Trading Range Is The Right Name
Breadth
is poor now on both the upside and the downside as reflected in the decline of
both new highs and new lows on our Top
RS/EPS New Highs list and our Bottom
RS/EPS New Lows list. The market
continues to behave more like a trading range than anything else.Â
Continue
to watch carefully the breadth indicators mentioned in our column
of two weeks ago for two or more of them to show up and announce a more
reliable up-trend starting to take place.Â
I
continue to believe that the one thing more important than breadth indications
is leadership. So far, leadership is
lacking on the upside and downside in this trading range.
Medical device companies look like the best bet for upside leadership,
but even here the plurality is not yet meaningful.
So far the number of leading stocks that have up-fuel, or nearly have up-fuel,
and are breaking out of valid four-plus-week bases on good volume and price
patterns (TBBLBG’s — see my courses) remains quite low.
It does usually take many weeks and even months off of a bottom before
leadership breakouts develop in strong numbers — but the numbers so far have to
be disappointing to the bulls. Let’s
watch carefully and see what the market will give us.
In
the meantime, we continue to suspect that a sustained
rally is unlikely until economic growth is more assured and the uncertainty over
the War on Terrorism is clearer. Â
Investors
should remember that the markets are EXTREMELY RISKY because they are reacting
to news with violent volatility. With
this much uncertainty in the market, sentiment can change from bullish to
bearish on a dime on any shift in news. That’s
why we continue to advocate caution.
Unfortunately,
economically sensitive commodities are now universally bearish — cotton, copper
and lumber all made new lows this week, while bonds made new highs.
No solid bottom formations yet in commodity currencies either.
Commodities are thus still clearly discounting recession with no recovery
yet in sight. Corporate bond
spreads also continue to widen — during the beginning of every other recovery
since WWII, bond spreads narrowed prior to the commencement of the recovery. So
most other markets are not discounting a recovery yet.
Earnings are likely to be quite negative in the weeks ahead, but the
shift in sentiment from news is likely to be the biggest factor in shaping
markets this quarter, and that is an unknown. It
would actually be surprising if the rally off of such oversold levels couldn’t
do better. From a volume standpoint, the
market rally appears intact so far — but investors are still advised to be
cautious.
Let’s
look at the breadth numbers on our lists for the week.
Top
RS/EPS New Highs vs. Bottom
RS/EPS New Lows for the latest week were 6/13, 7/13, 16/8, 20/8 and 13/11.
Breadth is trading range indicative — with no clear dominance by shorts
or longs and neither showing 20 or higher consistently on the week.
Breakouts vs. breakdowns of four-plus-week consolidations on our lists
for the week were a distressingly pathetic 1/1, 0/1, 4/1, 2/2 and 4/3.
No close calls on either side or valid trades on the week.
In a good market we would expect dozens of breakouts each day with dozens
of close calls or valid signals each week. Developing
many breakouts of nearly up-fuel criteria stocks is the most important component
of determining whether this rally is playable or not.Our
overall allocation is now SUPER DEFENSIVE with 100% 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 12.67%, with a heavy cash position. Â
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
new 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: None currently. If
we get two or more of the above breadth criteria for the overall market
developing from here on, we’ll then drop the two-per-week only advice on longs —
but until that develops, let’s remain somewhat cautious.
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 currently. 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 per week.
We
still suspect that either new lows or a retest of recent lows will develop over
the next 5-20 weeks until solid evidence of recovery begins to emerge.
But let’s let the market show us with breadth and then leadership
measures if a really playable rally can materialize off of this fall’s lows.
Until we get a couple of breadth indications or handfuls of valid
breakouts of four-plus-week consolidations of up-fuel stocks daily, the benefit
of doubt belongs to the bears and to being cautious.
Let’s be patient and watch what happens with the recession and new War on
Terrorism while paying super-close attention to clear market reactions to events
and to internal market dynamics.