These Are My Favorite Markets

  • August 1, 2003
  • Mark Boucher


Despite a surprisingly favorable GDP report that included evidence
of higher domestic capital spending than had previously been
imagined, the market is not yet fully breaking out of the constraints of the
trading range that we’ve been discussing since June.  There IS currently an
upward bias in the market, but until we get a plurality of breakouts in major
indexes, we can not be sure whether this stalemate will end in a real 1/3-2/3
correction, or in a continuation of the intermediate-term cyclical uptrend, as
the forces of massive fiscal and monetary stimulus overwhelm an overbought
market and overly bullish sentiment.

While gold and the Euro bounced
sharply off of support levels the prior week, during this last week they both
hit downtrendline resistance levels and have fallen sharply from these
resistance zones.  We suspect a sustained trading range looms while the forces
of a chronic current account deficit clash with the realization of how much
stronger the US economy is than that of Europe.  The commodity currencies are
also correcting here, and we would expect them to again lead the charge higher
as realization of the global economic recovery gaining steam advances in the
weeks ahead.   Our gold and commodity models remain bullish.

One technical problem with the gold move to date has been the lagging action of
silver.  Platinum has led, gold has been right behind, but silver has lagged —
at least until this past week.  Silver this week broke out barely over the range
that has been established since 2001, building a solid base.  We would buy
Silver stocks like HL (most liquid),
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SSRI |
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PAAS |
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FCX |
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preferred D (most conservative) on continuation higher.  These stocks are likely
to be quite volatile, but could end up being 5 or 10 baggers in a few years time
if inflation really picks up sharply, which is possible. 


As far as the broad market
goes, continue to watch the uptrend lines and the intermediate support zones
we’ve been publishing for weeks for indications of whether this correction will
retrace 50%-67% of the move since March before gaining new legs:  S&P below 960,
Dow below 8940, AND Naz below 1590.  Conversely, watch for accumulation days and
new highs on strong volume in all the major indexes above 1025, 9375, and 1700
respectively (all occurring) to confirm a new leg up. 

Our favorite foreign markets remain China, Thailand, India, Poland, small cap
value, and EM small cap value — watch these key markets for clues as to whether
the next move will be up or down in global equities.  These key markets have not
broken down yet, and it will probably require a break in the US trading range to
the downside to begin hitting these markets together as well. 

The story is similarly inconclusive as of yet for the internal US market leading
groups.  The leading sectors of the US rally have been biotech and medical
related, telecom, Internet related, Home Building/RE/Mortgage, Natural Gas, and
software, with small-cap value being the leading market segment.  So far
downside leadership is not remotely evident, but a plurality of upside breakouts
is not yet developing either.

We still believe that aggressive central bank and fiscal action that will lead
to a new leg up after the current correction/consolidation.  However the
environment is likely to be more volatile and quixotic than any investors have
witnessed since the 1970’s.  We strongly suspect that in the monetary and fiscal
panic the Fed and the Federal Government are undergoing that investors will have
to be extremely flexible and very nimble to do well in this environment. 
Rallies are likely to be explosive but temporary, and mood swings will be
extreme and very visible upon global markets.  Investors will need the compass
of confirmation by breadth and internals before moving into any asset class
aggressively — and they will need to be ready to pull the plug on nearly any
stock investment at a moments notice if breadth and technicals align in a
negative fashion.

We have been noting the pickup in activity in Iraq in recent weeks, and last
week’s killing of Saddam’s sons and the new threats of revenge by Saddam and al
Qaeda appear to be confirmation that things are heating up.  Be on the lookout
for a possible re-acceleration of the on-going war (or a new terrorist action)
that could shock the markets, and be aware that many top intelligence services
expect another phase of the war to develop in the months ahead. 

Investors should continue
to cautiously add stock exposure as trade signals are generated that meet our
strict criteria.  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 methodologies
should have portfolios up over 8% ytd by our calculations) — all on worst
drawdown of under 7%. 



Last week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 50, 25, 64, 61, and 33, accompanied by 8 breakouts of 4+ week
ranges, no valid trades and four close calls in CA, ITU, GMR, and MATK.  We
noted last week that if new daily highs could remain again above 20 consistently
this week that the market had a shot at continuing the rally from here — this
did indeed develop and the market must now breakup fully and hold up to confirm
another upleg developing.  So far, the action remains bullish biased, but with
nothing near the breadth and power of the great bull markets of the 1980’s or
1990’s.  Position in valid 4 week trading range breakouts on stocks meeting our
criteria or in close calls that are in clearly leading industries, in a
diversified fashion.  Bottom RS/EPS New Lows remained non-existent last week, as
they have been since mid-April, showing low readings of 2, 2, 8, 6, and 6, with
2 breakdowns of 4+ week patterns, no valid trades, and no close calls, so the
short-side remains dismal.
Continue to watch our NH list and buy flags or cup-and-handle breakouts in NH’s
meeting our up-fuel criteria that are in leading groups, but add no more than
two positions a week.

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.

On the long side we like
(
CCRT |
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(
SFNT |
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AVID |
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(
UNTD |
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still, the close calls from this week,
(
CA |
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ITU |
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GMR |
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(
MATK |
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and the close call from last week, FCX.  No short-side opportunities have
developed via our strategy for some time. We also like conservative gold stocks,
like FCX pfd A and
(
NEM |
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China, and Thailand, in particular — though here investors may want to tread
cautiously until it is clear that the correction/consolidation is ending.




Technicals and breadth have yet to confirm whether the massive
liquidity infusion is going to have traction quickly, or whether a more
meaningful correction is upon us.  We’re still in a stalemate.  Continue to
watch for clear leadership in leading new industries and plurality of breakouts
in those industries, for follow-through by close call and criteria stocks, for
breakouts by the averages that will confirm if this bear-market rally has legs,
and for further breadth thrusts, to tell us that a better bullish cycle is
developing here. 

Mark Boucher