This Is What You Need To Be On The Lookout For

  • July 24, 2003
  • Mark Boucher


The market remains within the constraints of the trading range
that has been in force since June. So far there are no solid indications of
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 oppose the forces of overexuberance on the runup to
date. 

This past week the Euro hit an uptrendline and has bounced sharply off of this
first significant support zone near 1.11.  Gold has also bounced sharply off of
the 340 support level within the 320-40 support zone, and
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remain bullish.  Global bonds remain in a sharp downtrend though initial support
levels are being reached in US bonds here.


Commodity prices (CRB) and currencies (AUD, CAD, NZD) have yet to react strongly
to strengthening global economic indicators, and we would suspect normally that
until these markets are leading a recovery, that more backing and filling will
develop.

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 to
confirm a new leg up.  We also continue to suggest that investors closely watch
the global equity leadership for clues as to whether the current consolidation
will get nastier — China, Thailand, India, Russia, Latin America, US small cap
value, and small cap value EMs for clues as to whether the next move will be up
or down in global equities.  So far evidence is gaining ground that the
leadership is stalling here, but no conclusive broad decline has yet developed. 

The story is similar 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.  While downside leadership is so far not
clear, the plurality of the breakdown in upside leadership is starting to grow a
bit. 

We still believe that aggressive central bank and fiscal action that will lead
to a new leg up after the current correction/consolidation, but that investors
will have to be extremely flexible and very nimble to do well in this
environment, which is likely to be more tricky and volatile than any we’ve yet
experienced since the 1999-2000 peak.  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 this
week’s killing of Saddam’s sons is confirmation that things are heating up.  Be
on the lookout for a possible re-acceleration of the on-going war 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 — 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 9, 8, 23, 21, and 24, accompanied by 3 breakouts of 4+ week
ranges, and no valid trades and one close call in FCX.  If new daily highs can
rise again above 20 consistently next week, the market has a shot at continuing
the rally as long as these hold up.  The action continues to rate as cautiously
bullish biased, but nothing like that of the great bull markets of the 1980s or
1990s.  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 4, 3, 4, 3, and 2, with
0 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.
On the long side we like
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and
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from last week, DRL.  No short-side opportunities have developed via our
strategy for some time. We also like conservative gold stocks, like FCX pfd A
and NEM, some broad EM exposure like DEMSX, Eastern Europe, 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 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