Middle East uncertainty weighing on the market

This week saw a 90% up day and a follow-through day on the upside Wednesday following Bernanke’s testimony. However we have yet to see the continuation and breadth that we would like in order to suspect a sustainable rally has begun, and Thursday’s downside action was a disappointment to the bulls. The lack of follow-through should not be surprise to those reading this column.

Yet another thorn in the side of the markets has developed with the Israeli-Hezbollah War. It is probably wise for investors to have at least somewhat of an understanding of what is happening in this war and what likely developments could emerge as well as how surprising events could impact markets.

For those wanting more than the brief overview below, we can suggest our own PSL and Macro Updates as well as the various intelligence services that cover the war in detail.

Hezbollah, sponsored by Syria and Iran has become increasingly hostile and instigated missile attacks against Israel and the kidnapped Israeli soldiers. This led Israel to defend itself via massive air-strikes that appear likely as preparation for a ground invasion aimed at wiping out much of the capacity of Hezbollah. Hezbollah has launched over 1600 missiles into Israel in the last eight days. There has been some brief ground fighting as both sides feel each other out. Hezbollah has built a series of tunnels and caves from which they can launch missiles and hideout from bombing raids and defend territory. Israel probably doesn’t have the luxury of completing a proper air campaign to “clear the road” because it will get increasing pressure to pull out. But there is popular support in Israel for destroying Hezbollah completely, including its 13,000 missiles, hidden all over Lebanon, many of which are Iranian made. Some see the War as an opening salvo of Iranian-US confrontation.

So far Sunni Arabs have acknowledged Hezbollah provocation of the conflict, which is unique. Many see the Hezbollah action as an attempt by Iran to become the dominant influence in the region and therefore more than usual would like to see Israel issue a severe blow to Hezbollah. But there is evidence that Hamas is also instigating increased conflicts. The War is likely to take many weeks at least before either side is willing to seriously consider peace negotiations.



Hezbollah may well ramp up international terrorism particular against Jewish soft targets in areas where it has operatives such as South America, Thailand, and Africa. Developed countries will probably step up anti-terrorist security in the weeks ahead as well. It is not inconceivable that Syria, Iran, the United States and other countries could eventually be drawn into the conflict, though the most likely scenario is for a quick in-and-out campaign by Israel that does not include other countries. Hezbollah can escape to Syria or hideout in caves and mountains and will probably not be dealt as serious a blow as Israel would like without a prolonged ground war. Investors need to keep their eyes on this conflict, which has the potential to disrupt global financial markets substantially if it spins out of control and expands, or if surprising developments ensue. So far oil prices have rallied to a minor new high and backed off – but substantial new highs will hit an already weakening US and global economy harder than they have to date.

This week Middle Eastern markets continued to weaken, but many markets got a bounce off of the Bernanke rally. We suspect the Fed will have to hike again in August and it will take a more prolonged bond market rally and evidence of a slowdown in growth before global markets can sustain a lasting rally. If we are wrong, breadth will expand and Top RS stocks will begin to breakout in number and we continue watching for this to develop. It has not yet. So far what we have in the markets is A MESS!



This difficult market environment should not come as a surprise to our readers. 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” 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 US selection methods, our Top RS/EPS New Highs list published on TradingMarkets.com, had readings of 9, 8, 8, 9 and 26 with 8 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 92, 112, 71, 95 and 16 with 25 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.