Fireworks in the precious metal market

Certainly metals have been remarkably strong during the first part of 2006 to
date. Today’s fireworks may well mark a pausing point. Technically silver tested
its 1983 highs and resistance and bounced off SHARPLY. One has to suspect a “buy
the rumor sell the news” reaction to the ETF planned in silver. At the same time
copper tested 300 a natural round number, tin tested 2004’s resistance — silver,
copper, nickel, tin, and zinc have been in parabolic run-up that remind one of
the late 1970’s. Reversals in most of these markets LIKELY mean further backing
and filling at least. However, new highs next week in most of these markets
would be extremely bullish the metals. We suggest taking half profits in the
metals if you haven’t already. Add back on a plurality of breakouts or after
support emerges after at least many weeks of consolidation/correction. Remember
that in SECULAR BULL MARKETS the surprises are usually on the upside, and
traders should only be very long, long, or out, but never short. Nonetheless
seasonally the metals usually make an intermediate-term peak before May.

To some the resilience of the market in the face of creeping bond rates shows
great strength, to us it adds to our concern, something we remember voicing to
clients for many months during the summer of 1987. Therefore we still advise
taking some offsetting shorts against the strongest segments of the markets.
Short group candidates are not deep, but do include utilities and interest
sensitive, like
(
TLT |
Quote |
Chart |
News |
PowerRating), publishers, some retails, biotech, consumer finance,
housing, and managed care. On the outperforming long side, we especially like
industrials, machinery, Indonesia, China, and Aerospace, while we would tread a
bit more cautiously in metals and energies here following the big reversals
today.

These are volatile and wild markets. Yes, there are great opportunities, but
check out how easily gains can come unglued by looking at silver and silver
stocks. I continue to 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, the top
secular themes, and the huge vulnerabilities of this environment. A potential
MAJOR SHOCK to the markets is brewing and those unaware could easily be
sideswiped.

This bond test remains critical we believe and markets that ignore continually
higher bond rates are ones that setup for a crash eventually. While our stocks
and favorite groups are off to a fantastic start for the year, up at double
digit rates already, realize that 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 the bulk of shocks in this likely
volatile investment year. As the market behaves more and more like a two-way
street and further deterioration of more groups leads to more short-sale
opportunities, investors should strive to move to a more neutral long/short
position, and keep risk to lower than normal levels.

In our US selection methods, our Top RS/EPS New Highs list published on
TradingMarkets.com, had readings of 18, 76, 150 and 205 with 30 breakouts of 4+
week ranges, one valid trade in
(
WIRE |
Quote |
Chart |
News |
PowerRating) meeting criteria, and no close call.
This week, our bottom RS/EPS New Lows recorded readings of 25, 23, 9 and 8 with
6 breakdowns of 4+ week ranges, no valid trades and no close calls. The “model”
portfolio of trades meeting criteria is now long
(
USG |
Quote |
Chart |
News |
PowerRating),
(
GG |
Quote |
Chart |
News |
PowerRating),
(
TS |
Quote |
Chart |
News |
PowerRating),
(
MTU |
Quote |
Chart |
News |
PowerRating),
and WIRE — with new highs this week in USG, GG and TS (could take partial
profits here), and WIRE. 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.

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.”