Tight Trading Range Remains
The
tight-trading-range market remains in force.
Continue to watch these key levels for breakouts above resistance or
below support in two or more of the three indexes before getting too excited in
either direction:Â Dow 11425-10420;
S&P 1340-1200; Naz:Â
2350-1990. Until we get some
decent volume and some breakouts or breakdowns in two or more major indexes
above or below these levels, our advice continues to be not to get too excited
or too heavily allocated. Investors who
played the head-and-shoulder topping formations made by some indexes are now
seeing how vexing a trading market can be — follow-through has so far not
developed well. I know it is difficult
for traders, but standing mostly on the sidelines now appears to be prudent.
Economically
sensitive commodities:Â Copper made
new lows this week again; lumber is
following through big time on the downside of the completed bearish triangle we
commented on two weeks ago; cotton
appears to be consolidating near its lows; and bonds are finally backing off
from their recent rally. The picture thus
remains mixed here, but with copper making new lows, these markets are clearly
NOT anticipating any significant economic recovery in the next six months yet,
which is quite significant.
 Â
A look at the numbers from our stock
lists tells a similarly mixed story that is nothing to get excited about yet. New
Highs vs. New Lows on our RS/EPS lists were
39/6, 58/10, 23/6 and 9/4 — new highs have now taken over slight
dominance but were not yet above 20 consistently. Continue to watch for something real —
like days of new highs or new lows on our lists above 50 daily and above 100 a time or two
each week again before becoming eagerly bullish or eagerly bearish. There
were 15 breakouts on the upside to new highs of stocks on our Top RS/EPS
New Highs list with no close calls and one breakdown on the downside of
four-week-plus consolidations on our Bottom RS/EPS New Lows list, with no close calls.
Close calls are stocks almost meeting our criteria that broke out of sound
bases. The environment thus remains not yet
nearly optimum on the long side or the short side.
Our
overall allocation is still relatively DEFENSIVE with 0% short and 17% long and the
remaining 83% in T-bills awaiting new opportunities. 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 up about 5%, with a mostly 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” and course “The Science of Trading.“Â
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. 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: International Game Tech
(
IGT |
Quote |
Chart |
News |
PowerRating) @57.95 (64.11) w/59 ops; and Wet Seal
(
WTSLA |
Quote |
Chart |
News |
PowerRating) @37.02
(33.7) w/31 ops. We have now booked profits on two of our four longs since the April lows and locked in profits via trailing stops
on all but one position.
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.
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.
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, until we get
more consistency in the number of downside breakouts in a given week off of our
Bottom RS/EPS New Lows lists.
As
we anticipated two weeks ago, the Fed did indeed ease rates by just .25 bp’s
last week. So far the market’s reaction
has been pretty mixed. Some technicals
have improved, but until the markets break out of the current trading range, a
summer vacation will likely be good for your profit book.
Patience is tough, but important. Wait
for good opportunities to develop with some consistency before moving.
Aggressive traders could also consider shorting the Yen.
Otherwise, the sidelines look better than churning your account.
Remember that it only takes a few weeks of a better market environment to
produce significant profits for an entire year. Wait
for a good shot before pulling the trigger.Â