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Red, yellow, or Green? Orange!


I think Toddo brought up a huge point in the Journal earlier today. It is probably the single most important comment I have read lately. As you know, Toddo is tied in very closely to the trading community and has an excellent (and proven) feel for the tape. Do I say this as mush? Absolutely not. I say it because if he says that the trading desk and hedge fund community is sitting it out ahead of Secretary of State Powell's address Wednesday at the UN, then that is what they are doing.

Why should anyone care? The answer is important in understanding the environment. The aggressive funds have been dominating the tape and its direction for some time now because the more plain vanilla funds are near fully invested and what cash they have is likely reserved for outflows. The market has been whipped around because many of the aggressive funds are trading against each other and none seem to want a major position to carry overnight. If they buy (or short) in the morning, they are likely to cover by the close. This is a very important point because it means that there isn't any huge bet going into news regarding Iraq, Venezuela, North Korea, Payroll Employment or anywhere/anything else. That is why there is limited follow through on bounce days. There has to be a better reason that "the market is oversold" to be a buyer.

Many are looking back to 1991 and suggest that the current environment could be similar, where the market spikes significantly higher on the initiation of military action. I disagree right now. It has nothing to do with my view of success or failure, but has to do with the fact that there isn't a new huge short position by the trading community that will look to cover on a spike. It is that panic buying that creates the huge up day. If the aggressive funds are not short huge, and stand poised to be a buyer on the initiation of the action, who is going to buy from them? As I said above, mutual fund cash levels are low and individual investors are unlikely to add even more money after being recently spanked again by "dividend plays" that are now mostly underwater.

Again, there should be plenty of time for upside once the intermediate-term low is generated and most indicators point to a countertrend rally that goes further and last longer than most expect. There could even be a little more bounce, but right now I think it is more important to listen to what the market tells us to do vs. tell it what we want it to do. Frankly, I doubt the market even knows I exist so is probably not listening to me anyway. Currently, I think the indicators continue to suggest patience in buying until the indicators get to levels that have kicked off meaninful rallies in the context of the current secular bear market.
I wonder what Daisy will look like in the summer? Moo la la!
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