As Europe Plays Catchup, Keep An Eye On These Stocks
The correction is looking more and more like
it is over for the short-term. Europe
started the breakout to new highs and is playing catchup. We like European
small-cap value funds here, as well as Spain, Austria, energy, health care,
consumer staples, and Russian stocks, and silver stocks which are also breaking
out and leading this rally. Mid-cap and small-cap indices continue to lead in
the US market (IWS).
Key to the rally is Greenspan’s
optimism and the dollar’s renewed decline, particularly against countries
raising interest rates (UK, NZ, Australia), and against Asian currencies (SGD,
THB, and KRW) and the Ruble.
The main trend is
up and should be given the benefit of the doubt, so we suggest investors
position in the leading sectors indicated above and watch for further breakout
confirmations in other favored sectors. Yet investors should be tactical and
trading-oriented. The rally is long in the tooth without a significant
correction. Note how sensitive the markets were to Greenspan’s change in wording
concerning possible rate hikes way down the road. The market is tentative and
traders need to very nimble and flexible.
So far our US long/short model is fully on the sidelines and we
continue to suggest investors position in our favorite sectors noted above and
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. 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) — all on
worst drawdown of under 7%. This did not include our foreign stock
recommendations that had spectacular performance in 2003.
This week in our
Top
RS/EPS New Highs list published on TradingMarkets.com, we had readings of
12, 24, 56, 46, and 69, a marked improvement over last week yet not a whole week
with readings above 20. Let’s see if this rally has teeth and we can get some
legitimate trade signals in stocks meeting our criteria and breaking out this
coming 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 1, 1, 1, 1,
and 0, with no breakdowns of 4+ week ranges, no valid trades and no close
calls. The short-side breadth remains bleak and it will be important to see if
it picks up here on further corrective activity. So far we don’t see internal
evidence of a serious correction, nor do we see good internal evidence that a
new broad-based upthrust is in the making.
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.
On the long
side, we like the recent close calls from past weeks,
(
PPC |
Quote |
Chart |
News |
PowerRating),
(
NFI |
Quote |
Chart |
News |
PowerRating),
(
MBT |
Quote |
Chart |
News |
PowerRating),
(
GALN |
Quote |
Chart |
News |
PowerRating), and
(
NIHD |
Quote |
Chart |
News |
PowerRating). We would keep allocations low until the trend is
more certain and emphasize global leaders noted above until more trade signals
are generated and the trend is more certain.
Mark
Boucher