These are 5 strongest groups

February 17, 2006
Mark Boucher

We know that market tops
tend to get more and more narrow as they develop, meaning that gains
continue to develop in a smaller and smaller list of groups and sectors as a
bull market matures.

Of the groups we like best the current volatility
showed that the groups holding up the best were Brazil, China, South Africa, and
health care (which is basing and includes both biotech for more aggressive and
more positive action as well as pharmaceuticals which are just breaking out of
bases and are more defensive). Note that Telecoms also did very well this week
and had strong breakouts although they are into a seasonal negative time-frame
yet appear undervalued and have underperformed for a long time and are a
historically defensive group as well. These are the main themes we would utilize
to build a portfolio in addition to the stocks meeting our rigid criteria.

Gold DID bounce off of a trendline and 50-day ma
and could be purchased or added to gingerly with stops under this weekâ€™s lows.
Some of the stronger oil stocks behaved in similar fashion as did some of the
broader metals stocks. These could be lightly purchased with stops under last
weekâ€™s lows but we suggest focus mainly on the TOP performing themes above.

At the same time, weaker segments of the market
should be closely monitored as well â€” for as these grow it will tell when the
market is likely to complete a topping formation of sorts

Note that consumer groups gained ground this
week.
(
XLY |
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PowerRating) did NOT close under 32 and
(
RTH |
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PowerRating) got support at the critical
93 level and did not close beneath it. These sectors may have gotten a reprieve
for a while with this weekâ€™s strong consumer reports. Utilities and bonds also
held above the critical levels –
(
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PowerRating) under 81 or
(
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PowerRating) under 87.5
joined by Utilities breaking Decemberâ€™s lows would be an indication that rates
may be ticking up more than expected, and this threat still bears watching.
Remember that the more groups that actually breakdown, the more dangerous the
market environment becomes.

Since global equities and groups have
substantially outperformed US markets since the 2002 bull market began, weâ€™ve
strived to discuss SOME of our favorite themes and global markets in addition to
simply following our basic US growth strategy of buying strictly only those
stocks meeting our rigid criteria and selling short those doing the same on
breakouts. So far over the last quarter or so, this simple strategy has done
quite well too. It is our best effort at advising what top themes and trends we
are expecting, as well as what investors need to watch to know if changes in the
outlook are developing. And it explains the current macro environment, which is
becoming more and more critical for all investors and traders to understand.

We are continuing to suggest more than normal
caution and milder than normal allocation to top global themes, and for
investors to expect volatility and less than optimum markets. There are risks,
the Fed is tightening, and a US slowdown may be materializing. Therefore
cautious exposure, trading in and out with minor trends, is probably yet again
the best approach to 2006.

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) â€”
all on worst drawdown of under 7%. This did not include our foreign stock
recommendations that had spectacular performance in 2003.

Over the past week in our Top RS/EPS New Highs
list published on TradingMarkets.com, we had readings of 63, 20, 20, 43, and 80
with 15 breakouts of 4+ week ranges, CHS & RY as valid trades and no close
calls. This week, our bottom RS/EPS New Lows recorded readings of 11, 14, 10, 7,
and 6 with 2 breakdowns of 4+ week ranges, no valid trades and no close calls.
The â€œmodelâ€ portfolio of trades meeting criteria is now long TRAD, CIB, GG, CHS,
RY and RVSN. Weâ€™ve already suggested tightening up stops a bit in all of these,
and profits should be locked in on all but the recent trades of this week.

Mark Boucher

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.

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.

These are 5 strongest groups

BUY THE FEAR, SELL THE GREED

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