There’s a bull market in Asia and here are 3 ways to trade it…
Crosscurrents Continue
Last week we discussed the
technical position of some of the groups we’ve been highlighting in recent
months for underperformance and overperformance that investors and traders
should use for positioning (though with less than normal allocation). Let’s
review after this week’s wild action.
The
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PowerRating) bank index has
continued to breakdown and was one of the weakest groups this weak, failing at
the 200 day and 50 day and being hurt by continued Fed tightening and yield
curve flattening. Breaks below 93 and 90 levels continue to be critical for
even longer-term underperformance here after this week’s substantial declines.
Even weaker than banks were
retailers, another group we’ve been highlighting as underperformers for some
time.
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this week on good volume and appears likely to test 88 as a minimum target now.
The breakdown in retailers this week was broad and led by the low-end ones we’ve
suggested, such as
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PowerRating).
Financials also had a tough
week, breaking to new several month lows on good volume, though banks seem
weaker in general. Drug stores broke down below weekly topping patterns as
well this week and Chemicals continued their descent and underperformance.
Last month we highlighted the
importance and significance of gold breaking out in terms of both Euros and Yen,
and suggested this for investors. Gold in Euro terms has moved since then from
352 to 389, a move of over 10% in a month. Some profit taking may be advisable
here on half of the position, but we continue to like the trend though it is too
exponential now. Ditto for the Gold/Yen, which has also exploded here. South
Africa is a smoother though less direct play we also like.
The breakout in the Japanese
Nikkei index of a multi-year base that we highlighted weeks ago has proven to be
a good base for a move from 12,000 to 13,000 in fairly short order. We
continue to believe Japan has a good chance of side-stepping softening in the US
economy, as it did in the 1994 soft-landing, and that this trend is one
investors should participate in. Korea has also broken out and continues making
new highs this week. Asia is continuing to show evidence of a reacceleration
in growth, and we would continue to add China to our list of favorites if the
FXTID index can break to new highs.
We have been touting Utilities
as outperformers for some time and would advise taking profits here.
Eastern Europe continues on a
roll and as long as the US downturn doesn’t start spilling into the strongest
areas, Eastern Europe continues to look set to outperform, though with some
volatility.
With rate cuts materializing in
both Mexico and Brazil (and with substantial more rate cuts likely in the cards)
as we have indicated in past columns, we suspect these markets and Latin America
in general will continue to outperform until and unless US contagion spills
over. Latin banks look particularly primed to continue on a roll and these
markets also made new highs this week.
Machinery and Canada also have
made new highs this week and continue to outperform, both beneficiaries of
Katrina and possibly Rita.
However, we’ve had one heck of
a run recently, and one problem investors need to be very watchful of is
spillover. So far the outperforming areas we’ve highlighted have held up well
and continued to new highs despite US market weakness. However the US market
decline has been sharp and on higher volume this week and closes by major
indexes below 200 ma’s in the period ahead could begin to influence spillover
weakness on some of the higher beta members of our outperformance team above
that investors need to be mindful of here. Some profit taking is probably in
order. Safer havens for outperformance like grocers could be considered from
the long-side if spillover effects start to creep in.
We continue to hypothesize that
this is a toppy environment on a longer-term basis, something at least similar
to 1994, if not worse. It is a two-way market here now and aggressive traders should
continue looking more at both shorts and longs in the period ahead we suspect.
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 44, 63, 120, 87, and 60 with 20 breakouts of 4+ week ranges, no
valid trades and close calls in BHP, APA and BABY. This week, our bottom RS/EPS
New Lows recorded readings of 13, 13, 19, 30, and 56 with 23 breakdowns of 4+
week ranges, a valid trade in NDN and close calls in BGP, ACLS, and PXLW. One
valid long signal remains in place in VLO on the long side. We’re still not
getting a lot of valid trading signals in valid breakouts, and though the
environment is becoming a clearer two-way affair, it’s also 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 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 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.