If Bonds Break Down Or Oil Breaks Out, Try This…
Breadth
Slowly Deteriorating Globally
We have been warning investors
for some time that as Fed tightening and inflationary pressures begin to take a
toll on bonds, global stock markets are likely to become more difficult and
choppy.  Leadership shifts and slowly deteriorating breadth seem to be
confirming this analysis. This week had the first day that new lows numbered
more than new highs on the NYSE since August of last year. Many averages closed
below their 50 day ma’s on strong volume yesterday. Our own breadth of top RS
New Highs numbers continue to decline to the critical 20 level, while the number
of bottom RS New Lows continue to slowly expand and are close to breaking above
the critical 20 number. GM got whacked and one-day routes such as this are
becoming more frequent.  A move by DIA under 106 AND SPY below 118 on a
closing basis along with a Nasdaq close below its 200 day ma would put in an
intermediate top of sorts. Â
Some of the global leaders of
the bull market since late 2002 are starting to deteriorate sharply. Emerging
Markets in Latin America and Asia are breaking down sharply. Even oil shares
are having trouble rallying despite ever higher crude prices, as OIH tests the
100 resistance level and has backed off.Â
The dollar continues to
deteriorate and appears likely to retest the critical 78-80 support level.Â
Bonds are rallying some after breaking down last week, but remain weak in the
face of higher commodity prices and inflationary pressures growing.Â
^next^
Our commodity models are
positive and suggest a test of around 340 in the CRB ahead.  There are mutual
funds and ETF’s that allow investors some exposure to commodity indexes — and we
continue to suggest a combination of indexes and managed futures funds for
commodity exposure for investors in this period. But watch carefully as a
blow-off may be developing in commodities when rates rise enough to slow growth
in the period ahead.
We suggest a pretty defensive
posture for investors and traders and fairly even short/long mix for those
wanting exposure. Sometimes it is better to mostly watch a fight than to
participate in it much. That may be the case to a large extent in the current
market environment. Risk is rising. We suggest investors continue to watch
carefully and go with CLEAR decisions by the verdict of the markets for their
short-term trading endeavors.
In US and global equity
markets, value/growth appears to be working and logical whether the market moves
up in a late phase rally, makes a volatile top over months to years, or even
moves down as the softness takes hold later on. European financials and
European financials/US financials continue to do well. Commodities should run
as the CRB sets up a potential test of the 340 level. More neutral long/short
strategies that buy the strongest sectors like energy, managed care, soft
drinks, foods, staples, rails, and short weaker sectors like financials,
brewers, US autos (thanks GM!), airlines, and parts of the technology sector —
also seems a good profit generator, albeit with some volatility, in this new
era. Investors should adopt an even more equity defensive and negative market
stance if US bonds break down or oil clearly breaks out (close at hand).Â
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.Â
This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 21, 29, 33, 59, and 28 with 10 breakouts of 4+ week ranges, no
valid trades and no close calls. This week, our bottom RS/EPS New Lows recorded
readings of 17, 21, 17, 18, and 26 with 9 breakdowns of a 4+ week ranges, no
valid trades and no close calls. Valid signals remain in place in BHP, LCAV,
and JBLU.   The balance of longs and shorts and breadth in top RS NH’s versus
bottom RS NL’s is slightly positive but drifting lower this week.
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.
Mark Boucher
