The Dollar Just Did Something Good Traders Pay Attention To

• December 17, 2004
• Mark Boucher

Rotation
Underway?

 

Dollar volatility and bottoming action does indeed appear to be taking place. 
Traders should note that the dollar rallied strongly on Thursday in the face of
negative news — something good traders always pay attention to.  I suspect more
unwinding of dollar shorts could develop over the coming weeks and that this
will unsettle markets a bit.

Initial evidence of another market rotation appears to be developing.  Late
cycle themes like consumer staples and health care that are somewhat defensive,
often take on relative strength in a bull market in its late phases as interest
rates move higher.  We’re starting to see evidence of that developing here. 
Managed care seems to be leading much of the non-drug health care sectors higher
and staples are starting to break out with more plurality.  Conversely tech
sectors and resource sectors may be easing up in relative strength, particularly
if the dollar stays in a range in coming weeks.  Investors may want to begin
switching out of HHH and software and into managed care and staples on further
breakouts and rotate with the market. 

Growth Europe continues to do well as a theme with countries like Ireland,
Austria, Belgium, and Hungary/Poland leading on the upside in continuation of
their strong leadership throughout this bull move.  Latin America is still
leading as well, though here too, investors may want to begin watching for a
slip in relative strength compared to Asia, which is still recovering from its
2004 correction.  Bottom-line — go with the leaders whatever they may be as the
bull market may be entering its final phase.

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 36, 56, 98, 74, and 134 with 19 breakouts of 4+ week ranges, no
valid trades  and close calls in NRG and CFCI.  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 3, 3, 4, 3, and 2 with 3
breakdowns of a 4+ week ranges, no valid trades and no close calls.  We’re
seeing a growing number of valid breakouts, though this is not a gung-ho
environment.  Valid signals are in place in MLI, KMRT, GBX, and BHP.  The rally
is still in place but starting to thin in breadth here, so investors should
remain aware of possible headwinds looming as discussed over the last few weeks.

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 playable rally is upon us.  Enjoy it but realize it is not likely to last as
long as normal.  Remain nimble and enjoy the good times while they last, but
don’t be afraid to take profits quickly.

Mark Boucher