Is A Fed Policy Shift In The Making?
Anticipation
of Fed Shift?
Leading
indicators are falling around the world and there is now little evidence of a
turnaround toward growth. Â The Chinese are raising rates slowly to keep growth
under wraps.  While the Fed has so far downplayed soaring oil prices and the
extent of the global slowdown, it is unlikely that Greenspan can ignore these
dangerous trends much longer. The bond market has done its best to try and
compensate for the impact of higher energy prices, but Greenspan’s policy of
neutralizing short-rates has offset much of the impact. During Greenspan’s
tenure at the Fed he has many times used signals from the markets as a
significant input in guiding policy. Only in 1987 did he fail to see the impact
of the combination of uncoordinated currency policy and sharply rising rates on
the markets and economy. We suspect that he learned his lesson from the ’87
market crash and that the Fed will soon signal that it is putting the rate hike
strategy on hold. Yet until this happens, the markets will likely begin to riot
and react to every new high in oil prices. And continued soaring oil prices
could begin a global economy crushing energy crunch. Notice how positive the
market’s reaction to a big oil price drop was this week. If oil can peak and
turn down in earnest, this week’s low may lead to another attack of the highs,
especially if the Fed gives more of a nod that it will not keep raising rates
indefinitely.
The dollar broke down below the
critical 87 level we mentioned, has attacked its highs and is now consolidating
its gains. It look increasingly like this is the beginning of a new labored leg
down for the dollar. Gold is behaving as a currency, and is stock investors
easiest dollar short (GBS.LN).
We live in interesting times.Â
Terrorist threats are more likely than ever over the coming weeks as many global
elections are upon us. The US response to the popping of the bubble was massive
liquidity infusion, and that policy is being tested now. China’s integration
into the global economy is probably the largest shock in recorded history. The
markets are uncertain and trends do not last long. It is particularly difficult
for low-risk investing.
We continue to expect that
investors will have to stay very nimble and watchful to make decent returns and
avoid the potential pitfalls during this historic period. We will continue to
try to understand and profit from the environment whatever it is and whatever it
develops into in PSL. We continue to strongly believe now more than ever that
investors must monitor global trends in a wide variety of asset-classes to be
able to profit strongly from the major waves that are developing.
Our favorite sectors/countries
continue to be South Africa, Rails and Transports, Software, Belgium and
Austria, Eastern Europe and Russia, value/growth and mid-cap value, Europe and
world/US, Indonesia, and gold.
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 69, 73, 42, 78, and 130 with 41 breakouts of 4+ week ranges, no
valid trades and one close call in AMXC. Breadth is expanding again and more
close calls would be a call to add some long exposure. 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 11, 14, 24, 19, and 10 with 6
breakdowns of 4+ week ranges, no valid trades and no close calls. We’re still
not getting a lot of trading signals in valid breakouts, though the environment
is improving slightly on the long side — let’s see if this holds up and we can
get some follow-through on the rally attempt.
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 continue to believe that we’re in a correction to a difficult but playable
rally that clearly entails unusually high risk and significant shock-risk. Only
experts should tread much here. Traders should know how to mix outright longs
with relative value plays that feature the strongest sectors over the market as
a whole or over weaker sectors. Even then we strongly suggest less than normal
allocation. Soon elections in many countries worldwide will be over and
terrorist shock risk will be reduced some. As the economic situation in both
China (now the dominant economy on the globe?) and the US clarifies, better odds
opportunities will develop. Wait for the good odds with most of your capital.Â
Mark Boucher