September 11th, 2008

Almost "Do or Die" Time

The reason everyone is saying that tech’s are the about the only safe haven left (other than the retailers, which I just can’t figure out) might be because the NASDAQ Composite Index is below where it was on January, 2006 – nearly three years ago. The same with the Russell 2000. You can go back to June, 2005 and find the S&P 500 at today’s level. How is anyone expected to make any money in markets like these?

The answer is that you’re not. Investors can make money in up markets (if they don’t they should switch to another hobby or profession); some can also make money in down markets. But in horizontal markets the best you can do is protect your equity.

Sure the market’s down 19.5% from its high but that decline only took out a burst that perhaps shouldn’t have actually occurred. Explained in macro-economic terms, the boom of 2005 to the middle of 2007 happened because of a overblown housing market, consumers borrowing on their home equity … the rest of the story is now painful history.

The next couple of weeks should tell the tale as to whether this market will turn around or continue dying. The S&P 500 is close to completing the right shoulder of that extended head-and-shoulder top formation that I’ve written here so much about:

You’ve probably heard some of the CNBC talking heads mention a “retest of the 1200 support level”. The neckline of the head-and-shoulder formation is what they’re actually talking about (even if they can’t see back further than this past July.

I have no idea of how this is going to play out, I can’t predict the future. But I do anticipate that failure of that support would be viewed by many market participants (whether chartist, technicians, fundamentalists, or economists) as a signal to finally throw in the towel and open the flood gates of all those trying to weather this storm with dividend-paying stocks, market leaders, defensive stocks like consumer disposables and medical stocks. It may be September (statistically the worst month) or October (the month that contains the worst market days) or November (as the election uncertainty is resolved).

One thing I can predict is that it will be more than a year before we’ll see 1500. It reminds me of the bet I made with Cramer on July 31 after he made his last “bottom call” when the S&P 500 was at 1278. I wrote:

If he’s sticking his neck out, so will I. I’d be willing to make him a side wager that the market, as measured by the S&P 500 will see 1150 (10% down from 1278 as of 10:22 today) before it sees 1405 (10% up from current).

With today’s close of 1232, it looks like I’m closer to winning that Cramer is.

Right now the MTI is still screaming “cash, cash, cash” (not borrowed from the stupid “drill, drill, drill”). So I’m being true to the Indicator and have ramped up to nearly 90% cash (and I’m still holding a chunk of ProShares UltraShort ETFs). So you know which way I think this is going to get resolved.

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