If You Must Trade, Try These Sectors
Two-way Zone
Continues
The market is trying to bounce
off of significant Fibonacci, moving average, and past support levels. Clearly
a drop by SPY below 116 and its 200-day MA, a drop by the DIA below 103 and its
200 ma, and a break below this week’s lows in the QQQQ’s and Nasdaq would signal
a fairly serious correction underway. We believe investors and traders should
mostly be watching this drama from the sidelines.
For those who must trade, look
for strong sectors that are moving up in terms of both RS versus the S&P and
making new highs outright. Hospitals, managed care, some staples, and some
media fit these criteria on the upside. For shorts also look for groups making
new lows outright as well as in RS terms, such as autos, financials, (start
taking profits on short brewers).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 22, 32, 29, and 27 with 11 breakouts of 4+ week ranges, no valid
trades and no close calls. This week, our bottom RS/EPS New Lows recorded
readings of 23, 27, 39, and 10 with 8 breakdowns of 4+ week ranges, no valid
trades and no close calls. Valid signals remain in place in LCAV and CHTT on
the long side and none on the short-side.   Notice that neither new highs or
new lows are exceptionally strong this week.Â
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.
A big part of keeping risk down and profiting consistently in the markets is
knowing when not to risk capital much. Only investing substantially when the
odds are substantially in your favor is critical. There are some relative value
themes that aggressive traders could exploit here, but most investors should be
mostly out of the market and awaiting better odds opportunities here.
Mark Boucher
