Retest Continuing
We still need some follow through days
and evidence of breadth entering the market on the bullish side before
we can assume an intermediate-term low is upon us. Let’s reiterate the
list of things we’re looking for in terms of breadth-thrusts to tell
us if a likely strong and sustained bullish move is in the making:
Look for two or more of the following breadth tools to indicate a
possible strong leg up before getting too excited about buying stocks
again:
1) the five-day MA of up volume being
greater than 77% of the five-day MA of total volume on a day after the
low has been made
2) the eleven day ma of advances are
> 1.9 times the eleven day MA of declines
3) up volume/(up volume + down volume)
is > 90% on a given day
4) the S&P rises by 2.75% or more
on a given day and 70% of issues traded advance on the NYSE
5) After the fifth day following a
market low price, we get a strong follow-through day, a day where two
or more of the major averages are up more than 1% on volume that is up
from the prior day and at least 20% above the 50-day MA of volume
6) Some sort of financial shock
or necessary bailout that will end the liquidity squeeze currently
under way in Europe
7) Clear evidence that the
economy is picking up significantly by several reports along with
evidence that earnings are starting to recover consistently
8) Finally and most importantly,
that we get a large number of breakouts to new 52-week highs by stocks
that are strong EPS and strong RS leaders breaking out of bases that
are four+ week solid bases on strong volume. Until some of these
breadth-thrust indications materialize, investors should continue to
tread very cautiously.
A look at the numbers from our stock lists tells us that the trading-range
environment continues. Any time breadth tilts slightly to the bull
side, within a week or two the market shifts again, and the same
happens when breadth tilts slightly to the bear side. Wait for not
tilts but real indications of breadth one way or another, totally
absent right now. New Highs versus New Lows on our RS/EPS lists were
26/7, 31/7, 31/9, 45/7, and 35/9 — showing no strength to the bulls
or bears once again. 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. There were just 11 breakouts on the upside
to new highs of stocks on our Top RS/EPS New Highs lists with no close
calls; and a dismal 5 breakdowns on the downside of 4-week plus
consolidations on our Bottom RS/EPS New Lows lists, with no close
calls. Close calls are stocks almost meeting our criteria that broke
out of sound bases. We want to see dozens of breakouts or breakdowns
in stocks meeting our criteria or close calls on one side or the other
before becoming aggressively allocated. The environment thus remains
not yet nearly optimum on the long side or the short side, and is
currently not even biased one way or the other. Good time for
vacations, although dull markets can change on a dime at any time if
some significant news changes the mixed outlook.
Our overall allocation is now in SUPER DEFENSIVE, with 92% 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 4.88%, with a fully cash position. Note that
we DID manage to make a little money on the rally off of the April
lows, thanks to low allocation, good stock selection, and tight stops.
It helped that we knew that breadth was poor and that this rally was
not likely to materialize into something lasting – information we
learned from watching the breadth-thrust indicators listed above as
well as watching the breadth and group action on our Top RS New Highs
lists. It pays to pay attention!
For those not familiar with our long/short strategies, we suggest you
review my 10-week trading course on TradingMarkets.com, as well as 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+
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,
and are now as defensive as possible.
Upside breakouts meeting upfuel criteria (and still open positions) so
far this year are: DORL @36.1 (37.28) w/ 31.75 ops. We managed to book
some profits on three of our four longs since the April lows and we
actually made a little bit of money on our overall portfolio – but it
wasn’t fun or easy folks! 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: No open positions.
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.
Let’s see if we can’t get some breadth-thrust indications of a better
market environment one of these days or weeks. As we’ve been remarking
for some time, in this environment, patience pays dividends. This two
weeks had technical breakouts in the major indexes first to the upside
out of a triangle, and then to the downside out of a triangle, with
both looking to have failed. Technicals can whipsaw you unless you use
wide stops in this nowhere market. So most traders should just stand
bye and wait. It only takes a couple of weeks of good environment to
make a year’s worth of profits in these markets. Wait for a good shot
before shooting with significant allocation!