August 5th, 2008

Whither the Bear Market?

I’ve returned to from vacation to see what appears like a filling out of the left shoulder of the head-and-shoulder top formation that I’ve been expecting since July 16 (click here to see the charts of each major average at the time). But it’s tough going through the process without some questions and self-doubts surfacing:

  • Is is really a shoulder or is there sufficient strength to sustain a further move up?
  • Does the withering precious metal trade and the apparent collapse of the oil and commodities prices signify that we’re close to getting out of the economic doldrums and a risky inflationary scenario?
  • And what about all the money that the Fed has pumped into the economy? Has the banking crisis passed and rising interest rates no longer on the horizon? (The Fed is going to announce their interest rate decision this afternoon and there’s a 90% probability that it will hold rates unchanged.)
  • With only one homebuilder bankruptcy (WCI), are we at a bottom and looking at the end of home price declines?
  • Bank stocks are actually making a V-shaped price recovery. Did our conservatism actually let a once in a lifetime opportunity actually pass us by?
  • Do layoffs, job losses and an increasing unemployment rate have no effect on consumer spending and the economy?

As indicated in the chart below, the MTI is still flashing a red light due to the arrangement of the moving averages and the position of the index. Some who look at charts with a magnifying glass will believe they discern an upward-sloping triangle forming. In my experience, chart patterns seen when zooming in so tightly fail to materialize into anything of consequence. A move above the trendline at 1285-1290 may support the bulls however, on the other hand, the pattern could just as easily morph into a wedge (an upward sloping channel) consolidation pattern in the decline since May. Small patterns like these usually fail to signal about faces for the market.

Over the past several of weeks I’ve incrementally added some tech and healthcare stocks to the double short and precious metals positions now leaving only 50% cash behind and putting my portfolio essentially stuck in neutral. We’re just going to have to be patient, nibble selectively around the edges and just wait it out until some clearer direction and momentum materializes:

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