Edging Higher, Cautiously
The markets are
doing a good job of positively absorbing all of last week’s news.
Asian markets continue to rally (and we like these Asian leaders) and European
(particularly in local currency terms) and North American markets appear to be
consolidating gains without adverse reaction.
Although this global bull market is ripe for a short-term correction, market
internals globally continue to improve on an intermediate-term basis and the
clearly bullish bias remains. Particularly in the US there are limits — bonds
seem set on limiting declines whenever they start, yet oil and resources along
with a higher dollar seem to limit the upside to a market that edges higher but
does not move on all cylinders. Our best guess remains that for the big cap
indexes this is a retest rally that will just slightly exceed the highs of
earlier this year before petering out — valuation problems loom not too far
overhead. Short-term oriented higher risk traders should be finding tradeable
action here, but we still advise a higher than normal degree of caution for
longer-term investors, though some participation is in order. 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, as do semiconductors. Soft drinks, defense/aero, 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
resistance level here.
The dollar/EUR test of 1.175 continues and is important to watch. A move over
1.23 will set up a more serious dollar correction, whereas a breakdown below
1.175 will likely setoff an avalanche of stop orders and lead to a move down to
1.10. Dollar strength would likely make commodity strength tougher. Bonds are
also drifting toward longer-term support uptrend lines that bear watching. It’s
watch and wait with the drift higher in global markets likely to continue until
some significant action develops.
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 81, 82, 129, 79, and 102 with 28 breakouts of 4+ week ranges, no
valid trades and close calls in MDR and SCUR. This week, our bottom RS/EPS New
Lows recorded readings of 3, 2, 6, 4, and 1 with 1 breakdown of a 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 some
caution on both sides of this aisle, though some allocation to global leaders
seems prudent here.
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 continues tipping its hat toward the rally continuing on an
intermediate-term basis with somewhat stronger breadth. This is a DECENT yet NOT
OUTSTANDING market environment in our opinion and investors should allocate with
less than full strength until a CLEARLY better environment emerges in our
opinion.
Mark Boucher
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