What We Need For A Tradeable Upmove…
Breakdowns Cause for Concern
Today’s big downside action and volume and breadth is starting to develop
into a troubling trend for the market that investors must monitor carefully.
Thursday, Aug. 5 saw the Naz break to new 2004 lows, and head and shoulder’s
tops in Retail Holders and many internet indexes that are leading the tech market
lower. Consumer cyclicals broke down on Wednesday. New lows broke above new
highs this week again too, and we’re getting more potential short-sales
than longs here. Also ominous was the action in the energy sector on Thursday.
Even though crude rose to new highs, oil stocks were down on heavy volume, and
XLE and other energy indexes are on the verge of forming small double-tops.
When the leaders join in the decline despite industry bullish action, the market
is on the verge of trouble, and this would be indicated by a double-top breakdown
among broad energy shares.
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However from a macro view investors should probably err on the side of caution
before becoming overly bearish as well. This so far feels more like 2001’s
decline than 2000’s which had more ample and safer shorting opportunities.
There may indeed be some more downside, but the downside SHOULD be somewhat
self limiting, as long as oil prices do not continue soaring into the high 40’s
and stay there. Remember the triple threat we talked about repeatedly in the
Spring — right now higher oil prices, one of those threats, is helping
push the market lower, as is a strengthening dollar another of the threats.
A new threat is also emerging — decelerating global and US growth rates.
While it is too soon to call this a return to recession, Leading Economic Indicators
globally, as well as in the US and Asia, are all turning lower — which
is rare in the absence of tight monetary policy. It appears that the stimulus
effects are wearing off. Economically, absent a shock, it is likely that this
deceleration will not deteriorate into no growth, but just ease into less growth.
But until it is clear that the deceleration in global economic growth is turning,
investors will be concerned about recession and deflation again as the markets
move lower. This is just the type of fear that may be needed to create a climax
that will setup a tradeable rally in markets (not a new bull move, but a tradeable
upmove for intermediate-term traders).
^next^
IF we can get bonds moving higher and higher as the market moves lower, rates
will help ease the pain and put a floor under the market, as long as oil prices
and the dollar do not continue soaring. Those brave souls who want to trade
this market, which we consider not a high odds situation, should look to buy
climax lows and sell overbought rallies in the weakest and strongest sectors
respectively. Strongest sectors include Austria, Telecoms, Utilities, Railroads,
Materials and Resources, and value, while the weakest sectors include consumer
cyclicals, retail, internet, tech, and growth.
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 41, 36, 48, 43, and 24 with 15 breakouts of 4+ week ranges,
no valid trades and no close calls. Upside breadth has backed off yet again,
and downside breadth is now expanding to nearly decent shorting levels. 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 recorded readings of 18, 13, 16, 21, and
33 with 7 breakdowns of 4+ week ranges, no trades and no close calls, though
we had valid shorts in WBD and ADLR in the past. We’re still not getting
a lot of trading signals in valid breakouts, though the environment is improving
slightly on the short side.
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.
To add to uncertainties, China and the US seem to be squaring off for a battle
of sorts over Taiwan policy. Jiang has reason to want a Taiwan crisis to remain
in power, so there are motivations behind the madness. The likelihood of terrorist
actions before November is high. The essence of successful trading is to only
risk precious capital when the odds appear heavily in one’s favor. To
us there are just too many crosscurrents in the markets to get this kind of
odds advantage — and so we continue to recommend a huge amount of cash
until the odds improve.
Mark Boucher
