These 3 markets are holding up best
The Contagion we’ve been
talking about for weeks has turned into real potential trouble for global equity
markets, particularly the US market. The key difference between this
decline and other since 2001 is that this one is not accompanied by lower bond
rates almost immediately. As we’ve been noting for many months, lower global
bond rates have been acting as a safety net and offset to any equity market
weakness for some time. With this critical support gone, the market is in
trouble.
We’ve been advising investors to watch the long bond and TLTs
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breakdowns for many weeks. Wednesday TLT, the bond ishare, broke decisively
below both its August lows (setting up a long-term double top pattern) and below
its 200 ma on good volume. The safety net is turning into a negative force here,
as investors fear inflationary flare-ups.
We’ve also been talking about critical 200 ma tests in major averages, which
gave way earlier this week as well. Note that the Housing Index
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broken critical support, as have REITS, the Nasdaq
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We continue to watch RTH
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for a decline below 90 as a sign that a real route is underway. Adding fuel to
the bearish flames, Lowry’s got a sell signal on the market this week, for the
first time since 2001. And even energy stocks are breaking down with the market,
leading on the downside when they were for so-long the last leaders on the
upside.
We had advised taking half profits out of the market a few weeks ago. And this
week there were clearly a strong plurality of the indications we’ve been
advising watching turning lower this week for investors to turn to the extremely
defensive posture we’ve been warning about. Traders should be sidelined or
slightly net short (though market getting oversold short-term), while we’ve
advised investors to be nearly fully sidelined virtually all year. Let’s see how
bad October gets from here. Gold in Euro and Yen but even in dollars, and Japan
seem to be holding up best here.
The action in the dollar remains critical here and bears watching. The EUR is
again testing the critical support level at 1.175-1.2. IF the EUR can hold at
the 1.175-1.2 support level throughout the end of Fed rate hikes, then the EUR
will take off in a new bull move as soon as the market begins to discount the
end of Fed rate hiking. That would fuel a further move in gold in dollar terms,
and be the time to exit the short EUR part of the gold/EUR position (as well as
the Yen short in gold/yen) we have suggested investors participate in.
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 11, 12, 50, 19, and 19 with 9 breakouts of 4+ week ranges, no
valid trades and no close calls. This week, our bottom RS/EPS New Lows recorded
readings of 56, 23, 18, 71, and 71 with 13 breakdowns of 4+ week ranges, one
valid trade in SUP and one close call in WYNN. VLO hit out stop on the long side
and the “model†portfolio of trades meeting criteria are now short NDN and SUP.
The environment is getting trickier and more treacherous and we are chickens
when it comes to risking principle unless it looks like the weather is clear.
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.” 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.
Just in case it is not and has not been totally clear, we are advising caution
here. Aggressive traders could have partial longs in Japan and perhaps a normal
sized position in gold/EUR and/or gold/Yen. Let’s watch the fireworks from the
sidelines for bit. Remember that one of the biggest keys to keeping equity
market drawdowns low is to know when the odds are NOT in your favor and the
risk/reward is not so strong. That looks like now to us.
Mark Boucher
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