Trading Range With Bullish Bias

August 25, 2000
Mark Boucher

Last
week we had some weak follow-through on the upside and action that
was largely upside biased. We had a week with every day producing 20-plus new
highs on our Top
RS/EPS New Highs List and some very weak new low numbers on our Bottom
RS/EPS New Lows List. And we had substantially more upside breakouts of four-week-plus
consolidations than downside breakdowns of four-week-plus consolidations. The
action is getting better toward longs and more biased toward longs. But, most
important of all, we had very few valid breakouts of stocks meeting our upfuel
criteria (one actually). Thus, until we get handfuls of valid breakouts in
upfuel stocks, the environment remains one to be cautious of on both the long
and short side. Â

Let’s
look at some numbers from an analysis of our lists that shows how biased to the
upside the latest week was. New Highs versus New Lows on our RS/EPS lists were
23/3, 30/5, 36/10, 34/11, and 31/14 respectively for the latest week, Wednesday
through Wednesday. A week with 20-plus new highs each day is substantial
progress. We also had 15 upside breakouts on stocks on our new high list, and
only six downside breakdowns of four-week-plus consolidations on our new low
list. We had two new trades in Actrade
(
ACRT |
Quote |
Chart |
News |
PowerRating) to the buy-side and Nippon
Telegraph
(
NTT |
Quote |
Chart |
News |
PowerRating) to the short side. We’re also taking profits now on short
Six Flags
(
PKS |
Quote |
Chart |
News |
PowerRating). Until we get lots more buy-side opportunities with valid
breakouts in upfuel stocks, the environment remains poor for shorts and fair for
longs, and we will continue to advocate a cautious stance, with investors to add
no more than two trades per side in the next week.Â

Our
overall allocation remains low but slightly increasing. We are now around 55%
long (including open profits) and 55% short for aggressive accounts using
leverage (27% long and 27% short for unleveraged, more conservative accounts).
Last week our longs rose an average of 2.6% (and with 55% allocation this added
1.43% to our overall portfolio), while our shorts fell 2% on average (and with
55% allocation this added 1.1% to our overall portfolio), giving our overall
portfolio a gain of about 2.53% on the week, and leaving us with around a 78.5%
gain on the year (barely a new equity high) on a 12% maximum drawdown so far.
Conservative investors not using leverage show about half these gains and
drawdowns. Â

_{“Until
we can see the whites of their eyes, don’t shoot tooÂ}

much allocation at
these markets.”

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-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 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. Â

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: Ciber
(
CBR |
Quote |
Chart |
News |
PowerRating) @13.44 — now use 10.75 ops; Airbourne
Express
(
ABF |
Quote |
Chart |
News |
PowerRating) @17 — now use 15.5 ops; PKS @18.13 — now take profits (15);
S1 Corp
(
SONE |
Quote |
Chart |
News |
PowerRating) @18.13 w/18.75 ops;Â Corus
Group
(
CGA |
Quote |
Chart |
News |
PowerRating) @ 11.88 w/11.75 ops; and British Telecom
(
BTY |
Quote |
Chart |
News |
PowerRating) @125.19
w/130 ops; and last week we had valid breakdowns in downfuel stocks: NTT @55.44
w/62 ops. These shorts are down over 50% 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.
Â

Last
week helped us lean much more favorably toward releasing our cautious stance in
regard to new long-side trades. What we need this week to turn us more
aggressive is a handful of stocks meeting our upfuel criteria and breaking out
of valid patterns. 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 With Bullish Bias

BUY THE FEAR, SELL THE GREED

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