These Are The Levels I’m Watching, As A Real Correction Is Possible
The
Fed continued its aggressive reflation policy with a 25 bp cut this week and
maintained a negative bias setting it up for a possible 25 bp cut at the next
meeting, or even leaving open the possibility that the Fed will buy Treasury
bonds to maintain strength in the bond market. Despite this, the market was
somewhat disappointed at the lack of a 50 bp easing by the Green man who was
sending out signals that the Fed is exploring extremely aggressive methods of
preventing deflation.
It is now dawning on currency traders that the US economy
is likely to strengthen while Europe remains in a funk, and that the ECB is
going to have to play catch-up in the global easing trend to keep its
economies from falling off of a cliff. Thus the secular trend of a lower dollar
is facing some headwinds here as a correction is emerging. This is impacting
gold too, though gold stocks are remaining quite resilient so far.Â
The
stock market is also grappling with the first possible real correction since the
start of the March war bottom. A strong-volume weak close below 970 in the
S&P 500
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PowerRating),
8940 on the Dow
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Nasdaq
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PowerRating) would signal head-and-shoulder tops and trendline breaks, likely to usher in a correction of 50%-62% of the March runup. Investors should become more defensive if all three indexes break these critical
levels.Â
The markets may also be able to hang in and consolidate above these
levels, a more bullish prospect. Let the market action tell the tale. So far,
breadth has declined in our Top RS/EPS New High List pretty markedly, though it
picked up on Thursday. But selling pressure is not increasing strongly as our
Bottom RS/EPS New Lows list is still languishing. Watch the support levels
above and our internal new high and low lists for clues as to the next move.
Will
the Fed and global central bankers’ push on liquidity levers combined with
massive fiscal stimulus finally turn the global economy into an accelerating
trend? We suspect in the short-term it will, but at the expense of stag-flation
down the road. BUT if the economy doesn’t start gaining traction soon, and even
the Herculean efforts of global central bankers here are not stemming
deflationary forces, watch out below, and watch out for extreme inflationary
actions to follow.
The
leading sectors continue to be biotech and medical related, telecom and internet
related, Natural Gas and software — though strong leadership is not prevalent at
this time. Downside leadership for shorts is barely existent.Â
Global Breadth is confirming a higher trend in equity markets. Nearly all of
the 48 countries we follow have their indexes above 200-day moving averages. Yet, for the first time in weeks, Upside/Downside Volume, Advance/Decline, and
New High/New Low data are beginning to weaken noticeably. We will see if the
market can find support here and consolidate, or whether a full-blown correction
is beginning.
Investors should continue to cautiously add stock exposure as trade signals are
generated. Wait for high volume, strong breakouts of the S&P and Dow new 52-week
highs before to become more aggressively bullish. All of the conditions are in
place for continued stock market strength with the lowest Treasury yields in 50
years; now we wait to see if the market can show further follow through and
breakouts that meet our strict criteria.Â
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 — all on worst drawdown of under 7%.Â
Last
week in our Top RS/EPS New Highs list published on TradingMarkets.com, we had
readings of 24, 8, 7, 4, and 17 in our Top RS/EPS New Highs list, accompanied by
just three breakouts of 4+ week ranges, no valid trades, and close calls in
Starcraft
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PowerRating) and
Enpro Industries
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PowerRating). With new daily highs below 20 for the first time since mid-April, the bias
is becoming more cautious when adding longs on breakouts. The action continues
to be cautiously bullish biased, but nothing like that of the great bull markets
of the 1980s or 1990s. On a major secular bull move we would see hundreds of
breakouts in close calls or stocks meeting our criteria, not just two. Remember
to try and 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 1, 1, 4, 6, and 4, with
3 breakdowns of 4+ week patterns, no valid trades, and no close calls, so the
short-side remains muted.
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.Â
We’ll present a list of stock meeting our criteria as the market environment
improves for either the short or the long side, though investors should still
have some exposure in Avid Technology
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United Online
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PowerRating), and
Rofin-Sinar Technologies
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PowerRating). We haven’t had decent short
exposure for sometime and valid shorts are absent from this environment so far. We also like conservative gold stocks, like FCX pfd A, some broad EM exposure
like DEMSX, Eastern Europe, China, and Thailand, in particular.
Wait
for breadth and technicals to confirm that the liquidity infusion is going to
have some traction, or that a more meaningful correction is upon us. Pare
your weaker holdings here and wait to rotate into new breakouts once this
consolidation/correction is over. Investors should remember to wait for valid
breakouts of stocks meeting or close to our rigid criteria before buying.Â
We
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.Â
Mark Boucher