Is this rally real?

We noted a couple weeks ago that we thought an intermediate-term low was being
made. We DID get another good upside day with strong volume, making two since
the rally began. Another 80%+ up day in breadth and up volume/down volume would
lead one to expect that this summer rally may last long enough to get some
trading opportunities. But so far, that has not yet materialized. And despite
the excited reaction to the Fed, we suspect that a sustainable rally to new
highs is not likely for global markets just yet. Growth appears to be slowing at
a time when lagging inflation indicators are still moving higher. It will be
tough for the Fed not to sound more hawkish soon and tighten again in August if
the next round of inflation indicators is still rising more than the target
rate. While the markets are interpreting the Fed’s statement as if the Fed were
blinking, we think the statement was very balanced and leaves the next room open
to reports ahead — and any report that doesn’t show slowing growth or slowing
inflation could knock the legs out from under this intermediate-term move.

In addition the rest of the world, and China in particular, is tightening, and
leading indicators globally and among a plurality of countries have turned down,
suggesting lower growth, and lower earnings expectations moving forward. The US
market is reasonably valued, but lower growth and an unclear Fed are not likely
to setoff long-term fireworks. If we are wrong breadth will grow, upside volume
will continue to dwarf downside volume, inflation has already crested and
reports will confirm this, and the growth slowdown will be even milder than we
expect. In this case we should start seeing some new leadership and some strong
breakouts in stocks meeting our criteria in the weeks ahead. But until then our
bias is that this is a 3-9 week or so summer rally underway that is not a new
leg up in global equities, but part of a see-saw market that will not likely be
resolved until growth slows materially and an actual recession scare emerges (or
a significant global shock causes central banks to REALLY blink) that leads to a
reversal of tightening policy and bias toward easing. Until then we suggest
enjoying the summer without a-lot of exposure to the market fireworks for all
but the shortest-term traders.

In late March we began writing about the danger of the current market
environment and how in 2006 the macro big picture would likely SWAMP all trading
strategies and that not understanding the precarious position the world was in
would be a detriment to traders. We hope you listened. In addition I have
written the “2006 Investment Roadmap” and now the new “Mid-Year Update 2006
Investment Roadmap” (see below) precisely to analyze and explain why this
happened, how it was anticipated, and what it means for the future as well as
what to watch to determine how this GLOBAL TINDERBOX will blow. I still honestly
believe that the ramifications to investments of events over the period directly
ahead will be as substantial as any period in post WWII history. I honestly
wouldn’t want to trade in any timeframe without a full understanding of the
current dangerous macro environment and how the recent decline could be just the
tip of the iceberg IF certain developments transpire from here. You’ve been
warned and warned again.

Our advice continues to be defensive and sidelined positions with the bulk of
assets until technical breakouts and strong breadth seem to align with a macro
scenario that makes sense for a sustainable global rally.

Our US selection methods, our Top RS/EPS New Highs list published on
TradingMarkets.com, had readings of 15, 20, 29, 22 and 16 with 17 breakouts of
4+ week ranges, no valid trades meeting criteria, and no close call. This week,
our bottom RS/EPS New Lows recorded readings of 43, 57, 28, 52 and 71 with 14
breakdowns of 4+ week ranges, no valid trades and no close calls. The “model”
portfolio of trades meeting criteria has some time back exited all positions and
is 100% in cash.

Mark Boucher has been ranked #1 by Nelson’s World’s Best Money Managers for
his 5-year compounded annual rate of return of 26.6%.