Slight Bullish Bias

September 1, 2000
Mark Boucher

Last
week, we had more weak follow-through on the upside and action that was largely
upside biased. We had a week with
every day but one producing 20-plus new highs on our Top RS/EPS New High List
and
some very weak new low numbers on our Bottom RS/EPS New Low List.
Just like last week, the action is getting better toward longs, but there
are still few valid breakouts of stocks meeting our upfuel criteria (one
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 four of our seven shorts via trailing stops this week, showing that the
days of profitable shorts are waning.Â

Let’s
look at some numbers from the week. New
Highs versus New Lows on our RS/EPS lists were 19/8, 26/5, 31/3, 39/9, and 43/4
respectively for the latest week, last Thursday through Wednesday. A week with
20-plus new highs each day but one and expanding new highs every
single day represents further bullish progress. There were roughly 20 breakouts on the upside with only three breakdowns
on the downside of 4-week-plus consolidations on our RS/EPS lists. The problem is that most of the upside breakouts were in thin small-cap
stocks or in stocks not even close to meeting our criteria. One valid breakout up and one valid breakdown down is all we
had in terms
of actionable items 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.Â

Our
overall allocation remains low, but slightly increasing on the long side. We are now around 62% long (including open profits) and 21% short for
aggressive accounts using leverage (31% long and 11% short for unleveraged, more
conservative accounts). Last week,
our longs rose an average of 1.65% (and with 62% allocation, this added 1.02% to
our overall portfolio), while our shorts rose 6.27% on average (and with 55%
starting allocation, this subtracted 3.45% from our overall portfolio), giving
our overall portfolio a loss of about 2.43% on the week, and leaving us with
around a 76% gain on the year (2.43% off of new equity highs) on a 12% maximum
drawdown so far. Conservative
investors not using leverage show about half these gains and drawdowns.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 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

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 these 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.Â

Slight Bullish Bias

BUY THE FEAR, SELL THE GREED

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