Our Bias Is Probably Slightly Bullish Here, But…

• September 10, 2004
• Mark Boucher

It was ever so slight and subtle,
but Greenspan did indeed acknowledge the slowdown in global growth. 
He effectively stabilized on the balancing beam by acknowledging a bit of
slowdown, assuring markets that it would not be permanent, and assuring bond
investors by saying that a measured rate of increase in rates, albeit possibly
more slowly than he previously thought, would continue. 
Bonds and foreign currencies were the short-term beneficiaries of his
testimony.

In the meantime global and US markets have inched up to the
first set of resistance levels.  Action from this week’s highs and a few
percentage points higher will be very important in determining whether this
rally can continue to grow into a weak leg up to new highs or not. 
Breadth is improving, and iron and steel are breaking out with some
degree of breadth, part of the materials group we’ve been commenting on for
quite a while as a market leader.  A
correction of less than 38% of the run up from August’s lows, followed by
strong volume rallies through the downtrend lines from the March-June highs
would lend credibility to the sluggish new leg up scenario. 
Conversely declining breadth and large volume declines that retrace more
than half of the up move from the August highs from here or from levels another
few percent higher than this week’s highs would not be a good sign for the
market on the whole.  Our bias is
probably slightly bullish here, but certainly not definitive. 
And as WD Gann put it, “when in doubt, stay out, and don’t get back
in until you’re sure.”

Economically, markets are still pointing slightly toward
the likelihood of the current economic deceleration stabilizing soon, before
outright recession develops.  However
oil prices are still flirting with highs — so one of the three threats is
making problems.  In addition, al
Qaeda seems to be increasing the pace of global terrorism ahead of key
elections.  Russia has been a
primary candidate, and the recent attack on the Australian Embassy in Indonesia
shows global activity.  We suspect
both recent attacks are and will back-fire for al Qaeda. 
What decent human being or moderate Muslim can now even possibly consider
the side of Chechnya after the grotesque attack on children? 
And the Australian embassy attack seems to be boosting both Howard’s
and Yudhoyono’s chances, a clear back-fire. 
Yet we suspect the increase in pace and breadth of attacks is a trend
that is not yet over — especially in light of the many elections globally
taking place in the next two months.  This
means wild card terrorism risk is very high and investors should factor massive
potential shock-risk into their risk/reward algorithm for potential trades. 
Only big profit potential trades should be considered, and in this
uncertain environment, these are few and far between. 

Despite some minor trading opportunities and some relative
long/short sector trading opportunities, we continue to recommend a cautious
stance toward equities, and heavy allocation to other asset classes in general,
including cash. 

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 66, 65, 118, and 82 with 56 breakouts of 4+ week ranges, no valid
trades and close calls in YELL, BNN, MVK, and MGLN. 
Breadth is expanding again and more close calls would be a call to add
some long exposure.  This
week, our bottom RS/EPS New Lows recorded readings of 3, 5, 4, and 5 with 2
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 now that some resistance levels are close at hand.

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.

While
some minor opportunities are developing that may lead to small moves that could
be played by short-term nimble traders, the environment is not yet clearly
advantageous, and so we continue to suggest high allocations to cash and other
assets and a low allocation to equities.  Sometimes
it is hard to be patient, but wise.

 

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