Still Nothing To Get Excited About
New
lows in lumber again this week tell us clearly that the economy is
not yet showing any signs of reaccelerating. The
markets continue to show some decent base-building
and short opportunities in our new low lists have all but vanished, but until
more breadth appears in this rally, the sidelines look pretty good.
One of the hardest, and yet most important lessons investors need to
learn, is patience. Don’t shoot until
you’ve got a good shot that has a high probability of profit.
Sure there are some double-bottoms and base breakouts like in WorldCom
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PowerRating)
and other stocks that have been decimated out there.
And there are some stocks on our lists that are close to meeting all of
our criteria — and certainly these make up the best shot at good trades out
there. But investors are probably much
better advised to sit, watch, wait and do nothing.
When breakouts develop in abundance and we get more base-breakouts to new
highs in stocks that meet all of our criteria, then the low-risk and high-odds
trades will be upon us. Until then, this
is a dangerous market that could chop up your capital and the fantastic gains we
produced last year and the year before. Jesse
Livermore once quipped that he made most of his money not trading, but sitting.
Livermore was talking about sitting with a big position on and letting it
run. But if Jesse had just learned the
art of patience in waiting for a really good opportunity before trading, he
probably wouldn’t have committed suicide. And
he might have been able to keep one of the tremendous fortunes he amassed.
Let’s
look at some numbers from the week. New
Highs vs. New
Lows on our RS/EPS lists were 9/1, 4/3, 3/2, 21/2 and 24/2.
Until new highs on these lists rise consistently above 20 every day, AND
we get a lot more breakouts, T-bills look like more fun than getting chopped and
faked. There were roughly nine breakouts
on the upside (a good environment will show 10 times this number or more) with
one breakdown on the downside of four-week-plus consolidations on our RS/EPS
lists. However, most importantly, there
were no valid breakouts on the upside in up-fuel stocks, and no valid breakdowns
on the downside in down-fuel stocks. The
one bright light was that there was a rather sharp increase in breakouts that
were CLOSE to meeting our criteria, such as AmeriCredit
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ACF |
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PowerRating) (again, but
with debt and funds too high), Extended Stay America
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ESA |
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PowerRating) (debt and funds
too high), Rent-A-Center
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PowerRating) (debt and funds too high) and probably the
best of the lot, LaBranche & Co.
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PowerRating) (debt too high).
If you really want to trade, you can lightly take some of these close-to-criteria
trades. But don’t use much capital until
the real thing shows up in significant numbers. If
the Fed cuts rates again and takes this market into a new bull move, we will
soon get a substantial increase in valid breakouts of leading stocks meeting our
up-fuel criteria on our Top RS/EPS New Highs List.
Until that develops, let the market back-and-fill and fool with bottom
pickers. The goal isn’t to pick the
bottom, the goal is to make consistent profits with minimal risk.
Don’t worry about missing the party, just try to identify when the party
gets hot enough to warrant your attendance.
Our
overall allocation is now 100% in T-bills awaiting new opportunities for the
first time since 1998. 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 down about 1.78%, with a full cash position.
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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.”Â
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-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 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.Upside
breakouts meeting up-fuel criteria (and still open positions) so far this year
are: none. And last week we had no valid
pattern breakouts up in stocks meeting our up-fuel criteria (see 10-week trading
course). 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.
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 at
the moment. And this last week we had no
valid pattern breakdowns in stocks meeting our down-fuel criteria (see 10-week
trading course). 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.At
this point our strategy is simple, but for many traders it is not easy.
Simply wait for valid breakouts of valid up-fuel stocks for
opportunities. When such opportunities
become abundant, pounce with both hands. Until
then, tread cautiously. Even if this is
just another bear-market rally, we should get some trading opportunities soon if
the rally has any real teeth.Â
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