This weekend we incorrectly predicted the US equity markets would fall hard into the election. In the past we had used a variety of sentiment indicators in conjunction with momentum to predict turns in this choppy market environment. In our weekly research note we remarked that the Nasdaq/Dow ratio was rallying not from market strength but weakness in the Dow. Therefore, we felt if the S&P 500 couldn’t hold onto 1100 this week the markets would break down.

Monday saw markets spike lower before recovering. On Tuesday morning we alerted subscribers that the uptrend would accelerate if the Dow and S&P 500 broke downtrend resistance at 9800 and 1100. Upon that break we covered our shorts and got long to enjoy the ride. Moreover, our bearish view is not dogmatic. We are willing to get bullish on US markets if the Dow can rise above 10,300.

In the chart below we show the Dow Industrials and our few market calls since August. As you can see, we’ve maintained an accurate gauge of market turns, but this kind of trading is uncertain and extremely difficult to manage money in so our bets have been small.

On the other hand our foreign ETF holdings have not only persevered in this unforgiving market but accelerated in recent weeks on the back of a falling dollar. Four weeks ago we highlighted AUD/USD predicting it to eclipse this year’s high of 0.80, which would be a boon to the Australian iShares EWA. Since we first featured the potential of EWA at $13.85 it is up 11%. In sum, foreign markets with an exposure to raw materials (Mexico, Brazil etc.) continue to outperform the US markets with less volatility. As such we favor such markets as our long bets.

© 2004 Jes Black
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