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Ollie's Follies

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This no carb thing is killing me!

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Good morning and welcome back to the city of critterly love. An autumn chill arrived in the 'Ville as the menagerie gathered at Ollie's grill. Their breakfasts have become a tradition of sorts and have survived bubbles, busts and all that falls in between. As the regular crowd shuffled in and out of the crowded diner, our crew sat at their corner booth and ate their usual fare. The conversation went a bit like this:

Hoofy: All in all, I thought yesterday was a healthy digestion of the recent rally. Textbook technicians prefer stair-steps to parabolic frolics and if that's the best the bears could do, I gotta think that more upside exists.

Boo: That's been your battle cry all year but despite stimulus that would put Viagra to shame, you're still looking at YTD returns on either side of the flat line. And all the while, creeping crude, debt digestion and further smoke in the GSE's have steadily evolved. If this is the best you can do with negative real rates...

Snapper: No offense, Boo, but you've been bantering the same bearish bent for as long as I can remember. Hey, at least you didn't point out the widespread complacency and opine on the disconnect between perception and reality! I mean, honestly--what are you--a bear or a groundhog?

Daisy: It would seem to me that the stair-step argument isn't just a near-term analogy. The bulls I talk with--and I talk to a lot of bulls--believe that the entire '04 slither is a simple digestion of the '03 ramp. What are you gonna say if we break to the upside and make a higher high? There wouldn't be any resistance until S&P 1170ish and that's a pretty penny.

Sammy: Did you guys read Professor Schaeffer's vibe last week? He did a pretty good job of offering perspective for where we are in the big picture. I'm not saying we can't rally--there's nothing more dangerous than a boxed in Fed and they've already proven that they'll use unconventional means if necessary. But your strategy doesn't need to be "all in" or "all out," it can be balanced and intelligent.

Hoofy: What about the all-time highs in the cyclicals? The five year highs in the trannies (in the face of $50 crude!)? The net name jig? The small cap jazz? You can't be selective in what you choose to see and what you ignore. That's rationalization and it'll ultimately lead to a blind side sack.

Boo: Yes, that's what Toddo was talking about yesterday in the "eyes" vs. the "stomach." I respect the drum tight corporate spreads (and am thankful for the Horse whisperer) and I understand that the buyers in a performance anxiety environment typically live higher. I just wonder how much ammunition global central banks have left without tipping the scales of an already imbalanced world. And, the truth is, it's out of our hands in many ways. Foreigners own more U.S. debt than we do!

Snapper: That's too big picture for me. I'm an active critter and, as such, prefer to look at the near-term landscape. S&P 1130 and NDX 1440 (1410) are the closest support and I'm gonna use them as a backstop. And as long as it's quiet (read: no nasty surprises), I gotta think the WSJ blurb this morning will put a bid to the tape. The White House wouldn't put their reputation on this line this close to the election unless they were certain that Friday's orange crop report will be favorable.

Sammy: Perhaps, but that's one of those "soft" catalysts that, while possible, isn't quantifiable. Just do me a favor--(looks at Boo, then at Hoofy)--and stay disciplined in your approach. The markets are ever-changing and the metric scale will dynamically shift. If your horizon is short-term, monitor the breadth, our sector tells and the levels. If you're a longer-term type, spend some time thinking about the secular trends and macro backdrop. But whatever you do, don't let emotion dictate your course of action. That's a first-class ticket back to Nowheresville.

The critters sat back and ate their (no carb) breakfast in silence. They were painfully aware that most funds were dabblin' in the single digits and pressing for performance. That environment adds a dose of risk to an already risky world and they knew the games had only just begun. As the sun danced through the tree lined street, they tossed a few shekels on the table and readied for the day ahead. It was, after all, a new day in the 'Ville.

Good luck today.

R.P.

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