This may be the safest trading opportunity triggered by Katrina
Our hearts go out
to all those in New Orleans and surrounding areas
affected by the horrible devastation of Katrina. The footage is mindboggling.
Katrina has also already had a significant effect on the markets. The bias
before Katrina was toward a stronger dollar as Fed rate hikes seemed assured to
continue. Katrina’s damage has been so bad that many now speculate that the Fed
will err on the side of caution and hold off increasing rates in September.
Euro-dollar futures erased losses of many weeks in the two days following
Katrina, as speculators started discounting the end of rate hiking being
possible. The dollar took a major hit yesterday in the wake of discounting a
possible end to rate hikes.
Breakouts influenced by Katrina abound — Canada
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beneficiary play), South Africa, machinery, utilities, lumber futures, oil, and
energy of all kinds are just some of the list. Investors should monitor the
impact on refineries carefully — for this might have the potential to seriously
hamper growth. The problem in the US is that environmental laws have essentially
prevented the creation of new refineries for many many years. Refineries need to
run at 95%+ rates just to supply the oil needs of the country currently. With
many refineries in the Gulf now shut down and damage not yet fully able to be
assessed, there is even the potential for gasoline shortages and rationing. We
hear reports of areas around the Gulf already running out of oil. Unfortunately
releasing the Strategic Petroleum Reserve will not really help — because it is
made up of crude and unrefined oil. Normally one would expect hurricane damage
to actually lead to a short-term burst from rebuilding efforts. However the
amount of devastation of Katrina is so incredibly large and the potential for
damage to one of the largest export ports and to refineries is so potentially
crippling that this time might really be different and Katrina might have a much
more growth-curtailing effect than a more normal hurricane. Unless the Fed
really eases up, investors should monitor a potentially large slowdown. Canada
seems likely to pick up much of the US’s lost exports out of New Orleans.
Also impressive is the continuation of breakouts in Japanese indexes and Eastern
Europe. The Nikkei has broken out above 12,000 for the first time in many years
and continues to march to new highs despite adverse news and potential global
economic softening. Investors continuing to watch FXTID could add more
comfortably to this and to Japanese trades when both indexes make new highs
here. We like the breakouts in Eastern Europe, in Canada, in machinery, and in
South Africa. We are also impressed by the continued relative weakness of the
retail group, particularly retail by lower income groups, which we suspect will
now be even more hard-hit and have to cut back from higher oil prices.
We continue to suggest fairly neutral exposure in the US and not too overly
strong long-bias in foreign equities, with less than normal allocation. Markets
are thin and treacherous here.
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 23, 21, 32, 51, and 104 with 29 breakouts of 4+ week ranges, no
valid trades and no close calls. This week, our bottom RS/EPS New Lows recorded
readings of 9, 16, 21, 16, and 13 with 8 breakdowns of 4+ week ranges, no valid
trades and no close calls. One valid signal remains in place in
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long side and in UIS on the short side. We’re still not getting a lot of trading
signals in valid breakouts, and though the environment is improving slightly on
the short side, it’s CLEARLY not a high odds environment on either side of the
aisle.
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.
Katrina may change the degree of Fed tightening we were expecting — we’ll have
to monitor to see. In the meantime some allocation to recent breakouts with
short-hedging in weaker groups is advised, though not aggressively. If Katrina
damage continues to grow in scope and the Fed starts to indicate and end to
hiking, portfolio impacts will have to be looked at carefully in the weeks
ahead. Let’s see what the less thin environment of early September looks like as
the market digests this shock. If plurality grows we may have a better
environment ahead, but let’s wait until this is clear.
Mark Boucher