Here’s Where I See Strength

April 2, 2004
Mark Boucher

Mark Boucher
is traveling today, so we will give you a short update on the US long/short
model.

The
strongest groups in the market continue to be Japan (particularly
small cap), Malaysia, Russia, selected energy, some resource areas (base metals
and oil in particular), silver and palladium, and real estate. Following this
morningâ€™s payrolls numbers, if we can get a couple good accumulation days in
major averages and then breakouts to the upside in these key leading areas, then
investors should begin to build some positions in these areas. This week we saw
good breakouts in our top sectors including; Europe â€” EWO, Real Estate â€” RIT and
DHI, Precious Metals â€” PAAS and NRD, and Resources â€” XTEX and GMR. We continue
to expect 2004 to be a volatile and risky year where sector rotation and stock
selection will be the keys to performance.

So far our US long/short model has been fully relatively inactive during 2004
(only one official trade – short TRMS), and we continue to suggest investors use
some caution until stocks meeting our criteria expand in breakout breadth.
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 on breakouts and signals as advised above. 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 had portfolios up 17% for the
year 2003) â€” all on worst drawdown of under 7%. This did not include our
foreign stock recommendations that had spectacular performance in 2003.

^Next^

This week in our
Top
RS/EPS New Highs list published on TradingMarkets.com, we had readings of
33, 46, 72, 65, and 64, with 21 breakouts of 4+ week ranges, no valid trades and
close calls in TKC and DVA. Upside breadth has improved substantially this
week. 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. This week, our

Bottom RS/EPS New Lows remained non-existent with readings of 3, 3, 3, 1,
and 1, with 4 breakdowns of 4+ week ranges, no valid trades and no close
calls. The short-side breadth remains bleak and it will be important to watch
for sector rotation and underperformance to find the best shorts.

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,”

my 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
U.S. 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 change in the
new-economy/old-economy theme appeared to be upon us. We’ve been effectively
defensive ever since, and did not get to a fully allocated long exposure even
during the 2003 rally.

Here’s Where I See Strength

BUY THE FEAR, SELL THE GREED

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