Looks for signs of leadership

The massive and swift decline that began on May 8 took pause beginning on June 14 both in the US and globally. The health of that advance needs to be monitored closely here for clues as to whether it is part of a roller-coaster environment without sustainable moves in either direction as one might suspect in a macro environment that appears poised to shift from inflation scare to growth scare in the weeks and months ahead, or whether this rally is something more durable.

Last week we suggested that investors watch our list of Top RS New Highs closely for breadth improvement and for a broad number of stocks meeting these rigid criteria breaking out to the upside and assuming leadership roles as a way of telling one whether this rally is playable or not.

This week, let us also suggest that investors should monitor the stragglers of the rally and leaders of the down-leg to monitor whether any of these segments and sectors are dropping-out of the rally and returning to the downside. Should that begin to happen with a broader range of downside leaders, it would likely mean trouble for the durability of the current rally, and if it grows substantially, that a new leg down is commencing.

Some of the leaders on the downside included US Housing sector, General Merchandise, health care equipment, QQQQ’s, Middle Eastern, 2nd Tier Eastern European, Turkish, Indian, Korean, and South African indexes. Currencies in Turkey, Iceland, India, and Hungary, as well as commodity currencies also led the down leg. Dubai and Slovakia led the decline and are already now making new lows. So far much of the Middle East is still holding up, but Lithuania, Latvia, Estonia, Jordan, Kuwait, Egypt, Turkey, Korea, South Africa, Greece, and Qatar are only rallying feebly so far. Leading sectors housing, health care equipment, the QQQQ’s, and General Merchandise are also rallying feebly and should be watched for new lows. The commodity currencies continue underperformance, and though the Turkish Lira, Icelandic Krona, Indian Rupee, and Hungarian Forint have all backed off of their lows, they are beginning to weaken again. Watch these dropouts for negative action. New lows by currencies, stock indexes and groups that led the rally in increasing plurality will be a potential warning sign that the forces of decline are starting to take hold again.



The leaders and laggards should tell the tale and tip their hat toward the next catch able move. Investors and traders should watch carefully. As long as there remains little plurality of leadership on the upside and little plurality of leadership on the downside, our bias is growing toward expecting a roller-coaster environment that has trouble following through in either direction for a durable move.

Particularly with the Fed and other central banks so data driven for their next policy moves, remember that one report that shows inflation pressure continuing could pull the rug out from under the current market rally, whereas evidence of substantial weakening in growth enough to cause bonds to rally could undercut any market decline. We suspect that until growth slows the environment will be tricky.



In late March we began writing about the danger of the current market environment and how in 2006 the macro big picture would likely SWAMP all trading strategies and that not understanding the precarious position the world was in would be a detriment to traders. We hope you listened. In addition I have written the “2006 Investment Roadmap” and now the new “Mid-Year Update 2006 Investment Roadmap” (see below) precisely to analyze and explain why this happened, how it was anticipated, and what it means for the future as well as what to watch to determine how this GLOBAL TINDERBOX will blow. I still honestly believe that the ramifications to investments of events over the period directly ahead will be as substantial as any period in post WWII history. I honestly wouldn’t want to trade in any timeframe without a full understanding of the current dangerous macro environment and how the recent decline could be just the tip of the iceberg IF certain developments transpire from here. You’ve been warned and warned again.



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 58, 83, 40 and 39 with 28 breakouts of 4+ week ranges; no valid trades meeting criteria, and no close call. This week, our bottom RS/EPS New Lows recorded readings of 14, 16, 18 and 24 with 1 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.

Our advice continues to be defensive and sidelined positions with the bulk of assets until technical breakouts and strong breadth seem to align with a macro scenario that makes sense for a sustainable global rally, or until a clear plurality of downside leadership breaking to new lows in the laggards develops for plays on a negative trend.



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” and the "Mid-Year Update" is 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.