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Thinking about the "grind"



Here is the risk as I see it for the next week. The tape remains in oversold condition, the indices are looking like they are about to break down or are breaking down and I can find absolutely no reason to have a high level of conviction that anyone should be a buyer.

The stunning aspect of this market is that it isn't down a heck of a lot more. It seems apparent to me that a lot of people are managing portfolios for the next week (trying to keep performance near current levels) vs. managing portfolios for the next quarter, year or heaven forbid - the long-term. Frankly I don't blame them; this has been a heck of a three-year run for equity fund managers and their investors.

I bring this up again because the action, while negative and driven by low volume, is very important because it suggests that the market is indeed closer to equilibrium between buyers and sellers. Those that wanted to sell near year end have obviously done so because given the news backdrop and the introduction of new issues such as North Korea and Venezuela, this market should be down huge. We have a nuclear threat that doesn't even want to hide it and an oil strike that has driven spot prices well above $32/barrel and yet the market is only grinding lower on very low holiday volume.

The immediate thought would be wait until the market participants come back and start selling, but do you really think portfolio managers are not watching? That sets the stage for interesting times again. Every aspect of the fundamental backdrop suggests things are not dramatically improving, which is what is needed given current valuation levels. The only positive influence seems to be lower rates. Every aspect of technical backdrop also suggests things are not dramatically improving with the exception of the near-term oversold condition.

Everything seems to look rather negative and prices are only grinding lower. This is very interesting, especially given the news backdrop. Then I think back to the twilight zone. In the twilight zone, there are going to be times where the market looks like it is going to crash and looks like it is going to surge and at the end of the period, doing very little.

While the intermediate-term picture continues to point to a market that has lost its momentum where any upside is likely to be unsustainable, selling into a terrible news environment, deeply oversold condition and illiquid holiday volume may "feel" right for today or even the next couple days. But think about this - if the market is only grinding lower given the above, I wonder what would happen if there were any incrementally good news.

Put very simply, the question in my mind has not been whether to sell given intermediate-term picture of a downtrend that has not been broken and lost momentum, it has been a question of from what level. I continue to believe that the appropriate level is above here and closer to that of a few weeks ago given seasonality and oversold near-term levels.

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Food for thought - i better get on the treadmill!
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