These 3 Areas Hold The Key…

  • June 24, 2005
  • Mark Boucher

The Oil and
Dollar Pressure Valves

 

As oil moved to new highs the
market retreated broadly and with strong plurality and breadth.  Investors
should move toward a more neutral defensive posture until better breadth
returns.

 

The leaders of the year have
been managed health care, oil, and utilities.  Oil is not a good leader for a
sustained market rally as higher oil prices can eat into economic growth and
earnings.  Oils new highs hit the Transports particularly hard.  The leadership
of the decline shows the market is becoming sensitive to higher oil prices from
here.  Watch oil like a hawk.  The other upside leaders are defensive groups or
rate sensitive.  We talked about how bonds have muted the Fed’s hiking efforts
last week. 

 

 

This week’s strong volume
decline comes off of resistance levels in a number of key indexes and groups. 
Semis failed to breakout, as did QQQQ’s.  The S&P tested its old high and looks
to be failing — ditto for midcaps and other leaders.  Let’s see a return of good
volume and breadth before moving back toward any kind of heavy net long
position.  Remember that this market is a meat grinder!

 

This week in our Top
RS/EPS New Highs list published on TradingMarkets.com, we had readings of 133,
140, 93, 77, and 80 with 46 breakouts of 4+ week ranges, no valid trades and no
close calls.  This week, our bottom RS/EPS New Lows recorded readings of 2, 2,
4, 6, and 6 with 2 breakdowns of 4+ week ranges, one valid trade in IDT and no
close calls.  One valid signal remains in place in LCAV on the long side and
none on the short-side.    After this week’s fireworks we’re back to a more
defensive posture. 

 

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.


The market will have to give strong clues as to whether the retest rally is over
and a broad trading range is established or whether this market can recover from
this setback — oil, bonds, and the dollar likely hold the key and right now the
dollar is still rallying as is oil, offsetting some of the cushion provided by
rallying bonds. 


Mark Boucher