Here Is The Good News About This Past Week

The equity indices of most of the largest developed
markets have risen above their 40-week averages and are beginning to
consolidate. The only major indices trading below their 40-week averages are
those of the Asian nations. SARS infections have not peaked, and the virus is
proving to be more deadly and economically costly than previously thought.
Quarantine efforts have not worked very well in China and Hong Kong even though
these efforts worked very well in Canada and Vietnam.Treasuries and T-Bills
have rallied in the past week during the stock market consolidation, and some
are starting to clamor for another fed rate cut before the end of the year.
Investors and economists are beginning to get impatient with the economy since
the “end” of Gulf War II. The economy has lost 500,000 jobs in the past three
months and the weekly first-time jobless claims continue to come in above
400,000. Let’s hope that consumers can continue to take advantage of low credit
rates while corporate America slowly gets back to spending on capital
equipment. Fortunately, housing data came in with positive growth after 4
straight weeks of declines.

The conditions are in place for an expanding economy with the end of the war,
the lowest interest rates in 40 years and continued consumer buying power and
renewed confidence. Any slight uptick in capital equipment investment can push
the economy forward. So far,  first-quarter earnings announcements out of
leading companies have beaten estimates (although estimates were very low), and
companies have issued positive guidance going forward. Investors are still
sorting out whether the economic weakness is due to lingering effects of the war
in Iraq or due to much deeper underlying problems in the US and world
economies. The dollar is hitting four-year lows against the euro and the Swiss
franc which will give US exports a bit of stimulus. Japan continues to fight
the strength of the yen. Investors have fully factored in the positive news
coming from Iraq and the War on Terrorism, and any shocks could throw the market
for a loop. China and Japan have become miffed at North Korea’s attitude
regarding nuclear weapons. If China were to pull the plug on aid to North
Korea, the country could collapse extremely quickly. For example, China
supplies North Korea with 70% of its oil supply and North Korea’s military
cannot function without oil.

We therefore continue to suggest that investors cautiously add exposure as trade
signals are generated, although a good volume strong break above the resistance
levels could turn us more aggressively bullish. Let’s hope that we can get some
follow-through up days following the current consolidation.

Our official model portfolio overall allocation remains SOMEWHAT DEFENSIVE. 
We’re now 32% long and 8% short, with 76% cash in T-bills (short-sale cash
included, four longs and one short at 8% each) awaiting new opportunities. 
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% — all on a worst drawdown of around 12%. We’re now up 4.78% for the
year 2003.

This past week our daily

Top RS/EPS New Highs registered 14 breakouts of 4+ week ranges.  Look for
positive market breadth indicators in the near-term and hopefully weeks with 20
or greater new 52-week highs will return if the market breaks out above of this
consolidation range.  Bottom RS/EPS New Lows continue to be non-existent as they
have been since mid-April. We had readings of 50, 82, 97, 69, and 36 in our Top
RS/EPS New Highs list, accompanied by 14 breakouts of a 4+ week range, no valid
trades and one close call in HOV.  We have been lucky enough to take advantage
of strong breakout opportunities that have presented themselves in the past
month and await further opportunities if the market can remain strong.  Bottom
RS/EPS New Lows last week showed low readings of 4, 1, 1, 1, and 2, with just 1
breakdown of a 4+ week pattern and no close calls.  Let’s see if the high ratio
of new highs to new lows continues as we wade through this key market resistance
level.

 

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 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 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.

Upside breakouts meeting up-fuel criteria (and still open positions) so far this
year are: Garmin
(
GRMN |
Quote |
Chart |
News |
PowerRating) @34.79 (46.05)
now use 37 ops; Stet Hellas
(
STHLY |
Quote |
Chart |
News |
PowerRating)
@8.64 (9.25) now use 8.2 ops; Avid Technology
(
AVID |
Quote |
Chart |
News |
PowerRating) @25.1 (27.87) now use 26.0 ops; and
Cyberonics
(
CYBX |
Quote |
Chart |
News |
PowerRating) @22.46 (23.00) w/ 20.5 ops. Continue to watch
our NH list and buy flags or cup-and-handle breakouts in NHs meeting our
up-fuel criteria — we’ll continue to advise adding only two stocks per week that
are in clearly leading groups until we get clear breakouts in all the averages.

 

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
Brooks Automation
(
BRKS |
Quote |
Chart |
News |
PowerRating) @8.46 (9.19) now
use 9.8 ops. 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
getting more excited about the environment on the long-side. However, be patient
and be sure to only buy strong breakouts that meet all of our criteria. If
indeed a multi-month bull move is in the making, the best trades are yet to
come, and waiting for valid breakouts will allow you to substantially beat the
moves of the averages, even though most trades come after the move is well on its
way. Continue to watch for confirmation that the war has ended soon enough to
prevent a global recession.  Let’s hope better times are just starting to
materialize here.

Mark Boucher