Retest Ongoing
The
weakness of the latest weeks brings into serious question whether the
7/11 lows will stand as retest lows or not. Breadth
is now completely mixed with no real evidence of strength to either the bulls or
the bears, although late earnings are usually more negative than early in the
announcement season. 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 slightly expand 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 11-day MA of advances are > 1.9 times the 11-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; 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-plus-week solid bases on strong volume. Until
some of these breadth-thrust indications materialize, investors should continue
to tread very cautiously.
Let’s
look at economically sensitive commodities. Bonds
potentially made an intermediate-term high this week, as they hit a Fibonacci
price target on a Fibonacci date and reacted off of this high with CGC down.
Further downside action below 102, basis Sept. bonds, should indicate a
backing-and-filling trend in bonds that could allow the stock market more room
to rally. Copper is making new lows yet
again, meaning that the markets are not yet anticipating an economic revival of
significance in the next three months. Lumber is a volatile mess, but it
is no longer either bullish or bearish economically.
Clearly, economically sensitive commodities are not yet anticipating
significant economic recovery. A sharp
move down by bonds and up by cotton and copper 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. Â
AÂ
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 not for tilts, but real indications of breadth one way or another,
which are totally absent right now. New
Highs vs. New Lows on our RS/EPS lists were
38/13, 17/18, 18/15, 8/20 and 12/12 — showing no strength to the bulls or bears
once again. Continue to 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 eight breakouts on the upside to new highs of stocks on our Top RS/EPS
New Highs list with no close calls, and a dismal four breakdowns on the downside of
four-week-plus consolidations on our Bottom RS/EPS New Lows list, 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 the 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 DEFENSE 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 3.77%.
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!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.“Â
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
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: Doral Financial
(
DORL |
Quote |
Chart |
News |
PowerRating) @36.1 (33) w/31.75 ops. We managed to book 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.
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 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. 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 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!Â