Yet Another Intermediate-Term Bottom Attempt
Whether
this week will mark the lows for these indexes prior to a decent
rally or not, we cannot yet be sure. Forget
about picking the bottom, which is at best, an academic exercise.
So far there remains a dearth of reliable opportunities for longs or
shorts in this environment. That means we
must remain defensive and await more reliable opportunities in stocks breaking
out of valid patterns that meet our fuel criteria in either direction.
Continue to have a “show-me” attitude toward the market for
now.
Let’s
look at some numbers from the week. New
Highs versus New
Lows on our RS/EPS lists were 52/25, 32/39,Â
5/70, 3/53, and 3/67.There is
huge and increasing marked dominance on the short side. The market is still behaving like a downward-trending trading
range. Value stocks and some small-cap
indexes may have indeed bottomed for this cycle, but until the broad breadth of
the market joins the party, investors are advised to tread cautiously.
There were roughly six breakouts on the upside with 27 breakdowns on the
downside of four-week-plus consolidations (a good week will show several times
that many) on our RS/EPS lists. We had
several close calls on the downside, but none that fully met our criteria.
We’re just not quite there yet on either the short side or the long, so
let’s let the impatient traders get whipsawed while we wait for real
opportunities.
Our
overall allocation is now 100% in T-bills awaiting new opportunities for the
first time since 1998.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 down about 1.3%, with a full cash position.
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
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.
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.
We’ve been effectively defensive ever since, and are now as
defensive as possible.
Upside
breakouts meeting up-fuel criteria (and still open positions) so far this year
are: none; and last week we had no valid
pattern breakouts up in stocks meeting our up-fuel criteria (see 10-week trading
course). Continue to watch our NH list
and buy flags or cup-and-handle breakouts in NH’s meeting our up-fuel criteria —
but continue to add just two per week.
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 down-fuel criteria (and still
open positions) in: no open positions at
the moment; and this last week we had no
valid pattern breakdowns in stocks meeting our down-fuel criteria (see 10-week
trading course). 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.
Here, too, remain cautious by only adding two shorts in a week.
Our
strategy remains cautious and simple: protect
against whipsaws by waiting patiently for real low-risk, highly reliable trades
that meet ALL of our criteria, or until it is clear that the environment is very
biased directionally. Continue to wait
and watch for solid and clear group leadership, which remains fairly absent.
Our goal remains to make consistently better than market returns with
relatively less risk. When valid breakouts of up-fuel or down-fuel stocks become abundant
again, we’ll pounce with both hands. Until
then, we must tread cautiously to avoid getting chewed up.Â