What you should be watching in global markets

With China and the US both looking like they are set to slow down slightly in
the period ahead, I am NOT as concerned about inflation as the market appears to
be currently. A US and China concurrent slowdown needs to be monitored. IF, the
US and China slow down but not too sharply, a soft-landing globally CAN still
develop here and markets would eventually recover, after more correction. Let’s
look at some of the key things to watch.

One key is bonds, as we highlighted in our “2006 Investment Roadmap”. Bonds have
bounced off of the long-term decade long trendline support area over the last
couple weeks. A CLEAR break of the 5.3% or so yield area and 82 area in
(
TLT |
Quote |
Chart |
News |
PowerRating)
would be very bearish for the market.

Another key is the dollar. A FAST further breakdown of the dollar and breakout
of Euro to new highs (around 135 on EUR and FXE) would be quite bearish for the
market.

Right now the market is in at least an intermediate correction, fairly
substantial technical damage has been done, and we suspect more downside is in
store although the market is so oversold that it could recover sharply before
retreating again at any time.

We’re watching critical tests of 200-day
moving average
support in a number of top global themes such as gold, oil stocks, emerging
markets, and other top groups. What would be most constructive here would be
tests of approximate 200-day MA levels, consolidations for a few weeks or more,
and then HIGH VOLUME rallies off of these levels.

Right now investors should be playing defense mostly. It’s too late to short if
you haven’t already done so unless you are pairing shorts against longs to
neutralize market exposure — something we had suggested for some time before
this correction developed. Despite the hype, inflation seems to be peaking, and
core inflation is still fairly benign. Therefore IF bonds can hold major
trendline support and IF the dollar can stop free-falling, we could just get a
major correction of the entire move since 2002 in this market and then a slow
resumption of the bull market and not an outright bear. Let’s watch carefully to
see the market tell its tale, mostly from the sidelines here.

I tried over the last two months to put out a subtle warning to investors
regarding the market. As I’ve sought to emphasize over the last month or two, I
continue to suspect strongly that the period directly ahead is one where it may
be ABSOLUTELY CRITICAL for investors to have a solid grasp and understanding of
the Big Picture Macro background of global markets, the top secular themes, and
the huge vulnerabilities of this environment. A potential MAJOR SHOCK to the
markets is brewing and those unaware could easily be sideswiped. The current
market behavior only reinforces the accuracy of this view.

Whether this is a REAL bear market we cannot yet say. Investors should be
defensively postured while the market provides evidence. Key markets need to be
watched and key levels as referenced above. Let’s sit mostly on the fence here
and let others risk assets in a risky environment while the market tells its
tale. We still suspect a soft-landing is quite possible, but positive action
needs to develop in bonds, the dollar, and the market to confirm this view.

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.

Our US selection methods, our Top RS/EPS New Highs list published on
TradingMarkets.com, had readings of 9, 4, 8, 15 and 7 with 1 breakouts of 4+
week ranges, no valid trade meeting criteria, and no close call. This week, our
bottom RS/EPS New Lows recorded readings of 43, 53, 62, 36 and 80 with 13
breakdowns of 4+ week ranges, no valid trades and no close calls. The “model”
portfolio of trades meeting criteria was only long in WIRE and if investors
weren’t stopped out on the break of 37.5 they should use an ops below this
week’s lows now. Look for short-sales hedges against any long positions and even
outright shorts in small size in some of our favorite short sale sectors like
interest rate sensitive, Utilities, managed health care, big-cap internet,
techs, and home builders.

Mark Boucher has been ranked #1 by Nelson’s World’s Best Money Managers for
his 5-year compounded annual rate of return of 26.6%.