This Trend Bears Watching Very Closely
Last week, we discussed the huge shift in US Central Bank policy
and how Asia was colluding with it. Even the ECB has joined the game. This
coming week, we will see how much more liquidity the Fed will pump into the
system and how fast. A 50 bp cut is not out of the question and will show
continued aggressive reflation policy.
Japanese bonds and global bonds took a hit this week, as fears
are escalating that global central bank reflation efforts will be negative for
bonds. This trend bears watching very closely. We suspect that it will take
substantially more time for real evidence of high enough inflation to develop,
but if global bond markets (in a clear bubble unless there is deflation) begin a
serious bear move, it will cut the equity market rally short.
Meanwhile, inflationary pressures continue to be evident (though
only slight) in China. A long-term gold bull market is in the making if the
reflationary global efforts are temporarily successful, as we suspect.
The market has reacted in its first minor technical setback since
the war ended. We watch and await further technical action before suspecting
that even a meaningful correction is under way. Breadth has deteriorated some,
but is still in a clear bullish bias. Thus the environment is still ripe for
longs that meet our criteria.
The bottom-line is thus that globally concerted intervention and
stimulus will likely take better hold than any attempt to fight deflation thus
far. There will still be traction problems with stimulus, but this much stimulus
the global economy will feel. However, investors need to realize that the stated
goal of this policy is likely to be achieved, and that is inflation. Thus, the
markets and economies have some room to run for a while, but the seeds of the
demise of both are being sowed in future inflation. Gold and foreign currency
deposits should be a core long-term holding for investors in this environment,
although the dollar is rallying in a correction off of deeply oversold levels
and this may continue in the weeks ahead, for a spell.
Breadth is confirming this trend both domestically and
internationally. Nearly all of the 48 countries we follow have their indexes
above 200-day moving averages. Upside/Downside Volume, Advance/Decline, and New
High/New Low data all confirm a slightly bullish environment, though one that is
getting overbought and subject to correction/consolidation at any
time. Nonetheless, for the intermediate-term at least, the trend is up, and the
trend is your friend.
Investors should continue to cautiously add stock exposure as
trade signals are generated. Wait for high volume, strong breakouts of the S&P
and Dow new 52-week highs before to become more aggressively bullish. All of the
conditions are in place for a stock market rally; now we await market follow
through and breakouts of stock 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 is up around 5.4% YTD on a worst
drawdown of under 7%.
Last week in our Top RS/EPS New Highs list published on
TradingMarkets.com, we had readings of 71, 37, 59, 86, and 43 in our Top RS/EPS
New Highs list, accompanied by just five breakouts of four-plus week ranges, a
valid trade in Rofin-Sinar
(
RSTI |
Quote |
Chart |
News |
PowerRating), and a close call in AAI Pharma
(
AAII |
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News |
PowerRating).
With new highs on this list remaining above 20 all week, the bias is still
toward cautiously adding longs on breakouts. The action continues to be
cautiously bullish biased, but nothing like that of the great bull markets of
the 1980’s or 1990s. On a major secular bull move, we would see hundreds of
breakouts in close calls or stocks meeting our criteria, not just two. (See
charts of
(
RSTI |
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Chart |
News |
PowerRating),
(
AVID |
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Chart |
News |
PowerRating) and
(
UNTD |
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PowerRating) below.)
Remember to try and position in valid four-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 2, 1, 0, 2, 0, and 0 breakdowns of a 4+ week pattern 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 NHs meeting
our up-fuel criteria that are in leading groups.
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, and
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 US 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.
So far, breadth and technicals continue to confirm that the
liquidity infusion is going to have some traction, though the markets are
overbought and could correct or consolidate here at any time in the short-run.
Pare your weaker holdings here and wait to rotate into new breakouts once this
consolidation/correction is over. Investors should remember to wait for valid
breakouts of stocks meeting or close to our rigid criteria before buying. By
positioning in these stocks, you should be able to continue to substantially
beat the moves of the averages with significantly lower risk than buying the
market as a whole. We 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.Â
Better times seem to be
materializing here at least until the seeds of its demise begin to show roots.Â
Mark Boucher