Beware of bonds, here’s why

In our “2006 Investment Roadmap” (details below) one of the
most important charts we highlight is the long-term chart of the 10-year bond
yield since 1979, which contains the entire SECULAR bull move in bonds, and bear
move in interest rates since the GREAT INFLATION of the 1970’s ended. 10-year US
government bond yields peaked at nearly 16% in October of 1981 and dropped by
more than half by 1986, prior to the run-up to 1987 in interest rates that ended
up putting long-rates into a broad trading range for six years. From that 1987
peak in rates (which led to the market crash in stocks by the way), long-rates
have developed a down trending channel, which has been intact since then, for
nearly 20 years. The high of that long-term down trending channel in 10-year
bond rates was tested or approached in 1989, 1990, 1994, 1997, 2000 and RIGHT

Right now the 5%-5.1% area represents a test of this major down trending channel
that has defined the trend in US (and global) bond rates for almost 20 years. We
believe investors should watch this test VERY CLOSELY. A breakout significantly
above 5.1% would likely signal a significant change in the disinflationary
global environment that should be monitored with heed. I suspect that a move
over 5.1% in the long-bond rate will increasingly begin to negatively impact
global stock markets from here on in.

While the markets have only begun deteriorating INTERNALLY to this point and
have actually hung on fairly well in the face of higher rates, a move over 5.1%
and continuation higher here and now in particular is something that would
substantially increase the risk of holding net long stocks as well as the shock
risk to the market environment in a way that investors should not overlook. It
is likely that bonds will at least stall in their decline here, but if 5.1% or
so gives way and bonds head lower yet again, that will be a degree of risk
similar to 1987 that investors should not be complacent about. Watch carefully

Meanwhile the market is STARTING to give better hedging opportunities to offset
net longs in the market. Utilities and interest sensitive (like
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leading on the downside with autos, publishers, and auto parts, but these are
now starting to be joined by the likes of some retails, biotech, consumer
finance, housing, and managed care. Note carefully too how REITS held up well
until a couple weeks ago and have since fallen sharply by over 10%. On the
outperforming side, energy, metals, industrials, machinery, Indonesia,
Aerospace, airfreight, and communication equipment continue to do relatively
well here.

As I have been repeating, but feel the need to repeat again, especially in this
current environment, I suspect strongly that the period directly ahead is one
where it may be ABSOLUTELY CRITICAL for investors to have a solid grasp and
understanding of the Big Picture Macro background of global markets and the huge
vulnerabilities of this environment. A potential MAJOR SHOCK to the markets is
brewing and those unaware could easily be sideswiped.

This critical bond test is one I believe investors need to understand the full
implications of and watch VERY CAREFULLY here. Notice that our Top RS new highs
fell BELOW the Bottom RS New Lows list this week — further downside FOLLOWING
this along with negative bond action would be very negative for the market’s
upside potential in the weeks ahead. The environment is growing more and more
treacherous and understanding what is behind the forces that could lead to
shocks at any time is important for day-traders, swing-traders and investors
alike. I believe that those using our stock selection techniques, favoring our
top themes and understanding the global macro environment thoroughly can
experience strong gains while avoiding shocks in this likely volatile investment
year. The market is behaving more and more like a two-way street and further
deterioration of more groups leading to more short-sale opportunities will only
serve to highlight the importance of long/short hedging in this environment.

In our US selection methods, our Top RS/EPS New Highs list published on, had readings of 113, 73, 54, 38 and 18 with 9 breakouts of
4+ week ranges, no valid trades meeting criteria, and one close call in
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This week, our bottom RS/EPS New Lows recorded readings of 13, 20, 19, 23 and 27
with 4 breakdowns of 4+ week ranges, no valid trades and no close calls. The
“model” portfolio of trades meeting criteria is now long
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GG |
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TS |
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— with several stop outs on trailing stops this week but new
highs in GG, and TS. Continue to tighten up trailing stops whenever possible on
stocks with open profits and strive to move stops to break-even or better as
quickly as possible in new entrants.

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%.

For those not familiar with our long/short
strategies, we suggest you review my book
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.”

The “2006 Investment Roadmap” is also my best
effort at explaining the top secular themes that every trader should be focused
on in their portfolios. A special offer of this exclusive report is available to clients at
. So far the groups highlighted in the 2006
Investment Roadmap are exploding in value and appear set to continue to do so.