These Are The Best Long And Short Groups

• April 22, 2005
• Mark Boucher

Still
Flirting With Critical Level Test

 

The Nas, Dow, and S&P all broke
through critical levels on high volume in the latest week.  They are flirting
with those levels again now and new lows will be decidedly bearish.  Investors
in particular should have long ago been heading for the sidelines and last
week’s breakdowns should have sent them into a very defensive mode.  The market
is likely to be manic with a downward bias until the Fed stops hiking, and that
won’t come until the economy softens markedly.  It’s usually a dangerous phase
for equity markets when rates are moving up and beginning to bite, but not
enough to stop the tightening. 

 

 

Investors should be nearly
fully sidelined, while traders should be fully hedged with shorts against
longs.   The best long-side groups appear to be Aerospace and Defense, Soaps and
some staples, health care (a broadening range of groups here and our favorite),
telecom, and non-cyclicals;  while the best short-side groups appear to be auto
equipment, autos, financials (S&L’s and mortgage services especially), brokers,
home retail, electronics and computer retail, RV building, and home appliances.

 

We suspect that the commodities
markets will find it difficult to sustain rallies until Fed tightening has eased
up — though some spot shortages and supply situations in grains, softs, or meats
could still develop.  We suspect the dollar and gold are in trading ranges that
are unlikely to be significantly resolved until the Fed tightening appears
likely to pull back as well.  Bond rallies with the softness in equities have
eased the blow — it looks like a trading range here too.

 

It looks to me like a pretty
difficult trading environment is upon us, and Richard Russell’s rule of “he who
loses the least wins” may be appropriate for a while.  Investors and traders
should patiently await better trend trading opportunities for the most part. 
Don’t over trade here!

Our model portfolio followed in TradingMarkets.com with specific entry/exit/ops
levels from 1999 through May of 2003 was up 41% in 1999, 82% in 2000, 16.5% in
2001, 7.58% in 2002, and we stopped specific recommendations up around 5% in May
2003 (strict following of our US only methodologies should have had portfolios
up 17% for the year 2003) — all on worst drawdown of under 7%.   This did not
include our foreign stock recommendations that had spectacular performance in
2003. 

This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 9, 89, 7, 16, and 13 with 16 breakouts of 4+ week ranges, no
valid trades and one close call in UTHR.  This week, our bottom RS/EPS New Lows
recorded readings of 56, 6, 57, 23, and 46 with 27 breakdowns of 4+ week ranges,
no valid trades and close calls in DTV, NBIX, IKN, HILL, and NWAC.  Valid
signals remain in place in LCAV and CHTT on the long side and ALO and BOBE on
the short-side.    Notice that neither new highs or new lows are exceptionally
strong this week. 

For those not familiar with our long/short strategies, we suggest you review my
book

The Hedge Fund Edge, my course “The
Science of Trading,”

my video seminar, where I discuss many
new techniques, and my latest educational product, the

interactive training  module.
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
the U.S. market, continue to only buy or short stocks in leading or lagging
industries according to our group and sub-group new high and low lists. We
continue to buy new long 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 of change in the
new-economy/old-economy theme appeared to be upon us. We’ve been effectively
defensive ever since, and did not get to a fully allocated long exposure even
during the 2003 rally.

A big part of keeping risk down and profiting consistently in the markets is
knowing when not to risk capital much.  Only investing substantially when the
odds are substantially in your favor is critical.  There are some relative value
themes that investors and aggressive traders could exploit here, but most
investors should be mostly out of the market and awaiting better odds
opportunities here.

 Mark Boucher