Almanac Investor Alert
Cracks in the Foundation 7/26/2007
Weekly Changes
DOW 13473.57 -526.84 -3.76%
S&P500 1482.66 -70.42 -4.53%
NASDAQ 2599.34 -120.70 -4.44%
Today’s market action corroborates our call last in Thursday’s email that the close of Dow 14000.41 represents at least a short term top in the stock market. We believe that the balance of the summer will prove to be a difficult environment for most equities. Almanac Investors are out of the market with respect to our MACD sell signals. Exposure to stocks is protected on the downside with fairly tight stop losses, a position in the Prudent Bear Fund (BEARX) and new buying is limited to a few select positions in mostly energy and precious metals. If you do not have down side protection as we have been advising, it is prudent to employ it immediately.
There is a cacophony of negative forces in play at the moment; most of which we have documented in this space. The “sub-prime homesick blues”, stealth inflation eroding the foundation of the economy, geopolitical distress, domestic strife, spiraling energy prices, the dismal dollar, a burgeoning trade war with China et al, are real concerns despite the quixotic spin from the talking heads that all is well. With all due respect to many of our well regarded colleagues, Goldilocks has not been anointed Empresses of the economy for life.
The time for warnings are over. As we stated in last month’s issue in the ETF Corner: Cracks in the Foundation? “It is possible that there is just too much blood letting in too many sectors for the stock market to shrug off this time…. recent market action smacks of at least a short-term top. ”
History dictates that the market will now, in all likelihood, retrench to its 200-day moving average. That puts it at or about 12750, about 9% lower than July 12th high. (See the July Proving Grounds for the complete analysis). After that, the market will find itself at a crossroads. It will either find support, pullback into a 10-20% correction or decay into a full-fledged bear market. We employ the Ned Davis Research definition of a bear market as either a 30% decline after 50 calendar days (Dow 9800) or a 13% drop after 145 days (Dow 12180). The severity of the bear, should it come to fruition, will be partially dictated by exogenous forces.
The longer term direction of the stock market will be influenced heavily by General Petraeus’ assessment of the Iraq situation in September. Remember, a basic tenant of our analysis is that the nonrecurring pattern that holds the greatest influence on the stock market is War. Positive developments in Iraq will bode well for The Street. A negative report will not be beneficial, but it may bring the conflict closer to some form of resolution. Either way, indecision and uncertainty are The Street’s worst enemies. So between now and the general’s September testimony, the specter of ambiguity is likely to quell any meaningful rally. Congress has mandated the general’s testimony be given no later than September 15. Some hemming and hawing about more time has already begun. Further delays on delivery of this report may foster additional uncertainty.
Of immediate concern, not to add kerosene to the fire, is tomorrow’s GDP report. Moody’s Economy.com forecasts 3.5% and lists a consensus estimate of 3.2%. If the primary measure of production and consumption for the U.S. falls short, look out below. And it doesn’t stop there. There is a lot of potentially bad news heading down the pike right now. If you have followed our advice over the past few months you are covered. You even have some big winners in the ETF portfolio.
The stuff has hit the fan. We have been worried about this market for some time. It turns out that at least for now our concerns are validated. Having been here before the best course of action is to batten down the hatches and don’t panic. Take profits if you have them and start looking for an entry point.
STANDARD TRADING GUIDELINES!
BUY LIMITS ARE GOOD TILL CANCELED.
ALL STOPS EFFECTIVE ONLY WHEN THE STOCK CLOSES BELOW THE STOP PRICE.
ALWAYS SELL HALF ON A DOUBLE.
Please Trade Carefully.
Jeffrey A. Hirsch, Editor
J. Taylor Brown, Director of Research
