Here are 6 bull markets ready to go even higher

The missing piece of information in each of the above equations is PRODUCTIVITY.
The industrialization of China and the emerging markets (EMs) combine with increased technological
advances, a global investment spree, and increased trade links to hit the world
with a vast new labor supply and a major productivity boom. Strong productivity
gains depress inflationary pressures and allow corporations to absorb higher
costs while still increasing profitability. Thus a deflationary boom (similar in
some ways to that experienced in the US during the late 1800’s) is evident in
many sectors, where prices are falling yet output is expanding briskly. Enhanced
efficiency is allowing companies to reap rewards from this environment despite
higher materials prices.

However macro tools are quite poor at measuring productivity gains. Therefore
many analysts see many reasons for output to stagnate, profits to disappoint,
and inflation to flare. Yet the global productivity boom continues to boost
efficiency, profits, and income enough to keep a lid on latent inflationary
pressures and on pressures for global interest rates to rise. In this
environment, some of the economies with the highest productivity gains also have
the most profitable equity market gains — that is why it is critical for
investors to understand the secular nature and importance of the productivity
boom.

The secular productivity boom is important, and its forces have so far prevailed
over negative cyclical influences like higher energy and commodity prices, Fed
tightening, and even weather shocks. Yet if cyclical pressures become strong
enough on the downside, they will certainly be enough to overtake the secular
trend for a while. It appears that it will take a further escalation of negative
cyclical forces to throw the global economy off of its secular rails.

Therefore the strongest EM’s can continue and have continued to roar to new
highs as long as cyclical forces don’t overwhelm these trends. Unless the US
market weakness becomes broad-based and threatens global impact, we suspect EM’s
will continue to be able to advance. This is why we believe it is critical for
investors to watch closely important levels and tests in specific sectors.

Our guess is that the strongest global markets, EM’s in Asia and Latin America,
will be able to move higher until and unless CONTAGION develops from
overwhelming US market weakness. This risk is what investors need to watch
carefully by looking both at the weakest sectors as outlined above and at the
behavior of the strongest sectors and whether they are reacting to other
negative action elsewhere.

So far our two-way market environment typical of a long-term top continues to
materialize, though it has been a heck of a run already. Nonetheless, most
investors should simply tread cautiously in the market until better trends
establish themselves — and we still suggest even aggressive traders have less
than NORMAL allocation. Markets are thin and treacherous here. Both RISK and
OPPORTUNITY are high now, in our opinion.

Our model portfolio followed in TradingMarkets.com with specific entry/exit/ops
levels from 1999 through May of 2003 was up 41% in 1999, 82% in 2000, 16.5% in
2001, 7.58% in 2002, and we stopped specific recommendations up around 5% in May
2003 (strict following of our US only methodologies should have had portfolios
up 17% for the year 2003) — all on worst drawdown of under 7%. This did not
include our foreign stock recommendations that had spectacular performance in
2003.

This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 54, 22, 55, 60, and 75 with 14 breakouts of 4+ week ranges, no
valid trades and no close calls. This week, our bottom RS/EPS New Lows recorded
readings of 64, 34, 25, 34, and 26 with 11 breakdowns of 4+ week ranges, no
valid trades and no close calls. One valid long signal remains in place in
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on the long side and
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of valid trading signals in valid breakouts, and though the environment is
becoming a clearer two-way affair, it’s also not a high odds environment on
either side of the aisle.

For those not familiar with our long/short strategies, we suggest you review my
book The Hedge Fund Edge. 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.

There are some playable trends here that nimble traders in particular should
watch and participate in to some extent. But this doesn’t look like a high-odds
environment to me, and so, for many the best move is to tread lightly, though on
both sides of the aisle.

Mark Boucher