Bear Operations--Stocks at the Median

IN A BEAR MARKET the best that investors can do is not buy--and wait. For speculators, opportunities prevail. Here is one example of aligning successful short-term short sales in high performance stocks within deteriorating portfolio conditions. The following table shows what happens when a stock's ranking level crosses median (18.5--bold faced) heading down. Each of these four companies dropped between 26% to 54% in value in three to six weeks. (Prices are rounded to whole numbers to conserve space. See How to Use This Site for details.)

Portfolio characteristics are the tip-off to a bear market. Look at this example. In the table below, the top blue bars (rows 4, 5, and 6--beneath the dates) show the weekly, growing negativity of the overall portfolio. The full versions of these tables may be seen each week at the bottom of each portfolio's Weekly Rankings spreadsheet--see any of the three big files, Classic, Paradigm 2000, or Internet Set. Here, the weekly Gain/Loss% is negative. The Money Flow is negative and growing worse. The Trend is down. In this kind of environment, when a stock demonstrates that it is weaker than half the portfolio by falling through the median rank, the probability is high that a continued drop in value of the stock will occur.

These examples are from the Paradigm 2000 Portfolio. The stocks are EMC Corporation, Oracle, Sanmina, and Solectron. The total portfolio's negative characteristics are the unanimous filter which permit a shorting strategy and facilitate the short-side profits in the individual stocks.

Date	Jan	Feb				Mar
2001	26	2	9	16	23	2	9	16
Gain / Loss %	0	-4	-8	-1	-7	-8	-3	-10
Money Flow	-13	-10	-19	-28	-38	-46	-55	-64
Trend	Dwn	Dwn	Dwn	Dwn	Dwn	Dwn	Dwn	Dwn
Rankings
EMC	19	18	22	28	30	30	32	33
ORCL	14	19	25	26	26	27	29	29
SANM	7	4	14	20	22	23	23	24
SLR	8	9	17	18	19	19	18	23
Prices
EMC	79	72	56	54	45	38	34	33
ORCL	30	28	24	24	22	17	16	14
SANM	49	44	38	35	32	29	31	26
SLR	39	40	30	31	30	29	26	20

The important observation to hold is, when gearing a selection of stocks to buy or sell, pay close attention first to the general market behavior of the whole portfolio of which the stocks are a part. This will strengthen the probability of success in the expected course of the individual candidate stock.

Here is another example of bear operations, this one from the Internet Set Portfolio.

Date	Jan	Feb				Mar
2001	26	2	9	16	23	2	9	16
Gain / Loss %	2	-10	-11	1	-11	-12	-8	-12
Money Flow	-33	-31	-33	-35	-37	-39	-43	-46
Trend	Dwn	Dwn	Dwn	Dwn	Dwn	Dwn	Dwn	Dwn
Rankings
CMRC	23	18	19	19	21	21	28	30
EXTR	18	21	22	24	24	25	27	26
EXDS	19	16	20	21	23	23	20	21
JNPR	11	12	17	20	20	22	23	23
Prices
CMRC	33	29	24	24	21	16	11	9
EXTR	47	39	31	32	28	22	19	19
EXDS	25	23	17	16	15	14	13	10
JNPR	119	101	84	80	75	54	55	53

Observe the profile similarity of overall portfolio behavior to that of the first example above, Paradigm 2000. Here, with the Internet Set, all three characteristics, Gain/Loss%, Money Flow, and Trend are equally miserably negative and therefore conducive to short selling and certainly not buying or investing.

Crossing median downward resulted in these declines over three to six weeks to the end of the period shown. Commerce One -63%, Extreme Networks -51%, Exodus -41%, Juniper Networks
-34%. Again, the lesson is, watch the portfolio first, then gear the stock selection and action to the portfolio's trend.

Bear Operations II--Stocks at the Bottom

RESULTS SIMILAR to those above are available using the bottom ranked stocks in a portfolio when conditions are ripe. Note that here, in the table below, on January 18, 2002, the weekly Gain/Loss% is negative. The Money Flow is trending down. The Trend has turned down. In this kind of environment, when a stock is among the four lowest ranks--33 to 36, the probability is high that a continued drop in value of the stock will occur. But, as always, you will want to go where where common sense tells you, where it's easiest and most natural. Go with the crowd. In this case, you will want to go with the two out of the three portfolios showing the greatest two-weeks' losses.

These examples are from the Paradigm 2000 Portfolio. The stocks are Gateway, JDS Uniphase, Qualcomm, and (again) Solectron. The total portfolio's negative characteristics are the unanimous filter which permit a shorting strategy and facilitate the short-side profits in these individual stocks.

These are not trades. They are observations, incomplete and anecdotal. They illustrate past correlations between portfolio characteristics and individual stock-price behavior--when portfolios are sinking in a certain way, selected stocks show significant drops in value. It is tempting--and appropriate--to build rules out of all this and similar patterns. But remember my comments on trading rules. Click here to re-read them.

The contrast in price levels of internet stocks between last January and this January is quite interesting. At these current low prices, institutions have great difficulty operating and therefore abandoned holdings and purchase-sale activities, leaving these markets to short-term speculators. Dollar-volume liquidity has fallen to such small levels that a number of these Internet Set Portfolio stocks become disqualified, but no 'new era' group has clearly emerged yet to take their place. Biotechnology may develop as the next best candidate. Those stocks will be more volatile than the internet stocks if they do become replacements.

A note of caution. These current examples of Bear Operations II are still in effect as of posting date (February 22, 2002), but now in their fifth week, they are well matured. It is best to enter positions the week in which the third out of three conditions turns negative. Usually it is the Trend.

Counter-bear Operations

PARADIGM 2000 will serve as the model again. You are already familiar with its overall portfolio statistics from above. These may be the most important information on the portfolio-table pages on the site. If not in gear with them, individual, selected stocks are poor probability bets win.

Nevertheless, steady preparation for turnaround and inauguration of the new bull market when it arrives is desirable. The way to do this is to watch the progress of inidividual stocks climbing through weekly rankings especially after crossing median upward.

Applied Materials, Dell, and Novellus are climbing the ranks while their prices stabilize or, if declining, are well cushioned compared with the stocks shown in Bear Operations above.

PARADIGM 2000 Stocks to Watch as of Now (16 Mar 2001)

Date	Jan	Feb				Mar
2001	26	2	9	16	23	2	9	16
Gain / Loss %	0	-4	-8	-1	-7	-8	-3	-10
Money Flow	-13	-10	-19	-28	-38	-46	-55	-64
Trend	Dwn	Dwn	Dwn	Dwn	Dwn	Dwn	Dwn	Dwn
Rankings
AMAT	22	21	20	19	17	10	9	9
DELL	23	20	19	17	18	13	12	11
NVLS	6	6	13	11	6	5	5	3
Prices
AMAT	48	48	43	48	48	45	47	44
DELL	27	25	24	24	23	22	23	24
NVLS	44	43	37	43	45	41	43	41

Novellus was in "This Week's Best / Top Ten" two weeks ago and remains in the top 20th percentile Shorter-Term as this is written. Applied Materials steadily approaches the top 30th percentile in "This Week's Best", up from the 84th percentile last fall. Dell's ranking progress in the table above, as does its pricing sequence, appears the steadiest of the lot. Could a major competitor be getting out of the PC hardware business leaving Dell and other survivors larger market share?

Bear markets always end, and when they do, there's multa pecunia to be made--mirabile dictu.

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