Stay Selective, Long and Short
Last
week (Wednesday through Wednesday) brought us some more upside breakouts
in stocks almost meeting our criteria, along with one stock meeting our criteria
on the short side. Our Top RS and EPS New Highs
list did not continue to consistently show more than 20
issues. Bottom RS/EPS New Lows list grew, but only briefly popped
above 20. Thus the environment is
okay for longs and not too good for shorts — but this is not an environment to get
overly aggressive toward yet. When Top RS/EPS New Highs top 20 daily and we get handfuls of stocks meeting
or almost meeting our upfuel criteria and breaking out of valid patterns each
day, then it will be safe to get aggressive on the alongside. Similarly when Bottom RS/EPS
New Lows top 20 daily and we get handfuls of stocks meeting or almost meeting
our downfuel criteria, and breaking down out of valid patterns each day, then it
will be safe to get aggressive on the short side. Until then, remain selective and somewhat cautious.
This
week Aztar Corp.
(
AZR |
Quote |
Chart |
News |
PowerRating) came the closest to a valid breakout meeting our upfuel criteria — but
AZR had debt levels above 30%, so it didn’t meet our criteria perfectly. However, we did get a valid short-sell signal in Ciber Inc.
(
CBR |
Quote |
Chart |
News |
PowerRating). CBR had negative momentum and dropping earnings growth rates in the past
two quarters. Its RS and EPS were at 50 or below. We sold the next day’s
open at 13.44 and will use a 17 ops now (initially it was an 18 ops).
Â
Our
overall allocation remains low. We
are now around 50% long (including open profits) and 14% short for aggressive
accounts using leverage (25% long and 3% short for unleveraged, more
conservative accounts). Last week,
our longs gained an average of 8.2% (and with 50% allocation starting the week,
this added 4.1% to our overall portfolio on the week), while our shorts rose an
average of 3% (and with 14% allocation, this subtracted 0.4% from our overall
portfolio), giving our overall portfolio a gain of about 3.7% on the week, and
leaving us with around a 72.4% gain on the year (finally a new equity high! —
the first since March) 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. 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 Highs 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.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).Â
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. Now is the time for
patience. Remember that while
breakouts don’t start en masse until the trend has already started, they make up
for lost time because the stocks that break out move much more swiftly than the
rest of the market. That’s why our long positions have outperformed so strongly
on the upside, and our short positions have outperformed so strongly on the
downside as well, this year.
Upside
breakouts meeting fuel criteria (and still open positions) so far this year are:Key Production
(
KP |
Quote |
Chart |
News |
PowerRating) (@13.38 level) w/ 15.25 ops;
PC Connection
(
PCCC |
Quote |
Chart |
News |
PowerRating) (@26.46)
(half profits taken on misprint of ops on half position last week) w/ 47.25
ops;Â Alliance Capital
(
AC |
Quote |
Chart |
News |
PowerRating) (@44) w/ 44.5 ops;Â Keithley
Instruments
(
KEI |
Quote |
Chart |
News |
PowerRating) @37 — now use 62.5 ops;Â and
Elantec Semiconductor
(
ELNT |
Quote |
Chart |
News |
PowerRating) @50.25 w/ 51 ops; (note that because we now have
break-even stops on all our positions, we can now add any new breakouts in any of
these groups that meet our criteria) and this last week, we had no valid
pattern breakouts up in stocks meeting our up-fuel criteria (see 10 week trading
course):Â The average gain
in these stocks from breakout points of entry to Wednesday’s close is 66%,
substantially outperforming the NASDAQ, DOW, and S&P for the year to date. Continue to watch our NH list and buy flags or cup-and-handle breakouts
in NH’s meeting our up-fuel criteria.
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: Rhythms NetconnectionsÂ
(
RTHM |
Quote |
Chart |
News |
PowerRating)
(@16.56) — now use 14.5 ops to lock in profits;Â
and last week we got a new valid pattern breakdown in down-fuel stock
Ciber Inc.
(
CBR |
Quote |
Chart |
News |
PowerRating)
(sold @13.44) now use 17 ops). These
shorts are down over 38% from breakdown levels on average so far this year
(before current prices or exits). 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.Â
The
trend of the market is not yet fully clear, although things are looking better
for buy-side stocks. We’re getting
some valid breakouts in up-fuel stocks, some breakouts in stocks close to our
criteria, and lukewarm breadth so far. It
appears to us that this is a tradable rally, but it is not yet at all clear
that this is a new bull market. Aggressive traders could increase long exposure a little beyond our model
portfolio level, but not much. You
can do this by buying stocks that almost meet all our criteria and have the best
technical criteria in their breakouts and are in top groups.
However, I continue to be happy with the allocation indicated by a
religious application of our strategy. So
far it is doing a great job of telling us what to do, when, and with how much allocation. Let’s stick with it and see if the market can prove this rally better,
with higher-quality breakouts.