What The Global Leadership Is Telling Us

We’ve had a couple distribution days in the major averages, while the global leadership is leading a correction – often a sign that a correction or consolidation is emerging for some period of time.

The big winners of 2003 were mining shares, raw commodity producers, and Emerging Markets. Mining shares started the correction and now Emerging Markets and resources are following lower. Defensive stocks are gaining on cyclicals and materials with some plurality for the first time in many months. Asia has the excuse of flu epidemics and Taiwanese/Chinese saber-rattling. Holding up well are Timber, Real Estate, high dividend stocks, water high yields, and prime rate funds. Investors are advised to move toward a defensive posture until global leaders start moving higher on strong volume again for at least a couple days. The top sectors of 2003 are volatile, and so the ups and downs in the markets could be a roller-coaster ride this year.

More conservative higher yield themes for the steadier parts of a portfolio we like are high yield timber, water, virtual banks, VVR and EFL only purchased not at a premium, short TLT w/ 89.5 ops, and Sing dollar deposits (Canadian dollar later on in the correction). We also like cash gold (GBS.LN ishare) and cash silver (FCX pfd D is best surrogate or futures) and Palladium (futures) FURTHER AFTER CORRECTIONS ARE COMPLETED.

Our US long/short model is fully on the sidelines and we continue to suggest investor fortify portfolios with the above global themes until this model picks up more allocation. Investors should continue to cautiously add stock exposure as trade signals are generated that meet our strict criteria, as well as allocate to our favorite segments. 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 54, 42, 55, 54, and 18 (our first new high reading below 20 in some time), accompanied by 9 breakouts of 4+ week ranges, with no valid trades and one close call in PPC. Internal strength has now deteriorated, though not rapidly yet. 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 remained non-existent with readings of 0, 0, 0, 1, and 0, with no breakdowns of 4+ week ranges, no valid trades and no close calls. The short-side breadth remains bleak and it will be important to see if it picks up here on further corrective activity. So far we don’t see internal evidence of a serious correction, nor do we see good internal evidence that a new broad-based upthrust is in the making.

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.

On the long side, we like the close call from this week, (PPC | Quote | Chart | News | PowerRating), and recent close calls from past weeks, (NFI | Quote | Chart | News | PowerRating), (SPIL | Quote | Chart | News | PowerRating), (MBT | Quote | Chart | News | PowerRating), (GALN | Quote | Chart | News | PowerRating), and (NIHD | Quote | Chart | News | PowerRating).

Mark Boucher