10-Year Below 4%, But There’s An Even Bigger Story Than That…

• June 3, 2005
• Mark Boucher

Bond Market
Celebration and Thank God for Democratic Forces in Europe

The bond market celebrated
forcefully this week as news of softer growth and jawboning by Fed officials
hinting that rate hikes were nearly over sent bond yields below the magic 4%
level.   Global bonds had already tested all-time highs in many cases and
continued their rallies.  Commodities also recovered and have bounced off former
resistance levels, making them support, which is positive action.  Much of the
rally in commodities came from oil — which tested its 200 ma successfully and
has now moved above its downtrend channel line since the March highs.  As long
as bonds and inflation gauges are not reacting negatively to higher oil and
commodities prices, then stocks, bonds, and commodities CAN rise together, at
least temporarily.  A swift new high in oil prices would not be desirable
however.  Stocks continue to crawl higher, and though breadth is not clearly
bullish, its upward bias continues to deepen.

Bond trading was just ONE of
the big news items this week.  In January and February we commented that the
dollar decline was hitting magazine headlines and that a dollar rally of
substantially more power than the markets expected was likely.  We also pointed
out the coming constitutional votes coming due in France and The Netherlands. 
This week, another HUGE item was the explosion of the dollar and collapse of the
Euro on the back of the French and Dutch popular votes against the European
Constitution.  Hurray for the forces of democracy in Europe!! 

The proposed European
Constitution was an absolute mess of a document that did little else but expand
socialism and create a new level of bureaucracy in Brussels.  Neither the right
nor the left could tolerate it.  In France, where the document was authored,
nearly 70% of the population turned out to reject the constitution by a 55%-45%
margin — what would in a US Presidential election be termed a “landslide.”  In
The Netherlands 60% of the population voted and it was even more substantial a
blow to the constitution with 63%-37% against.  Both the turnout and depth of
the No vote were beyond the most optimistic forecasts. 

The EMU is still alive and well
and that is monetary union and a common currency in Europe.  Despite the
sell-the-rumor, buy-the-news reaction of the Euro, it is still a viable currency
even without a constitution to further unite European countries.   However the
big picture critical story may be the realization that Europeans want to
maintain a degree of sovereignty and have their countries remain countries, not
mere States paying homage to a new bureaucracy in Brussels.  And they don’t want
a new bureaucracy thrust upon them by their politicians without their consent. 
Socialist, high-tax, high-unemployment countries like France, Germany, and Italy
don’t want to be “Anglisized” or forced toward free market reforms.  Low-tax,
low-regulation, high growth countries like Ireland, parts of the UK, and Eastern
Europe don’t want the high-tax, massive regulation, and no-growth rules of the
Socialist nations.  Thank God for that.  The dollar has rallied massively here
and likely will react, but technically is likely to ultimately test the major
support level around 1.20 against the Euro.  As long as the dollar rally doesn’t
break swiftly above 1.20 Euros in short order it is likely to be mildly positive
in the short-run for the US stock market.

 

We still advise patience and
caution for long-term investors, and ginger trading for traders.  We like
homebuilders, defense, softdrinks, biotech, and communications equipment on the
long side, and the rare stock that breaks out meeting our criteria in full.   
We continue to suspect that this is an upward bias trading range environment and
a meat grinder for trend following traders and investors.   If more breakouts
develop and the rally turns into a new bull leg, a host of stocks meeting our
criteria will breakout with more plurality in the weeks ahead — and those will
be the ones to buy.

 

This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 69, 76, 85, and 126 with 43 breakouts of 4+ week ranges, no
valid trades and one close call in RADS.  This week, our bottom RS/EPS New Lows
recorded readings of 11, 7, 14, and 12 with 0 breakdowns of 4+ week ranges, no
valid trades and no close calls.  Valid signals remain in place in LCAV and CHTT
on the long side and none on the short-side.    Broadening strength in our Top
RS/EPS new highs will lead us to venture slightly more on the long side if the
rally continues to build breadth.

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 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.

My advice remains:  Tread lightly and carry a big wad of cash awaiting a better
odds environment.  A soft landing later this quarter could set the stage for
some fantastic opportunities down the road a ways.

 Mark Boucher