Watch, Wait, And Lock And Load: How The Strategy Is Shifting

  • April 11, 2003
  • Mark Boucher

So far it’s been “buy the rumor, sell the news” in the US
victory march in Iraq. The market will need to clear the March-April resistance
zones of around 910 in the S&P, 8850 in the Dow, and 1450 in the Naz on good
volume to confirm that a catchable move to the upside is under way. Investors
should watch for more breadth-thrust indications carefully. It would also be
nice if we could get just one solid week of 20 or more new highs on our Top
RS/EPS New Highs list!!


Most intelligence sites are coming round to the story that
the US made a deal with senior Iraqi Republican Guard commanders for them to be
able to safely exit Baghdad in return for allowing the US to take Baghdad
relatively unopposed. It was a type of surrender bargain that the US coalition
could allow in order to show the world its strength. 

Investors still need to keep a keen eye on events in the
North, where things are very tense. The Kurds, led by US special forces, took Kirkuk and Mosul very easily, but the Turks have threatened to send troops into
Kurdish Iraq if the Kurds don’t pull back. Turkey is too critical to the US
long-term plans for the US to grant the Kurds their desired independence, so a
tightrope must be crossed. The possibility of the US having found Plutonium-239
also would be huge — it would mean not only that Iraq possessed fully capable
nuclear weapons but that there is a production facility for producing
Plutonium-239 somewhere that the world does not know about, that may be
proliferating nuclear arms in a manner that even the most ardent hawks never
dreamed. The peace may be more difficult to manage than the war, and the
markets are sensing this.

We suggest investors continue to cautiously add exposure as
trade signals are generated, although a good volume strong break above the
resistance levels cited above could turn us more aggressively bullish.  Wait for
more confirmation.


Since March 2000
the world index is down over 45%, the S&P over 48%, the IBD mutual fund index is
down over 62%, and the Nasdaq has crashed over 76%. Meanwhile since March 2000,
the long/short strategy we summarize and follow-up each week in this column has
made more than 39% on a worst drawdown of under 6%. While this
performance is certainly underperforming our long-term growth rate, and it is
hardly thrilling to have been so heavily in cash since March of 2000, we have
managed to eke out gains with very low risk in a very dangerous market
environment where nine out of 10 traders have been big losers. 

Our official model portfolio overall allocation remains DEFENSIVE. We’re
now 76% in T-bills (short cash included) awaiting new opportunities, with four
longs and one new short last week. Our model
portfolio followed up weekly in this column was up 41% in 1999, up 82% in 2000,
up 16.5% in 2001, and up 7.58% in 2002, an average annual gain of over 36% — all
on a worst drawdown of around 12%. We’re now up 0.08% for the year 2003.   

To our daily

Top RS/EPS New Highs list the entire rally from the 7/24 and then October
lows never even registered on the radar screen having mustered up just ONE solid
week of consistent +20 or higher readings since 7/24, though this past week was
close. Bottom RS/EPS New Lows have plummeted and we may be getting a strong
bear rally if the war is approaching its ending phase. We had readings of 5,
31, 63, 13, and 16  in our Top RS/EPS New Highs list, accompanied by 7 breakouts
of a 4+ week range, with no valid trades but close calls in
(
NTES |
Quote |
Chart |
News |
PowerRating),
(
MEOH |
Quote |
Chart |
News |
PowerRating), and
(
NFI |
Quote |
Chart |
News |
PowerRating). Bottom RS/EPS New Lows last week showed low readings of  44, 3, 3, 5, and 6
accompanied by just two breakdowns of 4+ week patterns with one valid short in
(
BRKS |
Quote |
Chart |
News |
PowerRating).

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
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.

Upside breakouts meeting up-fuel criteria (and still open
positions) so far this year are:
(
PORT |
Quote |
Chart |
News |
PowerRating)  @40.99 (48.81)- w/  a 44.5 ops to
lock in profits; and
(
GRMN |
Quote |
Chart |
News |
PowerRating) @34.79 (35.05) w/ 30.9 ops; and this week we
took new trades
(
STHLY |
Quote |
Chart |
News |
PowerRating) @8.64 (8.15) w/ 7.2 ops; and
(
AVID |
Quote |
Chart |
News |
PowerRating) @25.1
(25.73) w/ 21.25 ops. Continue to watch our NH list and buy flags or
cup-and-handle breakouts in NH’s meeting our up-fuel criteria — we’ll continue
to advise adding only two stocks per week that are in clearly leading groups
until we are more sure the war news is real and the follow-through is more
consistent.





On the short side this year, we’ve had breakdowns from
flags (one can use a down cup-and-handle here as well) in stocks meeting our
down-fuel criteria (and still open positions) in new trade
(
BRKS |
Quote |
Chart |
News |
PowerRating)  @8.46
(8.22) w/ 10.6 ops. Continue to watch our NL list daily and to short any stock
meeting our down-fuel criteria (see

interactive training module) breaking down out of a downward flag or down
cup-and-handle that is in a leading group to the downside but only add up to two
in any week (and only in the weakest groups) until we get better breadth numbers
on the downside and better leadership.


Investors and traders should be tentatively shifting from
survival strategy to cautiously long-oriented. The war is turning but the peace
is likely to be very difficult and treacherous to manage. The US must show
strength while balancing the demands of a widely diverse group. The markets
must get conviction that the war has ended positively soon enough to save the
global economy. Watch and wait but load up on ammo for a potentially catchable
bear market rally that may dwarf any since 2000. Let’s hope better times are
just starting to materialize here.

Mark Boucher