What The Global Markets Are Saying
The ECB loosened by 50 basis points this week
and so did the Danish central bank. The Japanese will have a new central
banking head who will likely target inflation. Asia has already
loosened. Australia and Korea and UK held off against tightening credit despite
strong areas of growth to help fight global deflation and improve global
growth. China is both loosening policy aggressively AND
providing fiscal stimulus, and this chief component of global deflationary
pressure is starting to stabilize and reverse its own internal deflation. We now
clearly have CONCERTED central bank intervention
and fiscal stimulus.Â
The markets will tell us whether this
global reflationary effort will be victorious over potential deflation. My
guess is that it will and that we are at a turning point in the tide between
deflation and inflation somewhere in here. But my guess doesn’t mean diddly! We’ll
let the markets decide. So far commodity markets are rallying, stock markets are
rallying, bond markets are reacting, and now even junk spreads are declining. A
plurality of markets seem to be suggesting that the global economy will turn
around here soon. That likely means more equity rally ahead. But there is a big
fly in the ointment — WAR jitters that could
knock things around on a moment’s notice. So risks are still pretty high.
The breadth and leadership of the rally since the 10/10 lows is OK though not
clearly strong. We have had two follow-through days, and one breadth thrust
during this rally. It would be very helpful to have more breadth thrusts like
another follow-through day up, a 9/1 up/down volume day, 5-day moving average of
advancing volume to be 77% or more of total volume, an 11-day A/D ratio of 1.9
or more, or a 10-day A/D ratio of 2 or more. True, since June we’ve had both a
9/1 volume day and an 11 day ma of a/d over 1.9, which is the best showing via
breadth thrusts the market has displayed since the October 1998 lows.
So far the rally has been mainly concentrated in the weakest stocks of the prior
bear move, and leadership is just now beginning to show signs of life. The
stocks that have broken out have not had solid continuation, though there are
signs this is beginning to improve. If volume, breadth, leadership, and
follow-through can emerge, we suspect this rally could develop into the
strongest and longest bear-market rally we’ve seen since the March 2000 peak.Â
Let’s tip-toe into the long side here while continuing to wait with substantial
allocation for stronger evidence of leadership and follow through.
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 38% 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
VERY DEFENSIVE. We’re now 92% in T-bills awaiting new opportunities, with
one sole long position. Our model portfolio followed up
weekly in this column was up 41% in 1999, up 82% in 2000 and up 16.5% in 2001 —
all on a worst drawdown of around 12%. We’re now up around 6.97% for the
year 2002.
Top RS/EPS New Highs have mustered up just one solid week of consistent +20
or higher readings since the 7/24 lows. Readings this week were 34, 33, 46, 14,
and 14, accompanied by 7 breakouts of 4+ week consolidations within these new
highs, with one close call on
(
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PowerRating). Let’s see if we can get 20+ breakouts
consistently, some follow-through on close-call breakouts, and some consistent
group leadership. Not there yet darn it!Â
Bottom RS/EPS New Lows continue to deteriorate with readings of 1, 1, 0, 1,
and 1, accompanied by a new low of just one breakdown and no close calls. Notice
that our analysis of new low breakout quality helped keep us from getting
trapped on the overly bearish side of the market in the decline from late
August, and that we’ve missed some potential traps on the upside so far in this
deceptive rally.
For those not familiar with our long/short strategies, we suggest you review my
book
The Hedge Fund Edge, course “The Science of Trading,” and
new video seminar most of all, where I discuss many new techniques.
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 Financial
(
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PowerRating) @40.99
(43) w/ 37.2 ops. Continue to watch our NH list and buy flags or cup-and-handle
breakouts in NHs meeting our up-fuel criteria — but be sure to only add names
that are in leading groups, and now only add two trades per week once again
until leadership and follow-through improve (soon?).Â
Â
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: NONE. Continue to watch our NL list
daily and to short any stock meeting our down-fuel criteria 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.
I’m now biased. I
think the market is heading for a “B†wave rally here and that the deflation
threat has TEMPORARILY been halted with the global
economy likely to improve soon. Eastern European markets and Asia are leading
the rally, and deserve attention (dominance) in global portfolios. Commodities
are starting to break out. Fiscal stimulus and monetary stimulus are being
deployed. IF the war APPEARS to go well we could
even get a rally throughout MUCH of 2003 before
excess capacity problems reassert themselves and the effects of all this
stimulus dry up and we retreat again (or conversely inflation threats perk up
faster than expected — watch GOLD). But I will continue to let the markets CONFIRM my bias — and that requires
MORE EVIDENCE OF CLEAR GROUP LEADERSHIP, MORE QUANTITY OF
BREAKOUTS THAT MEET OUR CRITERIA OR ARE CLOSE CALLS, MORE FOLLOW-THROUGH BY
CLOSE CALLS AND STOCKS BREAKING OUT MEETING OUR CRITERIA, AND MORE BREADTH OF
NEW HIGHS AND BREAKOUTS ON OUR LISTS.
Â
Let’s watch for more
follow-through, more breadth, and more leadership to develop with our finger on
the trigger looking for long opportunities here. Remember that war risks mean
cautious allocation is prudent.
Until next time,
Mark