Watch These Global Leaders
Global leadership continues to
consolidate and correct, while a rotation in sectors moving higher is
developing. Malaysia, Taiwan, and Russia continue moving higher and leading the
rotation into the laggards of 2003. Europe is continuing to outperform despite
a stronger dollar. Mid-cap value continues to outperform the technology leaders
that got overdone last year. High dividend plays like real estate, timber, oil,
coal, virtual banks, high dividend stocks, and utilities are rotating into outperformance as well. Energy plays are breaking out with some plurality here
and oil has been outperforming since the third quarter.
While platinum is flirting with
new highs, and silver is consolidating near highs, gold is correcting. Look to
the 370-385 area for potential long-term support in cash gold. Gold equities
are mostly correcting as well and may consolidate further until gold gets
support.
A correction in the downtrend
of the dollar has developed and will gain strength on a DXY close over
88.25 and a euro move below 1.23, which would confirm a double bottom in the
dollar and double top in the euro. Bearish dollar sentiment has gotten way
overdone on its over 50% decline in value against the euro since late 2000. Yet
the euro is still not strongly overvalued on a PPP basis, and we suspect a more
belabored return to the dollar’s declining trend will reappear after a
multi-month correction is completed, if the double top in the euro develops.
The best currency plays now seem to be crosses of interest rate raisers over
possible interest rate droppers like the GBP/EUR, GBP/CHF, and NZD/CAD. We
think the Asian currencies will likely lead the next leg up against the dollar
after this correction runs its course.
Global bonds have now
correcting 50% of last year’s big slide and are approaching resistance zones
here. It could take many months, but eventually stronger global growth and
inflationary pressures should lead another leg down in what could be a secular
peak in global bond markets here.
The base metals have been
soaring, with the exception of palladium. Yet sentiment is way overdone and
most base metals are getting close to historic resistance levels. Investors
long should tighten stops and take some profits here. Commodity indexes are
starting to break out again following the lead of grains and oils. We wouldn’t
be surprised to see palladium and the softs play catchup in the commodity bull
market later this year.
Rotational trading ranges are
not the most fun and profitable environment for global markets. Yet investors
should remember that the main cyclical trend is up and should be given the
benefit of the doubt, so we suggest investors position in the leading sectors as
they break out and give opportunities. This year more than any since 2001,
investors may need to be more nimble, tactical and trading oriented to make
decent profits.
So far our US long/short model is fully on the sidelines and we continue to
suggest investors position in our favorite sectors noted above and use some
caution until stocks meeting our criteria expand in breakout breadth. 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 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
35, 11, 20, 11, and 17, with 11 breakouts of 4+ week ranges, no valid trades and
close calls in AUO and FDG, a marked improvement over last week yet not a whole
week with readings above 20. A trading range environment is likely until we
get stronger internal breadth numbers and higher quality and quantity of
breakouts. 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 remained non-existent with readings of 1, 5, 7, 9,
and 3, with no breakdowns of 4+ week ranges, no valid trades and no close
calls. The short-side breadth remains bleak and it will be important to see if
it picks up here on further corrective activity. So far we don’t see internal
evidence of a serious correction, nor do we see good internal evidence that a
new broad-based upthrust is in the making.
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, and did not get to a fully allocated long exposure even
during the 2003 rally.
On the long side, we like the close calls from this week, AUO and FDG, and
recent close calls from past weeks, PPC, NFI, MBT, GALN, and NIHD. We would
keep allocations low until the trend is more certain and emphasize global
leaders noted above until more trade signals are generated and the trend is more
certain.
Until
next week,
Mark Boucher