Uncertain Environment Remains
face=”arial, helvetica” size=2>Last week featured an
attempted double bottom with some nice rallies, unfortunately on weak
volume. The mix of new highs and new lows on our lists grew in bias to the long
side, but there is no really definitive action on either the long or the short
side, for us to get excited about. We had one additional long trade and no
shorts on the week, along with one stop-out on the short side in Ventro
(
VNTR |
Quote |
Chart |
News |
PowerRating),
where we took a small profit via trailing stops.Â
face=”arial, helvetica” size=2>Once again our Top RS/EPS New
Highs list showed some days with above 20 highs and some days without. Our Bottom
RS/EPS New
Lows list languished with fewer than 10 issues per day. Clearly it remains
not an ideal environment for adding new longs or new shorts with any kind of
serious allocation. Breadth and volume remain poor in both directions. Therefore
we’ll continue with our defensive posture of only adding two trades in either
direction in a given week — and continue to allocate just 7% to new trades.
This
past week, all of the breakouts of four-week-plus trading ranges were on the
long side. Orthodontic Centers of America
(
OCA |
Quote |
Chart |
News |
PowerRating) broke out but the
PE/Earnings Growth was unfavorable and funds were too high. The Coastal
Corporation
(
CGP |
Quote |
Chart |
News |
PowerRating) had a low-volume breakout, poor PE/Earnings Growth, too
low a long-term growth rate and debt and funds too high. El Paso Energy
(
EPG |
Quote |
Chart |
News |
PowerRating)
had no momentum to the quarterly earnings growth rate (even though debt was too
high, that wouldn’t matter in this case because this is a high-debt
industry).Â
MiniMed
(
MNMD |
Quote |
Chart |
News |
PowerRating) had no solid pattern and PE/EG again was poor. Toll Brothers
(
TOL |
Quote |
Chart |
News |
PowerRating)
had a GR too low and funds too high. Mutualfirst Finl
(
MFSF |
Quote |
Chart |
News |
PowerRating) was one that
was just barely not a turnaround (65% earnings growth one quarter instead of
70%) but did break out of a nice tight pattern and was probably the best of the
bunch that didn’t quite meet our criteria. Finally, Alliance Capital
(
AC |
Quote |
Chart |
News |
PowerRating)
broke out again on good volume and met all of our criteria. Since we could add
this new position while still locking in a profit on our first long position in
AC, this is the trade we took on the long side.
face=”arial, helvetica” size=2>Our overall allocation remains low.style=”mso-spacerun: yes”> We are now around 31% long (including
open profits) and 42% short for aggressive accounts using leverage (16% long and
21% short for unleveraged, more conservative accounts).style=”mso-spacerun: yes”> Last week, our longs gainedstyle=”mso-spacerun: yes”> an average of 2.7% (and with 31%
allocation, this added 0.84% to our overall portfolio), while our shorts rose
4.6% (and with 42% allocation, this subtracted 1.93% from our overall
portfolio), giving our overall portfolio a loss of about 1.1% on the week, and
leaving us with around a 77% gain on the year (just 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.
face=”arial, helvetica” size=2>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, of 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.”style=”mso-spacerun: yes”> 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. Â
face=”arial, helvetica” size=2>Buy trades are taken only on
valid breakouts of stocks that also meet our up-fuel criteria.style=”mso-spacerun: yes”> 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 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.
face=”arial, helvetica” size=2>Upside breakouts meeting fuel criteria (and still
open positions) so far this year are: Alliance
Capital
(
AC |
Quote |
Chart |
News |
PowerRating) (@44) w/ 46.5 ops; GBC Bancorp
(
GBCB |
Quote |
Chart |
News |
PowerRating) @30.38
w/33 ops;style=”mso-spacerun: yes”> ACLN
(
ACLNF |
Quote |
Chart |
News |
PowerRating) @30.5 w/34 ops; and
this last week we one valid pattern breakout up in stocks meeting our up-fuel criteria (see 10 week trading
course): Alliance
Capital
(
AC |
Quote |
Chart |
News |
PowerRating) (@51.44) w/ 44.5 ops (we now have a double position in AC as
this was a pyramid). face=”arial, helvetica” size=2>The average gain in these stocks from
breakout points of entry to Wednesday’s close is 69%, substantially
outperforming the Nasdaq, Dow, and S&P for the year to date.style=”mso-spacerun: yes”> Continue to watch our NH list and
buy flags or cup-and-handle breakouts in NHs meeting our up-fuel criteria.
face=”arial, helvetica” size=2>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 position) in: Ciber
(
CBR |
Quote |
Chart |
News |
PowerRating)style=”mso-spacerun: yes”> @13.44–now use 12 ops; Airborne Freight
(
ABF |
Quote |
Chart |
News |
PowerRating) @17–now use 16 ops; Six Flags
(
PKS |
Quote |
Chart |
News |
PowerRating)
@18.13–now use 16.75 ops; and Ventro
(
VNTR |
Quote |
Chart |
News |
PowerRating) @13.94–out on 13 ops;
(
AMZN |
Quote |
Chart |
News |
PowerRating) @31.38
w/38 ops; and
(
SONE |
Quote |
Chart |
News |
PowerRating) @18.13 w/21 ops.
Last week, we had no valid breakdowns in down-fuel stocks.
face=”arial, helvetica” size=2>These shorts are down over
50% from breakdown levels on average so
far this year (before current prices or exits).style=”mso-spacerun: yes”> 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.style=”mso-spacerun: yes”> Â
The
trend of the market continues to be not wildly dominant in any direction
now. Longs have had the upper hand, but shorts gained strongly over the latest
few weeks. Neither the long nor the short side look like great opportunities in
which to aggressively position right now to me. Nonetheless, we’re near all-time
equity highs. Remember that when you have a strategy that can benefit from up
markets, down markets, and sideways markets, that your profits aren’t dictated
by what direction the market is trading at — but rather by how in sync with the
market your positions are, and by the action of the select group of stocks that
you’re trading.
While
this is a tough environment for many traders and it is certainly not even
remotely close to ideal for our strategy, we are continuing to eke out higher
and higher profits from our long/short strategy. Let’s stick with it! Remain
defensive on both the long and short side this week and don’t add more than two
stocks in a week on either side. Also only add positions in stocks that meet all
of our rigorous upfuel and downfuel criteria and have valid breakouts.
In
this way, we’ll continue to let the market action determine our allocation and
posture. A couple of follow-through days on the upside next week would be very
constructive and would verify a double bottom and the possibility of a
catch-able rally. Until then, remain defensive and cautious from both sides.
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