Some leaders faltering

January 20, 2006
Mark Boucher

This week some negative
action in some of the leaders of the global rally has us a bit
concerned and taking partial profits may be advised in some key areas.

Japan has led the rally but is now leading on the
downside. Since this has been nearly a vertical move up since the breakout we
highlighted last year, a move down below the 50 day ma could signal the
beginning of a sharp correction of 33%-70% of the prior up move. We would take
partial profits in Japan and Korea here and keep a core position, looking to
re-add after better technical action develops or after a more major correction.

Ditto for EMâ€™s where EEM could correct down to
the 85-88 level at any time and likely will if Asia continues to deteriorate.

Oil Service, resource plays, South Africa, China,
and Brazilian banks (after a surprising 75 bp cut in rates in Brazil with MORE
coming) continue to look relatively strong.

Gold and other metals are starting to display
quite a bit of volatility as well, and these shares often peak into the Jan-Feb
period. Here we would watch for further evidence of weakness before trimming our
core positions and looking to re-buy after a further correction or better
technical action.

Januaryâ€™s been good to us in the themes we like
so far, and weâ€™d book some of this good fortune, particularly in the sectors
mentioned above, but would continue to suggest some core holdings in each and
exposure to the strongest groups. Remember that weâ€™ve advised lighter than
normal allocation to all of these as a starting point as well.

Our basic strategy of buying strictly only those
stocks meeting our rigid criteria and selling short those doing the same on
breakouts has had more new trades in the last month than in the six months
prior.

While this rally may seem quite attractive to
many short-term traders, we are continuing to suggest more than normal caution
and milder than normal allocation to top global themes, and for investors to
expect volatility and less than optimum markets. There remain a number of big
risks, and the bull market is now older than average. We suspect that markets
will continue to march irregularly higher throughout the year but urge closely
monitoring key risk factors. A dollar or Yen crisis, a US consumption or housing
crisis, or an increase in Asian inflation (or even Asian Flu) are the primary
concerns investors should watch â€” and I guess another terrorist act should be
added to this list after this week. Therefore cautious exposure, trading in and
out with minor trends, is probably yet again the best approach to 2006. We are
completing our â€œ2006 Investment Roadmapâ€ for traders and investors and hope to
be able to offer this to TradingMarkets.com clients soon. We believe it is one
of the most definitive guides to trading in the coming year and it includes our
best analysis of global themes, trends, and expectations for the year as well as
what to watch for changes in the environment. Ask for it!!

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.

Mark Boucher

Mark Boucher has been ranked #1 by Nelson’s World’s Best
Money Managers for his 5-year compounded annual rate of return of 26.6%.

Boucher began trading at age 16. His trading helped finance his education at the
University of California at Berkeley, where he graduated with honors in
Economics. Upon graduation, he founded Investment Research Associates to finance
research on stock, bond, and currency trading systems. Boucher joined forces
with Fortunet, Inc. in 1986, where he developed models for hedging and trading
bonds, currencies, futures, and stocks. In 1989, the results of this research
were published in the Fortunet Trading Course. While with Fortunet, Boucher also
applied this research to designing institutional products, such as a hedging
model on over $1 billion of debt exposure for the treasurer of Mead, a Fortune
500 company.

For those not familiar with our long/short strategies, we
suggest you review my book The Hedge Fund Edge. 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 of 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.

Some leaders faltering

BUY THE FEAR, SELL THE GREED

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