This Group Is Due For A Correction

  • January 16, 2004
  • Mark Boucher

Some
themes are correcting strongly in the current environment.
Resource themes, mining shares, base metals, and foreign currencies have had
an absolutely wild runup and are due for a correction, with a broad list of
these stocks and commodities showing reaction patterns. Emerging Markets are
in a similar boat. Yet, some other segments of the market are continuing to
show decent strength: Small-cap and mid-cap value, lagging Europe (particularly
export-sensitive with dollar jawboning), Hong Kong and Taiwan, lumber, industrials,
finance, software and internet groups, and high-dividend stocks are still doing
quite nicely and making broad-based new highs.

image src=”https://tradingmarkets.com/media/2004/Boucher/mb011604-05.gif” />

image src=”https://tradingmarkets.com/media/2004/Boucher/mb011604-07.gif” />

image src=”https://tradingmarkets.com/media/2004/Boucher/mb011604-06.gif” />

Demand-and-Supply-estimating
indicators are also continuing to show that any reaction in the market lacks
selling power and that demand is close to new highs for the rally. Sentiment
is overdone and the market deserves a breather, but it doesn’t yet appear
that a major correction should develop from here, though several weeks of churning
shouldn’t surprise anyone, while the overdone sectors correct more seriously.

Our US long/short model
is doing reasonably well considering the low level of allocation it has had.
We have long encouraged investors to supplement this strategy with or favorite
foreign and global asset plays. Investors should continue to cautiously add
stock exposure as trade signals are generated that meet our strict criteria,
as well as allocate to our favorite segments. 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.

image src=”https://tradingmarkets.com/media/2004/Boucher/mb011604-01.gif” />

^Next^

This week, in our Top
RS/EPS New Highs list published on TradingMarkets.com, we had readings of
66, 60, 75, 69, and 71, accompanied by 23 breakouts of 4+ week ranges, with
no valid trades and no close calls. Internal strength has come back SOME, but
still remains slightly suspicious. 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 remained non-existent with readings of 0, 2, 1, 0, and 1,
with one breakdown of a 4+ week range, no valid trades and no close calls. Therefore
so far we don’t see internal evidence of a serious correction, nor do
we see good internatl evidence that a new broad-based upthrust is in the making.

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/EPS New Highs” 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 the valid trades from weeks past,
(
RADN |
Quote |
Chart |
News |
PowerRating), and
recent close calls from past weeks,
(
GALN |
Quote |
Chart |
News |
PowerRating),
(
PTNR |
Quote |
Chart |
News |
PowerRating),
(
NIHD |
Quote |
Chart |
News |
PowerRating), and

(
FDRY |
Quote |
Chart |
News |
PowerRating). We would wait for further corrections and some recovery before
buying more mining shares, resource plays, or Emerging Markets, though these
remain some of our favorite themes.

image src=”https://tradingmarkets.com/media/2004/Boucher/mb011604-04.gif” />

image src=”https://tradingmarkets.com/media/2004/Boucher/mb011604-03.gif” />

image src=”https://tradingmarkets.com/media/2004/Boucher/mb011604-02.gif” />

On the short side, we like
the close call from several weeks ago,
(
TRMS |
Quote |
Chart |
News |
PowerRating).

Mark Boucher