What To Expect In One Of The Hottest Sectors Of Recent Years
TLT, representing the
long-bond in the US, has now completed a double top from around 96.3
in early June to 92.6 and is now setting up to test a weekly uptrend line and
200 day MA support in the 90-91 area. We outlined in past articles how the bond
market has acted like a stabilizer preventing any corrections from becoming too
serious in stocks when they began to slide. We may now be seeing to opposite end
of this stabilizing effect. For as bonds have fallen over the last few days in
particular, it has begun to weigh on stocks globally.
We suspect the test of 90-91 in TLT will be a critical one for the market’s
intermediate-term rally mode to remain in effect. In the meantime the test of
this level gives an overbought and thin market an excuse for an overdo
correction that is getting broader-based as it continues. August is not the best
month seasonally, and we may get more correction/consolidation here than we’ve
had for many weeks that investors should watch out for.
One of the hottest sectors of recent years, housing has shown itself to be
particularly vulnerable to recent bond market weakness. Housing stocks and even
REITS have gotten pummeled on the heels of higher long-rates. The TLT test may
be critical for these sectors and as long as economic reacceleration continues
to impact bond yields, these sectors may have trouble outperforming further.
The dollar has also put in a top of sorts at historical resistance levels and
the EUR chart shows that the 1.175-1.2 support zone we have been warning about
has held and led to a double-bottom breakout on the upside. We suspect with US
rates still headed higher, that any EUR rally will be short-lived until the Fed
cools off and that the 1.24-1.27 zone will prove formidable for the EUR. Right
now however these thin markets are enjoying better EURO economic variables than
has existed for a while.
As we said last week, this global bull market is ripe for a correction. It may
well be that such a correction is starting to develop here. Nonetheless it still
looks like the intermediate-term trend remains higher, though not strongly so,
as valuation problems loom not too far overhead. The interplay of bonds, oil,
and the dollar remain critical to watch. We still advise a higher than normal
degree of caution for longer-term investors, though some participation is in
order. Emerging markets in Latin America, Eastern Europe and Asia are leading
the advance, though they are all reacting heftily this week. Oil and resources
remain strong though vulnerable to a peak in oil prices. European financials and
utilities still seem to be faring well in response to lower bond yields. Biotech
seems to be a newer leader in the current rally that traders could watch, as do
semiconductors. Soft drinks, and defense/aero continue to lead on the upside.
This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 169, 130, 160, 167, and 113 with 39 breakouts of 4+ week ranges,
no valid trades and close calls in PCO and TWGP. This week, our bottom RS/EPS
New Lows recorded readings of 8, 3, 4, 2, and 3 with 5 breakdowns of 4+ week
ranges, no valid trades and no close calls. One valid signal remains in place in
VLO on the long side and in IDT and UIS on the short side. We advise some
caution on both sides of this aisle, though some allocation to global leaders
seems prudent here.
Investors should note the introduction of a London-based brent crude oil i-share
recently. This allows investors to trade oil like a stock. US versions are in
the wings. We love these new i-share vehicles that give investors more and more
flexibility easily.
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 of
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.
We continue to advise that this is a DECENT yet NOT OUTSTANDING market
environment in our opinion and investors should allocate with less than full
strength until a CLEARLY better environment emerges.
Mark Boucher
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