The market keeps on climbing a wall of worry
An old market adage is that “bull markets climb a wall of worry.â€
This market certainly fits. Last week Japan broke out. This week metals did, while new highs were also made by many energies, industrials, Japan, China, Indonesia, and Aerospace. On the other hand, new lows were made by General Merchandise, Publishers, and many interest sensitives. Our favorites on the long side then remain metals, Japan, industrials, healthcare, networks, energy (bottom in natural gas stocks and trusts here?), China, Indonesia, Telecoms, and Aerospace and (we suggest some hedging here for those with close to normal exposure) we like on the short-side General Merchandise, Publishers, as well as some interest-rate sensitives, and big-cap growth. Aggressive traders could position with strong groups over weak ones, but with more cautious allocation than normal. The strong component of this market, and many of our favorite groups continue on an absolute runaway on the upside. Meanwhile bonds continue to falter and the 10-year yield has touched the 4.90 level. While the bond decline so far appears benign to global stocks, we suspect that somewhere between 4.9 — 5.1% yield on the long-bond will begin to hit stocks, perhaps sharply, and investors therefore need to watch the market’s reaction to further bond declines like a hawk here.
As I have been repeating, but feel the need to repeat again, especially in this current environment, I suspect strongly that the period directly ahead is one where it may be ABSOLUTELY CRITICAL for investors to have a solid grasp and understanding of the Big Picture Macro background of global markets and the huge vulnerabilities of this environment. A potential MAJOR SHOCK to the markets is brewing and those unaware could easily be sideswiped. That is why I wrote the
2006 Investment Roadmap* which is my best effort at thoroughly explaining the global macro picture and its precarious state as well as what to watch closely to monitor how massive risks are developing. The “2006 Investment Roadmap†is also my best effort at explaining the top secular themes that every trader should be focused on in their portfolios.
So far the groups highlighted in the 2006 Investment Roadmap are exploding in value and appear set to continue to do so.
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.
Meanwhile in our US selection methods, our Top RS/EPS New Highs list published on TradingMarkets.com, had readings of 128, 83, 154, 90 and 110 with 21 breakouts of 4+ week ranges, a new breakout by USG meeting criteria, and no close calls. This week, our bottom RS/EPS New Lows recorded readings of 8, 3, 12, 13 and 13 with 4 breakdowns of 4+ week ranges, no valid trades and no close calls. The “model†portfolio of trades meeting criteria is now long USG, GG, RY, AXA, TS, and MTU — with nice new highs this week in USG, GG, TS, and MTU. Continue to tighten up trailing stops whenever possible on stocks with open profits and strive to move stops to break-even or better as quickly as possible in new entrants.
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 have made an exhaustive review of top themes and trends for the year and tried to reveal the critical nature of the big picture macro environment in our “2006 Investment Roadmap†which we hope every trader and investor can and should benefit from (available at www.midasresourcegroup.com). The environment is growing more and more treacherous and understanding what is behind the forces that could lead to shocks at any time is important for day-traders, swing-traders and investors alike. I believe that those using our stock selection techniques, favoring our top themes and understanding the global macro environment thoroughly can experience strong gains while avoiding shocks in this likely volatile investment year. The market is behaving more and more like a two-way street and further deterioration of more groups leading to more short-sale opportunities will only serve to highlight the importance of long/short hedging in this environment.
Mark Boucher
*A special offer of this exclusive report is available to TradingMarkets.com clients at www.midasresourcegroup.com.