July 9th, 2008

Short Memories and Sticking to the Game Plan

Alcoa (AA) reports earnings 2 cents better than analysts expected – but almost 19% under the prior year and Wall Street takes off. Financial big-wigs Bernanke, Dimond and Paulson speak at an FDIC forum on mortgage lending for low and moderate-income households and indicate that home prices may be close to stabilizing but the Federal bailout may have to continue for some time to come. Crude prices fell more than $9 over the last two sessions to $136.04 – such a deal! To top it all off, the market increases around 1.5%.

And the “bottom” talk of starts all over again; what short memories we have. Have we forgotten all the grumbling about “Go away in May ….” or “Worst June since the Great Depression”. One day doesn’t make “bottom”, never has, never will. We clearly anticipated both the drop in crude and current “bounce” last week when on June 24 I wrote in “What we Fear Most

the whole Oil & Gas sector seems greatly extended by most technical measures (for example, Bollinger Bands). I started closing out some positions today. Selling too early? I won’t know for a while but the Congressional Hearings are my “tell” that it’s time to lighten up. It also may be impetus for the S&P 500 to resume its decline to 1150 and, perhaps, beyond.

and when on July 2 I wrote in “Our ‘Worst Fear’ is Realized

“It’s feasable to assume that:

  • the 2% decline could happen tomorrow
  • the trendline extending from 2006 could serve as a supportive lower boundary in a new horizontal channel with the upper boundary being the trendline that’s currently the lower boundary of the January-June channel
  • that support will be tested for several weeks, with a high likelihood that it will ultimately fail as the only strong stocks in this market, the oils, food, steel and other commodity stocks, follow coal’s lead and cascade down after the Olympics.

But this is getting way ahead of ourselves. First let’s see if the market bounces around 1234 or goes through that level, as one talking head recently said, “like a warm knife through butter”

It’s all still going according to plan with no major surprises – yet. Yesterday I laid out a road map, a plan for what the future might hold for the markets. Until the Market Timing Indicator (MTI) signals that the risk with equities has been reduced, I’m still going to stay very cautious. The MTI is about 8% away from that all-clear green light. I’ve been whipsawed enough in the past so that I’m willing to forgo a good portion of that 8%, should it happen, for a greater degree of safety.

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