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The World We Live In

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Hoofy, you best be nimble and you best be quick...

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I mentioned in a piece last week that while I was essentially bearish, I greatly respect Professor Reynold's analysis of how we could get a rally. In his Monday morning missive, He pointed out a series of risks to the bullish argument beyond the text of the FOMC announcement, one of which was global event risk associated with the U.S. Independence Day holiday.

Todd and others have done an exceptional job of detailing the daily mindset of traders in this market. If I may be so bold as to summarize, traders are exceptionally sensitive to global event risk (terrorism, etc.). This manifests itself in what has become essentially a four-day trading week because few people want to be long over the weekend - especially ahead of any type of gathering of prominent world citizens.

This behavioral trend is exacerbated by the traditionally low volume we see each summer. Since I believe these trends are likely to continue at least through the U.S. Presidential election in November, it seems worthwhile to me to plot out "zones" where there is less likelihood of world events interfering with investing.

The point of writing this article is to think aloud about the patchwork nature of our trading landscape this summer as seen through the lens of global event risk. If the planets align and the FOMC text is conducive to a rally, I'd like to be able to have some foresight as to when it might occur and how sustainable it might be.

I don't intend the zone map below to be exhaustive. For one, it includes no critical appearances by Beeks or by Dr. Greenspan's posse. Perhaps it is best thought of as a starting point for you to create your own zone map. Red boxes indicate days of particular concern.

The first part of July is red due to the hand-over of power to the Iraqi provisional government and the U.S. Independence Day holiday. If there were/are terrorist actions scheduled for the hand-over date, the fact the U.S. government made it happen a couple of days early is unlikely to cause terrorists to cancel those plans.

Late July is the Democratic National Convention, located this year in Boston. While one might presume the terrorist's hatred of President Bush combined with Senator Kerry's less aggressive stance towards the Iraq war might make this event immune from terrorist action, I doubt everyone shares this optimistic outlook.

August 11-28 is the Olympic Games, widely expected to be a target for terrorism. Whether Wall Street will be on edge the entire time the Olympics are underway is debatable, but I suspect few will want to be significantly long going into each weekend during that time.

August 29 through the first part of September marks the Republican National Convention in New York City. The GOP convention is already big on the radar screens of market participants we speak with - to the point most of the people we know in New York are finding a way to be on vacation around that time and out of the city altogether.

Late October marks the World Series. We include this because we've heard it discussed by other market people. While it would presumably be an attractive terrorist target, the logistics are more difficult since the locations of the games are not determined until the week before they begin.

November 2 is the election. What happened in Spain has made this time period especially significant to many people we have spoken with. I also added red boxes around Thanksgiving since that is a major travel holiday. If December appeared on the map, I'd add more boxes around that holiday for the same reason.

At first glance, there is a great deal of white space - which should embolden the bulls. However, the majority of that white space is the September/October time frame (the anniversary of 9/11 being a notable exception). Everyone take a look at historical stock performance from mid-September through October (2003 being a notable exception) and raise your hand if you want to buy ahead of that time.

Not many hands I suspect.

That's prime tax-loss selling season for funds since they have aggregated their fiscal year-ends into the September/October period. While this effect was not as prominent in 2003, few long-side funds had losses to take by that point in 2003 since nearly everything in the market was going up. Short funds had big losses (or at least reduced profits), but they take their losses by buying stock. I'd bet we'll see a more traditional September/October this year where selling and lack of buying creates a significant downdraft in the market.

By my eyes, if we're going to get a clear rally between here and November then Hoofy better flog his posse and get them in gear for a July gallop. Recent trends in trader sentiment combined with historical market patterns suggest July is one of the only windows of opportunity he will get.

No positions in stocks mentioned.

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