Coalition Gains Coincide With These Signals

April 3, 2003
Mark Boucher

The war has entered a critical stage. During
the past week, coalition forces threw the full force of US bombardment
capabilities at suspected Red Guard (elite Republican Guard) hideouts both south of Baghdad from Karbala
to al Kut and at the outskirts of Baghdad. Stronger bombardment of Command and
Control (C4I2) centers was instituted, even at the risk of higher-than-desired
civilian casualty rates. Iraqi strategy has been to hide troops and strategic
weapons and strategic facilities in amongst high civilian populations and next
to sacred Muslim religious mosques. This strategy had previously prevented
coalition forces from taking out troops and military-critical targets. The big
question now is whether the Republican Guards have survived the heaviest
bombardment in the history of warfare or whether US intelligence Bombardment
Damage Assessment (BDA) is correct that these troops are damaged to the point of
being inoperative.

That question is not yet clearly answered. However, initial evidence seems to
indicate that the massive bombardment campaign has done its magic. A division
surrounded Karbala in less than three hours in what was expected to be a 24-hour
mission, because of such light resistance. Another division boldly has
positioned itself in between the south Karbala-al Kut corridor and
Baghdad. Small forces are at Baghdad now. None of these forces faced much
resistance. In addition, over 60 busloads of Iraqi civilians and soldiers are
reported fleeing Baghdad to surrender to US troops. The traffic is so intense
that it has stalled military action as troops have reversed to set up makeshift
POW camps to process the flow out of Baghdad.

Israeli intelligence is reporting that several top Saddam government officials
have escaped to Syria, possibly Saddam and his sons with them. Thus it is
beginning to appear as though the coalition has scored a major victory in the
war. However, it is not at all known that this is fact â€” there is only evidence
supporting it thus far. The troops have not been accounted for. German and
Russian intelligence reported a far lower rate of damage from bombardment than
CENTCOM estimates, which is worrisome.

If the coalition has not been able to
seriously damage the combat ability of these forces, then the war will take a
substantial increase in troops and casualties than anyone thought
previously. Therefore the period ahead will be critical to monitor. It appears a
major victory has been scored and this is the probability â€” but if major damage
has not been done and troops are playing dead in order to trap the coalition,
then the war will turn very ugly, quickly.

The market is rallying broadly and we got many valid trades this week for the
first time in years. We suggest investors still tread with more caution, but
keep your fingers crossed. If the war is starting its ending phase the market
upmove should be the best bear rally weâ€™ve seen since the 2000 peak and could
last for months.

Since March 2000 the world index is down over 45%, the S&P over 48%, the IBD
mutual fund index is down over 62%, and the Nasdaq has crashed over 76%.
Meanwhile since March 2000 the long/short strategy we summarize and follow-up
each week in this column has made more than 39% on a worst drawdown of under 6%.
While this performance is certainly
underperforming our long-term growth rate, and it is hardly thrilling to have
been so heavily in cash since March of 2000, we have managed to eke out gains
with very low risk in a very dangerous market environment where nine out of 10
traders have been big losers.

Our official model portfolio overall allocation remains DEFENSIVE. Weâ€™re now 68%
in T-bills awaiting new opportunities, with two sole long positions. Our
model portfolio followed up weekly in this column was up 41% in 1999, up 82% in
2000, up 16.5% in 2001, and up 7.58% in 2002, an average annual gain of over 36%
â€” all on a worst drawdown of around 12%. Weâ€™re now up 0.33% for the year
2003.

To our daily

Top RS/EPS New Highs list the entire rally from the 7/24 and then October
lows never even registered on the radar screen having mustered up just ONE solid
week of consistent +20 or higher readings since 7/24, though this past week was
close. Bottom RS/EPS New Lows have plummeted and we may be getting a strong bear
rally if the war is approaching its ending phase. We had readings of 8, 26, 17,
35, and 67 in our Top RS/EPS New Highs list, accompanied by 17 breakouts of a 4+
week range, with potentially valid trades in STHLY, AVID, UNTD, and PCAR, along
with some close calls. Bottom RS/EPS New Lows last week showed low readings of
24, 2, 10, 6, and 2 accompanied by just 7 breakdowns of 4+ week patterns with a
close call in VNT on the short side.

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, and

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 US 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 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.

On the short side this year, we’ve had breakdowns from flags (one can use a down
cup-and-handle here as well) in stocks meeting our down-fuel criteria (and still
open positions) in: NONE. Continue to watch our NL list daily and to short any
stock meeting our down-fuel criteria (see

interactive training module) breaking down out of a downward flag or down
cup-and-handle that is in a leading group to the downside but only add up to two
in any week (and only in the weakest groups) until we get better breadth numbers
on the downside and better leadership.

Investors and traders should be tentatively shifting from survival strategy to
cautiously long-oriented. The war may be turning into positive news or this may
be a trap. Until we get more technical evidence ALONG
with CLEAR war news, weâ€™ll be willing to miss some
of the fun in return for preservation of capital. Letâ€™s hope better times are
just starting to materialize here.

Mark Boucher

Coalition Gains Coincide With These Signals

BUY THE FEAR, SELL THE GREED

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