Monday, July 17, 2006

Yes but what does it all mean. Am I commited to the full green tin?

Hi Longtimer,

I have been fishing for leadership stocks since mid-May as this was the time market internals (chiefly the indicator measuring the number of NASDAQ stocks over the 50-day MA) had reached levels associated with bottoms in the past. Of course, markets have continued to decline with not a bottom in sight (pushing the market internals deeper into oversold territory) and this had made the hunt for new market leaders very difficult. My most recent weekend post was an attempt to investigate where this decline might end and when it might be appropriate to step back in given I am holding to a bullish bias.

My Collective2 portfolio, linked here, is an attempt to demonstrate a strategy to trade this bottom. On May 16th I increased my equity exposure to 75% from 30% when I considered a bottom (of sorts) in place - this was burned on its first attempt as 6 of the (then) new 9 positions were stopped out for a loss. I then tried a second wave of buying in early June and this has turned a slight net profit so far, but has reduced equity exposure from a maximum of 80% equity down to 44%. The small profit is okay - but the strategy I am looking for is a 20% gain from the bottom (an average return of my stocks), which would mean a Collective2 portfolio valued around $136,000 by the time market internals reach levels associated with an overbought market (as they did at the start of February). I have 5 positions left in the portfolio and I will be looking to add 3 more when I think the time is right.

I hope this answers your question.