Looking for movers? Here are 7 of the world’s strongest markets
September
Whirlwinds
Many traders are watching the
markets carefully to discern the new trends when most investors return from the
summer holidays in mid September. A whirlwind of activity is brewing beneath
the surface.
Remember that September is the
worst month of the year historically for the market — and this one looks like it
will not lead to significant US market follow-through on the upside soon.
Volume has risen on declines and fell off on the latest rallies. The indexes
themselves are all over the place.
Our suspicion has been for some
time that the market is in the process of making a longer-term top. Whether
that leads to another leg up to new highs in the broad indexes or not cannot yet
be discerned. Turbulence in various sectors leads us to continue with this
suspicion.
Lowry’s did a recent study and
determined that more than half of all stocks peak and turn down markedly before
the day that the indexes make their ultimate high of a bull market. Thus for
most portfolios, catching the high day of the market is way too late to have
optimally exited positions. The point here is that new highs and new lows
peaked last year — as did the breadth of stocks at new 30 day highs. Sector
analysis is starting to look a bit more worrisome in some sectors, and
leadership is deteriorating. Those who want to participate in this environment
should therefore be looking at longs and shorts we believe.
Let’s discuss some sectors that
have underperformed and seem likely to continue to do so. The
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index has underperformed this year and is behaving poor technically.
A huge POTENTIAL weekly chart
Head & Shoulders top has been forming in the bank index since the beginning of
’04. A break down below 93 will pierce the neckline with a break below 90
setting up an even greater likely fall. On a daily chart basis, the BKX has
broken down below its 200-day ma on good volume, rallied up to test the 200-day
line and then turned down on good volume this week. Fundamentally banks are
starting to project lower profits from the squeeze on margins associated with a
flatter yield curve. And even if the Fed pauses once to measure Katrina damage,
further rate hikes appear likely still ahead, further eroding bank margins
potentially. It doesn’t appear likely that banks will outperform in the period
ahead unless something materially changes therefore.
Retailers (particularly
low-end), financials, chemicals, and drug stores also look like groups that are
vulnerable and likely to underperform here.
Meanwhile, gold in Euro and Yen
terms that we’ve highlighted prominently is at new highs and even gold in
dollars looks setup to test last year’s highs, as do gold stocks. Japan has
broken out of a multi-year base and continues to do well. Korea, Eastern
Europe, South Africa, Utilities, Machinery, and Canada continue to outperform
and look technically strong. Brazil just cut rates yesterday and stocks are
surging ahead today on good volume in response — with inflation falling it
appears many more rate cuts are likely ahead which should help volatile Brazil
outperform. We continue to watch FXTID index closely and would become more
bullish on new highs here as well.
Unfortunately this potentially
long-term toppy environment is not a repeat of 1999-2000 where we had lots of
valid signals in both longs and shorts and we could aggressively reap gains on
both sides of the aisle in highly reliable patterns. Nonetheless a more two-way
environment appears to be unfolding and aggressive traders could begin looking
more at shorts and longs we suspect in the period ahead.
Nonetheless, most investors
should simply tread cautiously in the market until better trends establish
themselves — and we still suggest even aggressive traders have less than NORMAL
allocation. Markets are thin and treacherous here.
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.
This week
in our Top RS/EPS New Highs list published on TradingMarkets.com, we had
readings of 70, 104, 111, 52, and 32 with 32 breakouts of 4+ week ranges, no
valid trades and one close call in
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PowerRating). This week, our bottom RS/EPS
New Lows recorded readings of 6, 9, 11, 9, and 11 with 5 breakdowns of 4+ week
ranges, no valid trades and no close calls. One valid signal remains in place
in
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PowerRating) on the long side. We’re still not getting a lot of trading signals
in valid breakouts, and though the environment is becoming a clearer two-way
affair, it’s also CLEARLY not a high odds environment on either side of the
aisle.
For those
not familiar with our long/short strategies, we suggest you review my book "The
Hedge Fund Edge." 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.
There’s a
great book by Ken Uston called “The Big Player†which tells the story of how
Uston and his group made millions counting cards and playing blackjack at
casinos. Basically he would sit half a dozen counters one each at different
tables and they would count the cards, waiting for a deck heavy on tens and aces
left. When a high odds hand developed, they would “signal†the big player in
some way that no one else would be able to recognize. The big player would walk
up to that high odds deck table and bet big. When the odds fell another signal
would be given and the big player would simply leave that table and wait for a
signal from another table. Basically Uston and group were applying excellent
money management rules — they were only betting big when high odds developed,
and trying to minimize bets the rest of the time (and they would have loved to
be able to not bet at all unless the odds were high). There are some playable
trends here that nimble traders in particular should watch and participate in to
some extent. But this doesn’t look like a high odds environment to me, and so,
for many the best move is to tread lightly.
Mark
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%.
Boucher began trading at age 16. His trading helped finance his education at the
University of California at Berkeley, where he graduated with honors in
Economics. Upon graduation, he founded Investment Research Associates to finance
research on stock, bond, and currency trading systems. Boucher joined forces
with Fortunet, Inc. in 1986, where he developed models for hedging and trading
bonds, currencies, futures, and stocks. In 1989, the results of this research
were published in the Fortunet Trading Course. While with Fortunet, Boucher also
applied this research to designing institutional products, such as a hedging
model on over $1 billion of debt exposure for the treasurer of Mead, a Fortune
500 company.