Whipsaw
Clearly,
this has been a whipsaw week for the markets, with significant downward pressure
early in the week, but with upward movement in the last few days. Therefore,
our predilection is to hold off on making a drastic move either way.Â
Let’s
look at some numbers from the week. New
Highs vs. New
Lows on our RS/EPS lists were 21/80, 19/23, 15/39, 43/15 and 34/16 as
new highs took over dominance over new lows as the week progressed. Investors
must prepare themselves for the possibility of a new leg down OR a new leg up.
On the brighter side, there were 25 breakouts on the upside with 6 breakdowns on
the downside of four-week-plus consolidations on our RS/EPS lists. However, none
of these breakouts met both our fundamental criteria and our volume
requirements. A truly strong (or weak) market would give us a handful or more of
valid breakouts in upfuel (or downfuel) stocks. Clearly, there is not yet clear
dominance on either the upside or the downside in such a manner that would
lead us to significantly increase our allocation either way. The market is still
not giving us many trading opportunities, and is, therefore, still warning us to
be cautious.
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Our
overall allocation remains quite low. We are now around 17% long (including open
profits) and 7% short for aggressive accounts using leverage (8% long and 4%
short for unleveraged, more conservative accounts).
Last week our longs rose an average of 4.37%
(and with 17% allocation, this added 0. 74% to our overall portfolio), while our
shorts rose an average of 13.79% (and with 15% starting allocation, this
subtracted —2.07% to our overall portfolio), giving our overall portfolio a
loss of around 1.33% on
the week and leaving us with around an 83.78%
gain on the year on a 12% maximum drawdown so far.
Conservative investors not using leverage show
about half these gains and drawdowns. Our three steps forward, 2.5 steps back
snail-slow gains with relatively low volatility in our total account continues,
but we have managed to keep our gains and avoid both the bloodshed and
volatility many other strategies have shown here, which is actually even more
important than cleaning up from the big moves up. 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 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. Â
Upside
breakouts meeting upfuel criteria (and still open positions) so far this year
are: Mid-Atlantic Medical Services (MME)
@20.63 w/19 ops; Downey Financial (DSL)
@45.94 w/44 ops; and last week we had no valid pattern breakouts up in stocks
meeting our upfuel criteria (see 10-week trading course). The
average gain in these stocks from breakout points of entry to Wednesday’s close
is 70%, substantially outperforming the Nasdaq, Dow and S&P for the year to
date. Continue to watch our NH list and buy flags or cup-and-handle
breakouts in NH’s meeting our upfuel criteria — but continue to add just two
per week.
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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: Global Crossing (GX)
@21.44 w/16 ops; and this last week, we had no valid pattern breakdowns in
stocks meeting our downfuel criteria (see 10-week trading course). These
shorts are down over 70% 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 up-and-handle. Here, too, remain
cautious by only adding two shorts in a week.
Remember to let
market action be your guide. Only when our opportunities grow to become abundant
will we be able to get more excited about moving our long allocation or short
allocation up to more aggressive levels. Let’s stick religiously with our
strategy, and let it tell us how aggressively or defensively to allocate and to
what vehicles on what side of the market, since the strategy is doing so well in
this market environment.