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The Noise of Summer


It's always a new paradigm...until it isn't.


When the last rose of summer pricks my finger
And the hot sun chills me to the bone
When I can't hear the song for the singer
And I can't tell my pillow from a stone

(Grateful Dead)

Good morning and welcome back to the wavy gravy. Yesterday's ziggly zag was quite a drag as it dipped and blipped through the summer lag. When the closing bell tolled and the night grew cold, the final tally wasn't all that bold. Will today's fray keep the bears at bay or can the ursine feast on some bovine prey? It's freaky Friday in Minyanville and the table is set, so grab your utensils and lets read the Gazette!

As we begin to collectively eye September, there's been a lot of chatter about the previous autumn falls. While past performance is no guarantee of future results, I thought it might be helpful if we looked at a previous top (Spring 2002) to gain some perspective. The following information was collected with the help of my good friend (and fellow Minyan) Warren Bachman. Thanks WB!

Similarities in the weekly S&P bar chart:

Then: 27 weeks of upward correction (low week 9/17/01, top week 3/10/02)
Now: 24 weeks of upward correction (low week 3/10/03)

Then: 25th-27th week form a double top (first top 1177, second top at 1174).
Now: A similar situation would display topping action near S&P 1015 between now and Sept. 12.

Structural, Fundamental and Psychological Similarities

Then: 2 months of decline followed by a 2-week advance back to the former high. Boo's morale hits a low point as the VIX dipped into the teens.
Now: After 2 months of sideways action, we're currently retesting the former high. Boo is demoralized as the VIX dips into the teens.

Then: The upward correction is propelled by liquidity stemming from monetary and fiscal stimulus (refis and tax cuts). This produced temporarily strong macroeconomic statistical reports that fueled massive optimism in the street.
Now: Same.

Then: Insider sales hit extreme levels.
Now: Same.

Then: A strong corporate bond market and large bond issuance accompanied the upward correction.
Now: Same.

Then: The subsequent downturn posted a 34% decline in 19 weeks (March 10-July 22 2002). It was accompanied by a corporate bond breakdown exacerbated by the WorldCom mess. The media frenzy centered on corporate malfeasance.
Now: Future similarities, should they occur, "might" include: a breakdown of a saturated corporate bond market, A Fannie Mae (FNM:NYSE) breakdown, a mortgage bond breakdown (not mutually exclusive), Middle East conflicts (Saudi Arabia), a spike in the price of crude oil, terrorism or a derivative spiral.

Then: Throughout the eventual 19-week decline, the dip buyers kept buying, the shorts covered too soon and 1-2 day snappers were met with supply. One-half of the 34% decline occurred in the final three week capitulation.
Now: Stay tuned.

I've intentionally offered these observations in the face of the constructive action and firm tone. I "see" what you see. The Dow Jones and NASDAQ have broken out, the semis act like they wanna continue their run, the S&P is eyeing all kinds of acne, the global central banks are cheerleading, the breadth is firm and momentum is strong. We can't ignore these developments but, at the same time, we can't defer to them either. We're entering a very important juncture for the market and it behooves us to maintain perspective regardless of posture.

In the near-term, I'm gonna key on S&P 1010 (triple top breakout) as the stop level for my lone appendage. I'll likely remove it win/lose/draw today as I'll be out next week and I don't want any tan lines. Monitor the financials (they acted funky yesterday), watch the semis (leadership), smell the breadth and appreciate that it's thin (and gonna get thinner). While I think you know my big picture bent by now, I will offer that the next six sessions are at the mercy of those with the deepest pockets and strongest conviction. The best we can do is follow our guides, maintain our discipline and trade in a manner consistent with our beliefs (while allowing for a margin of error).

Next week is the final summer pit stop before we turn the autumn corner and eye year end. We'll see if Hoofy has the juice to finish strong or if Boo finally takes a swing with that frying pan he's been holding behind his back. We're also less than three months away from the first annual Critters Choice Awards and, if all goes according to plan, we're gonna raise mucho bucco for the kids. Stay tuned and continue to check the CCA site as it'll be continually updated with the latest news and confirmed talent. I promise that you're not gonna be disappointed!

Good luck today.

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