Is a growth scare about to develop?

Did the Fed blink or not? It’s hard to tell and markets don’t like uncertainty. While the Fed DID pause, they also made it clear that if inflation gauges continue to climb they may hike later in the year. Even with growth slowing, rent-inflation and commodity inflation obtain, so there is still enough of a chance of potential hikes down the road, that we suspect the market didn’t get what it wanted out of the Fed enough to drive a sustainable new leg up just yet.

So far the markets have started discounting a US growth slowdown but are still focusing on inflation pressures. Risky assets faced an initial wave down as fears of stagflation escalated in May. US markets in particular have recently begun to discount inflation pressures abating fairly quickly -- as US bonds have rallied, TIP spreads have eased, and inflation expectations have receded. However USUALLY if growth is to slow significantly, a GROWTH SCARE will develop, and during this phase profit concerns tend to overwhelm lower bond yields for a while as both stocks and yields drop together, particularly in risky and cyclical sectors.

This is normally the period to BEGIN watching for buying opportunities to develop as long as growth does not appear to be falling off too swiftly. EM’s, cyclicals, materials, and small caps tend to under perform until this period when bond yields and stocks fall together in a growth scare. Right now breadth has not expanded well on the rally in global markets, and volume has fallen off during the rally since June, meaning internal market action is confirming the likelihood that a further period of volatile or weak prices can develop from a growth scare.

We continue to suspect that a growth scare will indeed materialize, but that it will create a very good buying opportunity in cyclicals and reflation trades, and not be a precursor to global recession. We also suspect that markets will be surprised when a global growth slowdown materializes, and not just a US slowdown in growth. Until evidence materializes that allows us to discount a reacceleration in growth, we tend to favor long/short pairings to outright directional positions in global equities. It may well be more of the same mess we’ve had since May for awhile longer.



Investors should continue to skeptically let market action be the guide. Strong rallies in the major averages accompanied by high volume to create a couple more follow-through days would be the first sign of more upside ahead. The real excitement may not come until the breadth of Top RS new highs starts to expand broadly and stocks meeting our runaway up fuel criteria begin to break out with some plurality. Until then, we still suggest keeping your powder mostly dry. We still like Large-Cap-Value over small caps and PPH over the market as some of our favorite plays. Yet we continue to regard this as a TREACHEROUS ENVIRONMENT where CAPITAL PRESERVATION SHOULD BE PARAMOUNT. Don’t allocate heavily to anything that doesn’t scream at you.



Unless there are surprising developments in terms of peace initiatives, an even more expanded ground war phase may be beginning in Israel. The attempted terrorist attack on ten planes heading from London to the US will not help. The thwarted al Qaeda terrorist attack on the US makes it appear even clearer that the vanguard of terrorism has been handed from al Qaeda to Hezbollah, and we suspect a stronger focus on Iranian-backed terrorism will follow. Investors may want to watch the rhetoric in editorials in the US and in Israel closely now. Increasingly there have been calls for attacking Iran and Syria, the suppliers to Hezbollah, by Israel or the US. A small but growing minority is starting to believe that if fanatical Islamic terrorism is not dealt a massive blow now, that it will only lead to global War down the road. There is talk about striking Iran’s nuclear facilities and even its oil facilities, to knock out the revenue source that is allowing the constant supply of arms to terrorist Hezbollah. Investors should monitor if this trend toward calls for broadening the war substantially grow both here and in Israel. Opinions aside, such action would have DRAMATIC effect upon global stock and commodity prices. Oil could double and global recession could follow sharply and swiftly. The odds still remain LOW of such substantial action -- but as talk of it increases the low odds are rising, and investors need to be prepared if they rise further of the major risks to capital in the short-run that could entail.



Our US selection methods, our Top RS/EPS New Highs list published on TradingMarkets.com, had readings of 28, 31, 10, 13 and 18 with 7 breakouts of 4+ week ranges; no valid trades meeting criteria, and no close calls. This week, our bottom RS/EPS New Lows recorded readings of 24, 10, 17, 29 and 40 with 8 breakdowns of 4+ week ranges, no valid trades and no close calls. The “model” portfolio of trades meeting criteria has some time back exited all positions and is 100% in cash.

Sometimes the sidelines are the best place to be. We suspect we’re still in one of those times. Conflicting forces continue to grow, and high odds sustainable moves don’t appear likely to materialize just yet. Until they do, we suggest mostly keeping your powder dry and watching events transpire closely.

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%.

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".

The “2006 Investment Roadmap” is also my best effort at explaining the top secular themes that every trader should be focused on in their portfolios. A special offer of this exclusive report is available to TradingMarkets.com clients at www.midasresourcegroup.com. So far the groups highlighted in the 2006 Investment Roadmap are exploding in value and appear set to continue to do so.