Watch Gold And The Dollar — Both Are At Critical Levels

October 31, 2003
Mark Boucher

There
are potholes in the global road to recovery.
After we suggested investors take profits in Russia and Eastern Europe on a
move below last weekâ€™s lows, the Russian market broke those levels and
then proceeded to collapse subsequently and is currently over-reacting on the
downside and creating potential opportunity, with a big downside move in response
to Putinâ€™s ousting of an oil oligarch. A good volume reversal up could
be a decent speculation for risk-oriented traders.

Asia is close to new highs
or at new highs, and we still like BROAD exposure to the region over specific
countries from here. Chile is our favorite market in Latin America and is leading
those markets higher, but broad Latin indexes have yet to make new highs. Broad
EMs are also making new highs, and remain a favorite play. Resources are dominating
new highs, particularly junior mining shares and base metals (like FCX), which
weâ€™ve been recommending for many months.

src=”https://tradingmarkets.com/media/2003/Boucher/mb103103-01.gif” />

src=”https://tradingmarkets.com/media/2003/Boucher/mb103103-04.gif” />

Gold and the dollar are
at somewhat critical levels that bear close watching here. The commodity currencies
have done well against the dollar and led this latest leg up against the dollar
since we remarked on the AUD breaking out in late September. Move stops up to
lock in profits in the AUD and CAD. Watch the euro carefully. A move by the
euro below 1.15 and by the nearby Swiss franc below .74 will likely signal a
period of brief dollar strength ahead and the euro and Swissy have been unable
to confirm the new highs in commodity currencies. Such a move would also likely
impact gold to the downside, as gold has followed the currencies with an outside
day down near 395 resistance.

src=”https://tradingmarkets.com/media/2003/Boucher/mb103103-05.gif” />

src=”https://tradingmarkets.com/media/2003/Boucher/mb103103-07.gif” />

Global bonds are also finishing
reactions and new lows in Gilts are leading what we expect will EVENTUALLY become
a new leg down in global bond prices â€” particularly in the strongest global
economies where rate hikes are likely closest at hand (Britain and Australia).
JGBs will likely signal the broad move lower.

The main trend continues
to be up for both US and global equities, but things are overdone in most markets
and they are therefore vulnerable to setbacks at any time. The baton is being
passed from MASSIVE fiscal and monetary stimulus to actual economic growth,
earnings growth, and even employment growth as the fuel for the next leg up
in global equities. This transition may take a while for sentiment to buy the
strong recovery theme. It still appears that the most likely dangers that could
derail the recovery remain a bond surge, a dollar crash, a renewed oil crunch
and price surge, or a major terrorist action that breaks the back of consumer
confidence.

src=”https://tradingmarkets.com/media/2003/Boucher/mb103103-06.gif” />

Our US long/short model
is doing reasonable well considering the low level of allocation it has had.
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 portfolios
up over 11% ytd by our calculations) â€” 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 21, 16, 45,
67, and 94, accompanied by 22 breakouts of 4+ week ranges, no valid trades and
close calls in
(
NCEN |
Quote |
Chart |
News |
PowerRating) and
(
LEND |
Quote |
Chart |
News |
PowerRating). Internal strength has come back
SOME, but still remains slightly sub-par, after plummeting last week. 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 with readings of 7, 2, 3, 2, and
0 with 1 breakdown of a 4+ week range, no valid trades and no close calls. The
short-side remains bleak.

src=”https://tradingmarkets.com/media/2003/Boucher/mb103103-02.gif” />

src=”https://tradingmarkets.com/media/2003/Boucher/mb103103-03.gif” />

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 change in the new-economy/old-economy theme appeared to
be upon us. We’ve been effectively defensive ever since.

No short-side opportunities
have developed via our strategy for some time. We also like broad metal stocks,
like FCX, small-cap Emerging Markets in general, metals and resources, South
Africa, broad Latin America, and broad Eastern Europe (on a good upside reversal
on high volume) and broad Asia. But use tight stops in all of these plays as
the upside party is well established and a bit overdone.

We still believe that weâ€™ll
have to be very nimble to profit consistently and know when to pull the plug
in this market, and when to time the hiccups. A mini-mania could develop if
global economic statistics start to change investor psychology â€” or a
shock could tank this market so quickly it would make you dizzy. Thatâ€™s
why we suggest using funds and vehicles that are liquid enough to get in and
out of quickly for our current exposure to top relative strength markets. Investors
are advised to remain extremely flexible.

Mark Boucher

Watch Gold And The Dollar — Both Are At Critical Levels

BUY THE FEAR, SELL THE GREED

Quick Links

Company Info

Contact

Company Resources