This Is The Allocation I Recommend
Some
Breakouts Develop While Some Countries Ease Rates
While the Fed is clinging to
the continued growth scenario and discounting the importance of the deceleration
in global and US growth rates, many other central banks are starting to be
concerned enough to cutting rates further. Recent rate CUTS by Brazil, Korea,
South Africa, and Hungary are the first inklings of concern globally.
Brazilian, Korean and Hungarian indexes (EWZ, EWY, BUX indexes) have broken out
as well upon rate cut news. This is the first evidence of the capitulation that
is likely to be necessary for a catchable leg up in global equities to develop.
We suspect investors can play these breakouts relative to US and global indices
and to a lighter extent outright.
^next^
Also on the verge of confirming
an intermediate breakout are gold stocks, which need to close up strongly today
on continued good volume (Thursday). Silver has stayed strong and platinum has
recently broken out, confirming the move. While junior and exploration mining
indexes continue to lag, we suspect TRADERS can catch a bounce in NEM or a
majors index for a retest of approximate highs. Perhaps this is discounting
global currency devaluation pressures as well as the increased likelihood of
terrorist actions in the weeks and months ahead.
The US market has bounced off
of down-channel support and off of a Fibo point in a Fibo time-frame. Whether a
catchable rally can develop off of this minor support remains to be seen and may
hinge on when the Fed starts talking less hawkishly.
Despite some minor trading
opportunities and some relative long/short sector trading opportunities, we
continue to recommend a cautious stance toward equities, and heavy allocation to
other asset classes in general.
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.
This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 10, 7, 21, 32, and 33 with 19 breakouts of 4+ week ranges, one
valid trade in MLI and one close call in IPS. Upside breadth has backed off yet
again, and downside breadth is now expanding to nearly decent shorting levels.
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 62, 55, 19,
8, and 6 with 10 breakdowns of 4+ week ranges, no valid trades and no close
calls. We’re still not getting a lot of trading signals in valid breakouts,
though the environment is improving slightly on the short side.
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.
While some minor opportunities are developing that may lead to small moves that
could be played by short-term nimble traders, the environment is not yet clearly
advantageous, and so we continue to suggest high allocations to cash and other
assets and a low allocation to equities. Sometimes it is hard to be patient,
but wise.
Mark Boucher