What Traders Need To Focus On In The Coming Days

• July 29, 2005
• Mark Boucher

Chinese
Revaluation and More Bombs Aimed At the West

 

What a news-filled week!  First
another stab at bombing London’s rail system was attempted.  9 million people a
day use this rail system and particularly for those living outside of London but
working there, the attack on this critical infrastructure is an attack on their
freedom, productivity, and mobility.  London’s AIM had more IPO’s in number and
dollar volume than the Nasdaq over the last twelve months with companies listing
from all over the world, so don’t underestimate the importance of this global
financial center.  This is an attack on global capitalism, pure and simple.  The
Brits have a better spirit to endure this kind of thing than any people on
earth.  They have not caved-in to appeasement like the Spanish did.  And yet,
one cannot help but note that an attack on the British rail system is brilliant
in sick sort of way — it is an Achille’s heel of English transport.  And with
multiple attacks coming from men who were actually born in Britain, we fear the
repercussions of this attack on civil rights and freedom of movement globally as
governments respond to the increased awareness of threats.

 

Additionally in the latest
week, the Chinese revalued.  Investors should understand that a 2% revaluation
is a cosmetic step that will likely have few far-reaching implications, despite
some short-term reactions in Asian currencies and equities.  Moreover, the fact
that it was so clearly politically motivated, rather than economically, should
not be lost.  Hu is coming to DC in the week’s ahead and this move was clearly
designed to take some of the wind out of the sails of US protectionists (such as
Schumer and Graham) whose yells have been growing troublingly louder.

 

Chinese revaluation ultimately
will occur again, and one must remember that China is indeed committed to
eventually freely floating the currency, although we believe such a shift will
not be in China’s (or anyone else’s!)  interest broadly until China has done
more to take care of its non-performing loans to State Enterprises and has more
internal inflationary pressure.  We may now only get an extremely mild version
of the eventual impact of such moves:  a lower dollar; an improving
trade-balance in the US;  higher global and US bond yields;  higher gold
prices;  improving US exports to China and Asia, and fewer import price
declines.   These effects will come EVENTUALLY, and short-term market reaction
may be similar though not long-lasting, until a more meaningful revaluation or
shift to free float develops.

 

Yet with the present move being
clearly more politically motivated than economically so, we are concerned that
the protectionists in America, Schumer and Graham and Co., will take this as
evidence that their pressure is working, and step up pressure on China even
more. The further rising of protectionist spirits would be very sad indeed for
the US and the world, and bears close watching following Hu’s visit in
particular. 

 

Market internals are improving
still and remain with a now clearly bullish bias.  Our best guess is that this
is a retest rally that will either test or just slightly exceed the highs of
earlier this year before petering out.  Short-term oriented higher risk traders
may find some tradeable action here, but we still advice a higher than normal
degree of caution for longer-term investors.  Emerging markets in Latin America,
Eastern Europe and Asia are leading the advance.  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 housing continue to lead on the
upside.  Midcap value and small cap sectors continue to do well relative to
other segments, though small caps are up against a valuation resistance level
here. 

 

We also had more Greenspan
testimony this past week.  It seems clear that the Fed remains intent on raising
short-rates, while most of the rest of the world is easing, thinking of easing,
or not tightening (except Canada).  This means the yield advantage wind is
behind the sails of the dollar, despite its being very overbought and many
currencies opposed to it hitting very significant support levels here that
should hold for at least a consolidation if not contra-trend rally.

 

 

Breadth on our TopRS/EPS New
highs versus new lows lists is bullishly biased with new lows and potential
shorts practically non existent. 

 

 

This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 105, 152, 205, 97, and 137 with 67 breakouts of 4+ week ranges,
no valid trades and one close call in MRVL.  This week, our bottom RS/EPS New
Lows recorded readings of 7, 1, 0, 0, and 0 with 0 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 caution on both
sides of this aisle, though some allocation to global leaders seems prudent
here.

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.

The market continues tipping its hat toward the rally continuing on an
intermediate-term basis with somewhat stronger breadth.  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 in our
opinion. 

Mark Boucher