Still Getting There, But Not There Yet

• December 21, 2001
• Mark Boucher

The
market environment continues to improve, but at a snail’s pace.
It is still NOT an all-clear
environment where we get dozens of breakouts each day, with five or six
potential opportunities on the long side — and all we have to do is pick the
right sub-groups we want in our portfolio. That
environment WILL be back someday — just not yet, evidently.

In
the meantime, our light allocation is doing relatively well.
Many observers note that the averages have been performing well on a
volume analysis bases, which is definitely true.
However, I wouldn’t describe the major averages as giving an “all
clear to go long” signal just yet. Once
the S&P and Dow clear their respective 200-day moving averages on good
volume, I’ll feel much better about the message of the averages.
Until then, I’m still a bit skeptical — we could easily have a
half-hearted retest attempt in here in the weeks ahead.
 

On
the other hand, economically sensitive commodities are performing better than
they have since August. Lumber now
appears to be forming a better-quality base between 215-256.
Cotton is consolidating between 35-40. Copper
is holding half of its gains with wild gyrations between 74-67.
And bonds are signaling the clearest return to economic growth, holding
at the 98 support level after their collapse from 112 in short order and break
through weekly trend channel support levels.

We’ll
feel even more confident that the plurality of markets are discounting economic
recovery when lumber breaks out solidly and on good volume above 216, copper
above 74, and cotton above 41. But in the
meantime, this base building is constructive and consistent with the discounting
of better times ahead. Continue to watch
the NZD and Aussie dollar for breakouts of what appear to be very nice and sound
base formations underway as well. 
 

Let’s
look at the breadth numbers on our lists for the week.
Breadth and leadership are IMPROVING, but not quite where we would
normally expect them to be at the beginning of a sustainable move that will take
growth stocks for a nice ride. Top
RS/EPS New Highs vs. Bottom
RS/EPS New Lows for the latest week were 18/3, 13/4, 30/5, 37/1 and 30/0.
Still not a whole week with 20 or greater new highs, but getting closer.
Leadership on new lows continues to be dead.Breakouts
vs. breakdowns of four-plus-week consolidations on our lists for the week were
actually weaker than last week at 3/1, 1/0, 6/0, 4/0 and 4/0.
This means we had 18 breakouts to new highs of decent bases on the whole
week — still not anything close to lots of opportunities.
During the 1999-March 2000 rally we had 25+ breakouts a day on average
for weeks at a time, for comparison. We
did have a couple pf close calls on the long side, but no new trades this week,
meaning the quality of breakouts deteriorated a bit this week. Without clearer
leadership, more breakouts by leading stocks and groups, and broader breakout
participation, this move will be difficult to capture with substantial
risk/reward. 

Our
overall allocation remains DEFENSIVE, with 68% in T-bills awaiting new
opportunities. For year 2001, we are
now up about 16.45%, with a heavy cash position. 

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,” 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-plus-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.Upside
breakouts meeting up-fuel criteria (and still open positions) so far this year
are: Possis Medical [POSS|POSS] @15.3
(18.36) w/15.35 ops; Central European
Distribution [CEDC|CEDC] @10.3 (12) w/9.9 ops;
Ryland Group [RYL|RYL] @64.3 (73.7) w/62.5 ops;
and Urban Outfitters
(
URBN |
Quote |
Chart |
News |
PowerRating) @21.9 (22.05) w/18 ops.
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 until we get breakouts in S&P and Dow and
three more days with top RS/EPS New Highs above 50.
If we get two or more of our breadth criteria for the overall market
developing from here on, we’ll also then drop the “two per week only”
advice on longs — but until that develops, we’re letting this market prove
itself.
 

On
the short side 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: NONE.
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
that is in a leading group. The oversold
nature of the market leads us to suggest that investors remain cautious by
only adding two shorts in a week.

Let’s
watch and see whether we get more consolidation before a real breakout in
averages and breadth or whether the market will undergo a bit more backing-and-filling
retest action before the environment really changes and good opportunities are
abundant again via this methodology. NOW
is the time to PAY CLOSE ATTENTION.