Our Bias Is Probably Slightly Bullish Here, But...(like evil MMs, we're building short positions on covering spikes)
Friday September 10 -By Mark Boucher TradingMarkets.com
It was ever so slight and subtle, but Greenspan did indeed acknowledge the slowdown in global growth. He effectively stabilized on the balancing beam by acknowledging a bit of slowdown, assuring markets that it would not be permanent, and assuring bond investors by saying that a measured rate of increase in rates, albeit possibly more slowly than he previously thought, would continue. Bonds and foreign currencies were the short-term beneficiaries of his testimony.
In the meantime global and US markets have inched up to the first set of resistance levels. Action from this week's highs and a few percentage points higher will be very important in determining whether this rally can continue to grow into a weak leg up to new highs or not. Breadth is improving, and iron and steel are breaking out with some degree of breadth, part of the materials group we’ve been commenting on for quite a while as a market leader. A correction of less than 38% of the run up from August’s lows, followed by strong volume rallies through the downtrend lines from the March-June highs would lend credibility to the sluggish new leg up scenario. Conversely declining breadth and large volume declines that retrace more than half of the up move from the August highs from here or from levels another few percent higher than this week’s highs would not be a good sign for the market on the whole. Our bias is probably slightly bullish here, but certainly not definitive. And as WD Gann put it, “when in doubt, stay out, and don’t get back in until you’re sure.”
Economically, markets are still pointing slightly toward the likelihood of the current economic deceleration stabilizing soon, before outright recession develops. However oil prices are still flirting with highs – so one of the three threats is making problems. In addition, al Qaeda seems to be increasing the pace of global terrorism ahead of key elections. Russia has been a primary candidate, and the recent attack on the Australian Embassy in Indonesia shows global activity. We suspect both recent attacks are and will back-fire for al Qaeda. What decent human being or moderate Muslim can now even possibly consider the side of Chechnya after the grotesque attack on children? And the Australian embassy attack seems to be boosting both Howard’s and Yudhoyono’s chances, a clear back-fire. Yet we suspect the increase in pace and breadth of attacks is a trend that is not yet over – especially in light of the many elections globally taking place in the next two months. This means wild card terrorism risk is very high and investors should factor massive potential shock-risk into their risk/reward algorithm for potential trades. Only big profit potential trades should be considered, and in this uncertain environment, these are few and far between.
Despite some minor trading opportunities and some relative long/short sector trading opportunities, we continue to recommend a cautious stance toward equities, and heavy allocation to other asset classes in general, including cash.
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 66, 65, 118, and 82 with 56 breakouts of 4+ week ranges, no valid trades and close calls in (NasdaqNM:YELL - News), BNN, MVK, and MGLN. Valid trades appear open in CETV and MLI. 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, 5, 4, and 5 with 2 breakdowns of 4+ week ranges, no valid trades and no close calls. We’re still not getting a lot of trading signals in valid breakouts, though the environment is improving slightly on the long side – let’s see if this holds up now that some resistance levels are close at hand.
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," 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.
While some minor opportunities are developing that may lead to small moves that could be played by short-term nimble traders, the environment is not yet clearly advantageous, and so we continue to suggest high allocations to cash and other assets and a low allocation to equities. Sometimes it is hard to be patient, but wise.
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