Trading Range Fake-Out

September 15, 2000
Mark Boucher

Just
as it began to look like the market would show definitive action to the plus
side, the Nasdaq hit resistance and did a belly-flop reversal to the downside.
The trading range continues with a slight upward bias.
Despite the fireworks, the long-side continued to show more than 20 new
highs on our daily Top
RS/EPS New High List, along with fewer than 20 new lows on each day on our Bottom
RS/EPS New Low List.The buy-side
still has the upper hand, but neither side is worth getting very excited about
yet.Let’s
look at some numbers from the week.New
Highs vs. New Lows on our RS/EPS lists were 32/11, 41/11, 42/7, 47/12,
and 45/14 respectively for the latest week, last Thursday through
Wednesday. There were roughly 25 breakouts on the upside with only five
breakdowns on the downside of four-week-plus consolidations on our RS/EPS lists.
The problem remains upside breakouts were almost all in stocks that in someway
failed to meet our upfuel-plus-valid-breakout criteria. We thus had a decent amount of stocks to look at, but little to do
as far as new trades are concerned on the week — one new long in Key Productions
(
KP |
Quote |
Chart |
News |
PowerRating).
The environment is more conducive to longs than shorts, but not one to
get aggressive towards in either direction.We
will continue to advocate a cautious stance, with investors to add no more than
two trades per side in the next week. Our best guess is that if this market can
get through October without a nasty spill (below 3600 Nas) then most of the
major averages will be set to make new all-time highs, but that the rally will
not be a wonderful one for finding the type of stocks we favor, and it will be a
frustrating stop-and-start-type rally similar to what we’ve seen since May.

Our
overall allocation remains somewhat cautious.We
remain around 70% long (including open profits) and 13% short for aggressive
accounts using leverage (35% long and 7% short for unleveraged, more
conservative accounts).Last week
our longs rose an average of 1.44% (and with 70% allocation, this added 1% to
our overall portfolio), while our shorts fell 4.68% on average (and with 13%
allocation, this added 0.6% to our overall portfolio), giving our overall
portfolio a gain of about 1.6% on the week and leaving us with around a 77.6%
gain on the year (1.1% off of new equity highs) on a 12% maximum drawdown so
far. Conservative investors not using leverage show about half these gains and
drawdowns.Our snail-slow gains continue.

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.”
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
upfuel criteria.Shorts are similarly
taken only in stocks meeting our downfuel 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 could 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.
We’ve been effectively defensive ever since, and continue to be.

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 downfuel criteria (and still
open positions) in: Corus
Group
(
CGA |
Quote |
Chart |
News |
PowerRating) @ 11.88 w/10 ops; and Blockbuster
(
BBI |
Quote |
Chart |
News |
PowerRating) @8.94 w/10 ops. These shorts are down over
43% 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 downfuel 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.

We
now need a week of abundant breakouts that meet our criteria on either the
upside or downside in order to release our cautious stance toward either longs
or shorts. Only when our opportunities grow to become abundant will we
be able to get more excited about moving our long allocation up to higher levels.
Until we can see the whites of their eyes, don’t shoot too much allocation at
these markets. We’re doing quite well this year so far, given the market
environment — so let’s stick religiously with our strategy and let it tell us
how aggressively to allocate and to what vehicles on what side of the market.
Enjoy the ride. Remain defensive and cautious during the week ahead.

Trading Range Fake-Out

BUY THE FEAR, SELL THE GREED

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