is clearly not yet giving any
advanced indications that it is re-accelerating.
The markets are base-building, but until more breadth appears in this
rally, the sidelines look pretty good. There
are almost no short opportunities via our methodology in this environment.
But the long side needs to take over and gain strength, and so far this
is lacking.
Let’s
look at some numbers from the week. New
Highs vs. New
Lows on our RS/EPS lists were 14/5, 14/0, 34/3, and 36/0.
In other words, a dismal picture for shorts, and no consistency in the
picture for longs. We will look for New
High dominance similar to what we had a few weeks ago before getting excited
about the long side. There were roughly
15 breakouts on the upside with 0 breakdowns on the downside of 4-week-plus
consolidations on our RS/EPS lists.(
ACF |
Quote |
Chart |
News |
PowerRating) was the closest), and no valid
breakdowns on the downside in down-fuel stocks. If
the Fed rate cut takes this market into a new bull move, we will soon get a
substantial increase in valid breakouts of leading stocks meeting our up-fuel
criteria on our Top RS/EPS New Highs List. Until
that develops, let the market back-and-fill and fool with bottom pickers.
Wait for the low fruit. Don’t
fight the Fed and don’t fight the tape — wait for breadth and volume to come in
before moving.
Our
overall allocation is now 100% in T-bills awaiting new opportunities for the
first time since 1998. Our model
portfolio followed 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 down about 1.9%, with a full cash position.  Â
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
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.
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 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; and last week we had no valid
pattern breakouts up in stocks meeting our up-fuel criteria (see 10-week trading
course). 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.
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: no open positions at
the moment; and this last week we had no
valid pattern breakdowns in stocks meeting our down-fuel criteria (see 10-week
trading course) . 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.Let’s
hope that we get an intermediate-term bottom that has at least as much teeth as
the May-August bear market rally last year. We
suspect that a major strong up-leg will not develop until it is clearer that the
economy is responding to rate cuts and re-accelerating.
But our suspicions don’t effect our trading. When such opportunities
become abundant, pounce with both hands. Until
then, tread cautiously. Even if this is
just another bear-market rally, we should get some trading opportunities soon.Â