My Favorite Markets

September 5, 2003
Mark Boucher

We have been discussing how global markets have
been breaking out for several weeks, and this week the S&P
finally confirmed the global breakout in equities with a strong-volume close
over 1025. Breadth is expanding SOME, but not markedly, so investors can expect
a slow liftoff following the breakout. The strongest remain strong, although
some rotation may develop.

Cyclicals, industrials, small cap (growth now but value very soon, in response
to a rising inflation environment), and materials sectors, along with metals
shares are leading and doing well. Asia should continue to lead on the upside,
although a consolidation or correction is long overdue. Our favorite markets
are Asia in general, Thailand, India, China, South Africa, Eastern Europe, metals,
and resources.

Investors should continue to watch the party killers:

1. Over 4.75% on 10-year government bonds (this week European and Japanese
long bonds fell to new lows)

2. Oil over $38-$40

3. A fast-plummeting dollar

4. A CLEAR and strong successful terrorist
attack in the US or on a major US installation. (Was the power outage terrorism?
An Islamic group claimed credit and the investigation team claims that they
donâ€™t know what caused the outage but they do somehow know it wasnâ€™t
terrorism, which seems strange if they donâ€™t know the cause)

The euro has fallen below the 1.10 support level and should now test the 1.02-1.05
support level, which may later this year prove a very good support level to
buy. The AUD broke down but the CD has nearly broken out on the upside so the
plurality on commodity currencies is not clear here. Commodity currencies should
lead the next currency move up in response to clearly stronger global demand.
The yen is holding up well, too well in fact, as the BOJ has intervened again
to keep it under the critical 115 level. Gold and silver stocks creep ever higher
while the metals display surprising strength to hold up while the currencies
are weaker. Are global investors beginning to catch on that gold itself is the
only refuge to competitive devaluations?

Commodities are also gaining relative strength as weâ€™ve been expecting.
A good volume close by the CRB index above 244 is a breakout of a five-month
base, and investors could buy futures with a 229 ops on such a breakout as commodities
models point higher with global leading indicators moving up.

Our internal breadth tools are improving in the US market as well as global
breadth indicators â€” though not sharply so, yet. Last week our Top RS/EPS
New Highs list stayed above 20 each day once again, while breakouts expanded
to 31, but breakout quality needs to improve.

Investors should continue to cautiously add stock exposure as trade signals
are generated that meet our strict criteria, as well as allocate to our favorite
segments. Our model portfolio followed in TradingMarkets.com with specific entry/exit/ops
levels from 1999 through May of 2003 was up 41% in 1999, 82% in 2000, 16.5%
in 2001, 7.58% in 2002, and we stopped specific recommendations up around 5%
in May 2003 (strict following of our US only methodologies should have portfolios
up over 13.9% ytd by our calculations) â€” all on worst drawdown of under
7%.

Last week in our Top RS/EPS New Highs list published on TradingMarkets.com,
we had readings of 78, 69, 122, and 138, accompanied by 31 breakouts of 4+ week
ranges, no valid trades and one close call in
(
DISH |
Quote |
Chart |
News |
PowerRating). With New Highs above
20 consistently the assault on a valid breakout of this trading range is gaining
credibility. Position in valid 4 week trading range breakouts on stocks meeting
our criteria or in close calls that are in clearly leading industries, in a
diversified fashion.

Bottom
RS/EPS New Lows are still quite weak (through improving now) with no new
lows this past week. The short-side remains bleak, though health care and consumer
staple indexes are clearly underperforming and should make up a sizeable percentage
of any short exposure for those desiring some.

For those not familiar with our long/short strategies, we suggest you review
my book The
Hedge Fund Edge, my course “The Science of Trading,” video
seminar where I discuss many new techniques, and my latest educational product,
the interactive training module. 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.
In the US. market, continue to only buy or short stocks in leading or lagging
industries according to our group and sub-group new high and low lists. We continue
to buy new long 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 of change in the new-economy/old-economy
theme appeared to be upon us. We’ve been effectively defensive ever since.

No short-side opportunities have developed via our strategy for some time.
We also like conservative gold stocks, like FCX pfd A and
(
NEM |
Quote |
Chart |
News |
PowerRating), some broad
EM exposure like DEMSX, Eastern Europe, India, China, Thailand, and South Africa,
in particular.

The stalemate is starting to give way to a new leg higher. Foreign markets
are leading and will continue to outperform. Gold, resources, and our close
calls should give investors all the selections they need to participate with
caution in this next leg up.

Until next week,

Mark Boucher

My Favorite Markets

BUY THE FEAR, SELL THE GREED

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