You Really Need To Watch The Dollar–Here’s Why
A Little
Tougher Going Ahead?
The market rally since the
election in particular has been dramatic. Breadth has improved markedly and the
market has pushed ahead consistently. For the US market in particular, events
may start to make the headway a little more choppy soon though.
The dollar is nearing 80
support, while the Canadian dollar and a host of currencies are also reaching
fairly long-term support. This comes at a time when the dollar’s decline has
been too swift for the comfort of global central bankers. Greenspan has further
unwound the market with comments at the G-20 meeting this weekend, in which he
bashes the US chronic current account deficit and emphasizes that the currency
will weaken at these deficit levels. No G-20 coordination may push the dollar
down early next week to new lows. However the Yen is in the 100-105 region
where the Japanese have defended with intervention. The Japanese economy is not
on firm enough footing for Japan to let its currency explode unabated. Other
Asian currencies have exploded as well.  Some European officials are also
discussing intervention against the dollar’s collapse. I suspect at some point
between here and 80 in the dollar, intervention will begin.
In addition the dollar’s
decline is starting to spook the bond market. An orderly dollar decline is
bullish for the market — and likely to allow bonds to avoid a resulting
decline. But too swift a decline is undesirable — and the swiftness of this
dollar decline is hitting bonds today, and bonds are hitting stocks. More
tradeoffs in this story may make market gains more volatile and less consistent
in the period ahead.Â
Investors need to watch the
movement of the dollar and currencies and its impact on bonds and stocks
carefully in the period ahead.
We still like Rails, South Africa, Chile, Eastern Europe and non-oil Russia,
Software, Belgium and
Austria, value/growth and mid-cap value, Europe and world/US, Indonesia,
Malaysia, and gold.
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.Â
^next^
This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 133, 172, 187, 90, and 154 with 49 breakouts of 4+ week ranges,
one valid trade in BHP and one close call in NATR. Breadth is expanding again
and more close calls would be a call to add some long exposure. 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 3, 4, 4, 2, and 0 with 2
breakdowns of 4+ week ranges, no valid trades and no close calls. We’re seeing
a growing number of valid breakouts, though this is not a gung-ho environment.Â
Valid signals are in place in MLI, VIP, KMRT and GBX. The rally is picking up
and so is our allocation, though investors should be aware of possible headwinds
looming as discussed above.
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.
A playable rally is upon us. Enjoy it but realize it is not likely to last as
long as normal. Remain nimble and enjoy the good times while they last, but
don’t be afraid to take profits quickly.
Mark Boucher