Here’s Where I Would Take Partial Profits

October 24, 2003
Mark Boucher

The last few weeks have experienced some spotty,
sharply volatile moves in various markets, that each related in one way or
another to bumps in the road on the way to the recovery scenario. Gold, Chinese
stocks, Russian stocks, and even the S&P have experienced some quick moves up
and down as the markets have already experienced most of the impetus from
monetary and fiscal policy stimulus. The baton must be passed to greater
confidence in the economic outlook and consistently better-than-expected
earnings growth and employment growth to spur markets ahead much further. This
phase change comes as VIX and other overbought/oversold sentiment gauges, as
well as insider net selling, are at extremes. Thus, we may get some
consolidation/corrective action here as the markets await more economic clarity
before investors focus on the recovery. How well the global economy shows that it is responding to fiscal and monetary reflation will likely determine how long
and how much further markets will go globally.

Despite
this action and a distribution day in the major indexes, the main trend
continues to be up. It still appears that the most likely dangers that could
derail the recovery remain a bond surge, a dollar crash, a renewed oil crunch
and price surge, or a major terrorist action that breaks the back of consumer
confidence.

We would
take partial profits on Asia and Eastern European plays if this weekâ€™s lows are
broken â€” buying back on breakouts to new highs subsequently in broad Asia and
Eastern Europe. Latin America and resource plays seem to be holding up
relatively better, as do broad EM exposure, so far. The base metal and junior
mining sectors continue to explode to new highs here. Commodity currency plays
also remain a favorite of ours.

Our US
long/short model is doing reasonable well considering the low level of
allocation it has had. Investors should continue to cautiously add stock
exposure as trade signals are generated that meet our strict criteria, as well
as allocate to our favorite segments. 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 portfolios up over 13.5% ytd by our
calculations) â€” all on worst drawdown of under 7%.

Last week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 32, 30, 33, 48, and 24, accompanied by 10 breakouts of 4+ week
ranges, no valid trades and no close calls. Internal strength has come back
after plummeting last week. 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. Bottom RS/EPS New Lows remained
non-existent with readings of 1, 1, 0, 0, and 1 with 3 breakdowns of 4+ week
ranges, no valid trades and no close calls. The short side remains bleak.

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.

Donâ€™t get complacent
here. We still suspect that weâ€™ll have to be very nimble to profit consistently
and know when to pull the plug in this market. A mini-mania could develop if
global economic statistics start to change investor psychology â€” or a shock
could tank this market so quickly it would make you dizzy. Thatâ€™s why we suggest
using funds and vehicles that are liquid enough to get in and out of quickly for
our current exposure to top relative-strength markets. Investors are advised to
remain extremely flexible.

Mark Boucher

Here’s Where I Would Take Partial Profits

BUY THE FEAR, SELL THE GREED

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