BEAR-MARKET STUDIES
 

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.

Date

Jan

Feb

2002

11

18

25

1

8

15

22

Gain / Loss %

-3

-6

0

-2

-8

3

-6

Money Flow

2

0

-8

-15

-23

-28

-37

Trend

Up

Dwn

Dwn

Dwn

Dwn

Dwn

Dwn

Rankings

GTW

31

35

36

36

36

35

33

JDSU

35

34

35

35

35

34

35

QCOM

32

33

33

30

31

31

30

SLR

36

36

34

32

30

29

29

Prices

GTW

7

7

5

5

6

5

5

JDSU

9

8

7

7

6

6

5

QCOM

47

45

46

42

35

37

33

SLR

12

11

11

11

10

10

9

The bottom four ranked stocks in the portfolio resulted in these declines during the five weeks to the end of the period shown. Gateway -21%, JDS Uniphase -39%, Qualcomm -27%, Solectron -22%. Again, the lesson is, watch the portfolio first, then gear the stock selection and action to the portfolio's trend. (The percent loss calculations are based on the stocks' actual values, not rounded prices which you see here.)

Again, the first observation to hold is, when gearing a selection of stocks to buy or sell, determine 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 direction of price movement of the individual candidate stocks.

Here next is a further example of bear operations and short-selling if you are a trader--or don't-buy-or-add-to if you are an investor--this one from the Internet Set Portfolio.

Gain/Loss% is negative. Money Flow is trending down. Trend has turned Down. When a stock is among the four lowest ranks--33 to 36--in this definitively negative environment, the probability is high that a continued drop in value of the stock will occur.

Date

Jan

Feb

2002

11

18

25

1

8

15

22

Gain / Loss %

-2

-9

-2

-5

-10

0

-9

Money Flow

6

4

-2

-8

-13

-18

-22

Trend

Up

Dwn

Dwn

Dwn

Dwn

Dwn

Dwn

Rankings

CMRC

29

32

35

35

35

36

36

JNPR

34

34

34

34

34

34

34

OPWV

35

35

36

36

36

35

35

VRSN

33

33

30

27

28

29

30

Prices

CMRC

4

3

2

2

2

2

2

JNPR

19

17

17

15

13

10

9

OPWV

10

9

7

7

6

6

5

VRSN

36

34

35

31

26

25

24

The bottom four ranked stocks in the Internet Set Portfolio on January 18 (Cash was ranked 36th, but Cash is not a stock) resulted in these declines during the five weeks to the end of the period shown. CommerceOne -33%, Juniper Networks -44%, Openwave Systems -34%, Verisign -31%.

Again, the lesson is, watch the portfolio first, then gear the stock selection and action to portfolio trends--two out of three portfolios should be down. (The percent loss calculations are based on the stocks' actual values, not rounded prices as you see here.) After short selling in these types of conditions, holding periods of approximately eight weeks seem optimum, at the end of which it seems best to offset and take profits, depending on the ensuing environment. The two portfolios above have two-week losses on January 18th of -9% and -11% respectively. The Classic Portfolio (not shown) has -5%.

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.

stocks and stock market timing best profits in the U.S.

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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