As Far As Rallies Go, This Is Not An Outstanding One

• July 15, 2005
• Mark Boucher

Market
internals remain somewhat mixed though with more of a bullish bias
continuing.  Our best guess is that this is a retest rally that will either test
or just slightly exceed the highs of earlier this year before petering out. 
Short-term oriented higher risk traders may find some tradeable action here, but
we still advice mostly caution for longer-term investors.  Emerging markets in
Latin America, Eastern Europe and Asia are leading the advance.  Oil and
resources remain strong though vulnerable to a peak in oil prices.  European
financials and utilities still seem to be faring well in response to lower bond
yields.  Biotech seems to be a newer leader in the current rally that traders
could watch.  Softdrinks and housing continue to lead on the upside.  Midcap
value and small cap sectors continue to do well relative to other segments,
though small caps are up against a valuation resistence level here.  Global
stocks have responded well to the London terrorist bombing — anticipating more
liquidity on the way.

Breadth on our TopRS/EPS New
highs versus new lows  lists is bullishly biased with new lows and potential
shorts practically non existent. 

This week in
our Top RS/EPS New Highs list published on TradingMarkets.com, we had readings
of 69, 152, 205, 153, and 98 with 55 breakouts of 4+ week ranges, no valid
trades and close calls in RADS and BZH.  This week, our bottom RS/EPS New Lows
recorded readings of 7, 1, 0, 0, and 0 with 0 breakdowns of 4+ week ranges, no
valid trades and no close calls.  One valid signal remains in place in VLO on
the long side and in IDT and UIS on the short side.    We advise caution on both
sides of this aisle.

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.

The market is
tipping its hat toward the rally continuing on an intermediate-term basis with
somewhat stronger breadth.  Yet as market environments go, this is NOT an
outstanding one, and investors should pare back on allocation and play with less
than full strength until a CLEARLY better environment emerges in our opinion. 
There are lots of trap doors out there. 

Mark Boucher