Here’s What Investors Are Faced With Now

• July 9, 2004
• Mark Boucher

As The See
Saws

 

One week we get breakouts in
materials and industrials.  The next week we get a breakdown in semi’s and tech,
while gold stocks return on the back of a weaker dollar.  We get some breakouts
while the market is up, but precious few that meet our rigorous criteria.  Oil
is down on OPEC pressures one week, and up to new highs again the next.  What a
mess of a see-saw market!!  Investors are faced with either getting an unusually
large number of whip-saws or sitting on their hands (we prefer the latter). 

 

 

^next^

 

 

 

 

 

With the Naz breaking through
50 and 200 ma support and trading range support, it is difficult to get overly
bullish.  Yet bonds are rallying and the dollar is falling — so as long as oil
prices don’t continue to runup, we suspect the market will be able to rally
feebly in the weeks ahead until the time comes when rates ACTUALLY choke off the
bull market and recovery. 

 

 

Although we continue to suspect
this is a playable though volatile rally, we continue to advise much lower than
normal allocation to it.  The global environment is so on edge that trends in
any instrument are less reliable than normal, and whip-saws are more abundant in
a wider array of asset-classes than I can remember for many many years.   There
are still huge risks and this is not the time to bet the farm.

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 83, 43, 49, and 44 with 8 breakouts of 4+ week ranges, no valid
trades and no close calls.  Upside breadth is continuing to improve, and we are
now eagerly awaiting trades that meet our criteria.  Position in valid 4+ week
trading range breakouts on stocks meeting our criteria or in close calls that
are in clearly leading industries, in a diversified fashion.  This week, our
bottom RS/EPS New Lows recorded readings of 7, 15, 17, and 16 with 12 breakdowns
of 4+ week ranges, no trades and one close call in PCLE.  We’re still not
getting a lot of trading signals in valid breakouts, though the environment is
improving.

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.

Massive stimulus globally is working to create a self-reinforcing recovery.  But
it is based on a weaker foundation and faces more potential risks than any
recovery since WWII.  And eventually its underpinnings will be removed.  Central
banks can only be magicians for a while before reality must come home to roost.

Mark Boucher