Nothing To Shoot At Yet
Yes,
the Fed cut rates again, and yes, we should have our finger on the
trigger waiting for opportunities and juicy breakouts.
There’s just one problem. No
decent breakouts and no decent breadth on any rally yet.
This week the Fed admitted to Congress that the economy is probably not
growing at all right now. The markets
already discounted today’s rate cut of a half-point, so the news did little to
help the market. Remarkably, the bond
market actually RALLIED on the rate cut announcement — this means investors are
anticipating that the economy is so weak that these two rounds of cuts will NOT
be enough to turn the economy around. The
age-old adage of buying on the THIRD rate cut, which normally only works in a
recession, may work well this time around, as it looks like the soft landing
will not be quite as soft as most investors had hoped.
The
bottom line is WAIT FOR A LARGE NUMBER OF VALID BREAKOUTS IN STOCKS MEETING, OR
VERY CLOSE TO MEETING, ALL OF OUR FUEL CRITERIA, AS WELL AS CLEAR LEADERSHIP BY
SOME GROUPS CONSISTENTLY ON OUR DAILY TOP RS/EPS NEW HIGH LIST.
Lumber is finally bouncing off of the bottom some, but don’t get excited
until it has fully completed a nice basing pattern.
Keep your finger on the trigger, but don’t shoot until you see an
abundance of valid breakouts of up-fuel stocks.
Let’s
look at some numbers from the week. New
Highs vs. New
Lows on our RS/EPS lists were 14/2, 18/2, 35/1, 27/1 and 35/2. Yet we still didn’t get a
full week of 20 or more new highs each day. Definitely
not the stuff of runaway bull markets! There
were roughly 16 breakouts on the upside (a good environment will show five times
this number or more) with one breakdown on the downside of four-week-plus
consolidations on our RS/EPS lists. However,
most importantly, there were no valid breakouts on the upside in up-fuel stocks,
and no valid breakdowns on the downside in down-fuel stocks.
This week did not show an increase in the number of breakouts that were
CLOSE to meeting our up-fuel criteria either. So
we must wait patiently for highly reliable trades to show up.
We’re just not there yet.
Our
overall allocation is now 100% in T-bills awaiting new opportunities for the
first time since 1998. 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 the year 2001, we are now down about 1.66%, 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.”Â
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.At
this point, our strategy is simple, but for many traders, it is not easy.
Simply wait for valid breakouts of valid up-fuel stocks for
opportunities. 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 if
the rally has any real teeth. It may take
another rate cut on March 20 before real teeth develop. We’ll see.
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