Sunday, December 02, 2007

So What Now?

This coming week will be filled with many unknowns. The markets last week had a tremendous run, consistent with Bear Market snap back rallies. The intensity and ferocity has surprised me a bit as the indexes and stocks recovered parabolically. This violent price swings only happen in bear market environments so don't read too much into the main stream media's proclamation that a new rally has started. Before you jump onto that band wagon consider these points:

1. We are in the 5th year of the bull market run started in late 2002. Most bear markets average 3 to 4 years, so we are extended and due for one.
2. Continued signal by the 10 year Treasury that all is not well, currently at 3.908%. If all was well, shouldn't the yield rise, especially since if everyone is jumping onto this renewed market vigor?
3. Continuing deterioration of credit liquidity, and the very real possiblity of government intervention in our supposedly "Free Market System?"
4. The last 2 rate cuts culminating in 75 basis point reduction has yet to slow the downward deflationary spiral.
5. Inflation fight is abandoned by the FED, why? Because we are facing a more deflationary problems with growth implosion of GDP, personal spending declination, Wage deflation, Credit quality issues, and the very real contemplation by the FED that we may in fact already be in a recession. Not maybe, ABSOLUTELY!
6. Pundits and investors alike are still drinking from the "hope" koolaid. The sentiment is still cautiously bullish.
7. put to call ratio is at its lowest levels in 1 month! This is a contrarian indicator and while the reading is bullish, it is too skewed to one side and the possiblity for the market to react in the opposite grows.
8. Consumers are dead. If you don't believe me, just go check out your neighborhood Target, Walmart, mall, and casual dining establishments.
9. LBO is now coming front and center as a possible next shoe to drop that the markets haven't even considered.

There are many more reasons but 9 reasons should suffice. Never the less, markets are irrational over the short term. So be careful with your money. If the market continues to remain bullish despite the obvious, don't fight the tape but keep a modicum of common sense about you.

I am still short but ready to bail if market doesn't turn down ward.

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