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Just call me Ray


The way this week has gone, I wish it were Friday the 13th, but alas it is only Thursday the 13th. So far, there are no rumors running around, but then again 6:45am EST and there is a tremendous backup on the West Side Highway in Manhattan. That was clearly the theme of trading yesterday - wait for the upgrade to "code red" rumor and then emotionally react to it. The great odds are that if the Government was going to take such a serious step as upgrading the Terrorism Alert to "code red," they probably are not going to tell the S&P futures traders (or anyone they know) first.

I have tried to be pretty consistent with the intermediate-term outlook. As you know, the various indicators I use continue to suggest that the market is not yet ready to move from the reality to perception trade. The indicators remain a solid distance from levels needed to generate a rally that goes further and lasts longer than most expect. That said, there is always the potential for a sharp day or week bounce that makes it seem like the pain is over and that upside at hand. Of course, the fun proves fleeting until the various indicators reach those much needed levels. Is there any precedent for such a bounce with the indicators outlined last Thursday looking so far from buy zones? Glad you ask because there is.

In the early part of last year, the market experienced a bounce AFTER the MACD sent out a sell signal on an intermediate-term basis (Exhibit 1). I don't know if that could happen again this year and I wouldn't mortgage the house to play it on the upside, but it may make sense to hold off on any emotion based selling until we see if it plays out.

Exhibit 1 - A ray of hope for higher sales rests in last year's precedent

The market has been so weak over the last few weeks and the obvious train of thought is who in their right mind would be a buyer ahead of a three-day weekend given the ominous geo-political backdrop? That brings up an easily identifiable issue, which is, that the market normally does the opposite of what is the most obvious. At this juncture, the weakness hasn't really come from aggressive selling because the volume and percentage drops would be higher. In my view, it has come from a total lack of buyers. As a matter of fact, my friends over at Lowry's Report who have an index that tracks buying power stated that their Buying Power Index was at the lowest level in six years. Lower than any prior bottom during the bear market. Yes folks, that means enthusiasm isn't exactly bubbling over, but until there is interest in buying, there is unlikely to be any sustainable upside.

While there could be a bounce around these levels, any upside is likely to be fleeting until; (a) the indicators get oversold enough on an intermediate-term basis, (b) there is some resolution to the Iraq situation, (c) valuations come down either by price deterioration or surging fundamentals.
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