Here’s What Would Fuel This Rally
Fed Fuel Next?
Thursday’s economic reports confirmed for the markets that
inflationary pressures will be low enough for the Fed to raise rates by just 25
bp’s next week. Breadth is improving. Top sectors are materials (paper
chemicals, containers and packaging), industrials (machinery, Railroads,
electrical equipment), Energy (E&P, integrated, oil services), health care
(managed care and health care facilities). Weaker sectors are homebuilding and
appliances. A confirmation by the Fed next week with only a 25 bp rate hike
should help fuel this slippery rally further. Bonds will continue their bear
rally on a 25 bp hike but like most markets will react quite negatively to a 50
bp hike in the short-term.
Thursday was a big day for currencies and metals. Gold
closed over the critical 400 level, completing a head and shoulder bottom.
Confirmation up by XAU over 92, by HUI over 205, and by July silver above 6.25
should lead to a retest of the highs by gold and gold stocks. The dollar
appears to have peaked as well, as we’ve been suggesting, and is likely to at
least retest its lows. Don’t expect the same type of wave we had last year, but
a retest in metals and currencies.
The triple threat of bonds, oil, and the dollar are all
currently on relief, and so this relief rally is gaining steam. Volume is
improving on rallies, a positive sign. We suspect this is a playable rally — we
just don’t advise playing it with nearly the allocation as normal. There are
still huge risks and this is not the time to bet the farm.
^next^
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 52,
52, 65, 38, and 87 with 36 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 sunk back to bull market territory, registering readings of 6, 9, 9, 9, and
8 with 6 breakdowns of 4+ week ranges, one valid trade in WBD and one close call
in RDY. We’re still not getting a lot of trading signals in valid breakouts.
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.
We have been expecting a
tradeable relief rally, and today’s action confirms that it is starting to
materialize. We expect further upside as long as the Fed plays along with a 25
bp hike, which is most likely. Materials and industrials look like the best way
to play the move. However we continue to suggest traders tread lighter than
normal as risks are growing, rewards are not great, and potential shock-risk is
huge and more likely than at any time since WWII.
Mark Boucher