These Sectors Are Outperforming
Cautious
Global Rally Continues
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The markets are starting to
anticipate a stabilization of the deceleration in the global economy we have
been talking about for months. We’re seeing outperformance by sectors like
materials (particularly Steel), emerging markets, Russia, and Belgium, as well
as large-cap value.  More bullish and aggressive traders and investors could
begin nibbling on outright longs in these leading areas, whereas more cautious
investors could pair these leaders against ETF’s in the US and global markets as
a whole. We continue to suggest keeping it simple and not allocating too
heavily in what is a high-risk market, even if the reward is also rising. The
odds favor the rally continuing to new highs slowly, but we’re in a period of
time that is perfect for more terrorism, and the degree of certainty in this
rally is not yet optimum.
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Therefore despite some trading
opportunities and some relative long/short sector trading opportunities, we
continue to recommend a more cautious than normal stance toward equities, with
significant allocation to other asset classes in general, including cash.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 (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.Â
This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 75, 72, 128, 62, and 42 with 14 breakouts of 4+ week ranges, no
valid trades and close calls in CORS, SSL, BHBC, and OS. Valid trades appear
open in CETV and MLI. Breadth is expanding again and more close calls would be
a call to add some long exposure. 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. This week, our bottom RS/EPS New
Lows recorded readings of 3, 3, 3, 4, and 6 with 6 breakdowns of 4+ week ranges,
no valid trades and one close call in CDL. We’re still not getting a lot of
trading signals in valid breakouts, though the environment is improving slightly
on the long side — let’s see if this holds up now that some resistance levels
are close at hand.
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.
We suspect a playable rally is underway. However it entails significant
shock-risk and is not yet signaled by a broad-based plurality of markets. Some
nibbling, either via outright longs or spread trades may be in order. Yet
investors should continue to be more cautious than usual in this difficult
market period. Sometimes it is hard to be patient, but wise.
Mark Boucher