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Morning Cup of Jo: Where to Go Into Year End?


...whichever direction is picked it will be like a stampede of antelope being attacked by a pack of lions.


"Choices are the hinges of destiny."
(Edwin Markham)

Key Points:

  • "Jibe and hoist the main sail, or heave-to and lower?"
  • Increased volatility.
  • Weekly stochastic divergence.
  • Financial sector remains uncertain.
  • Potential stampede of antelope.
  • Asset Architects Inc. states increased uncertainty behind financial sector changes risk/reward investment levels.

Market Commentary

Year end, last 2-months and what to do? Do we jibe and hoist the main sail or heave-to and lower? The waves are high and horizon unclear but if not for the courage of the fearless crew, your investment may be lost.

This question is being reckoned with day after day. All one has to do is look at the increased volatility to realize that all parties involved in the equity markets are contemplating this very verbiage. In recent years, at least since the 2003 market bottom and throughout the latest cyclical bull market, it's been a race to the finish in the latter half of the 4th quarter. See the following 5-year graph of the DJIA.

Click to enlarge

I outlined the end of year "runs to the finish" from each year in light purple. But let's not mistake; just because it's happened four times before, does not necessarily mean it will happen again. Technically speaking - forgetting about…

  • The additional $8 to 12 billion Citigroup (C) may have to write-off,
  • If black gold will cross $100 a barrel before year-end,
  • If consumer spending is going to dry up,
  • If the greenback will ever find a bottom,
  • Well, you get the picture...

- the market on a weekly basis is looking a little heavy.

This is the first time in the cyclical bull market there is a confirmed stochastic and volume divergence on a weekly basis. My bearish concern would become more substantiated if the market was to bust downward through its 200-DMA; which correlates to the secondary trend the market has put in place since mid-2006.

The previous question, "…jibe and hoist or heave-to and lower?" is going to be determined sooner than later. My belief is that whichever direction is picked it will be like a stampede of antelope being attacked by a pack of lions. My thought process stems from institutional money managers making the best of what is left.

For example, if the market was to breakdown from here, the theory will be… "Sell what you can to preserve any sort of profit gain throughout the year." If the opposite transpires and the equity market begins another bull run, the theory will be flipped on its head and many money managers will be – what we like to call – "Chasing Beta." In other words, they will be buying frivolously in an attempt to put further gains on the board before year end.

To better understand where these technical 'lines-in-the-sand' are drawn, let's take a closer look. Thus far the DJIA has held its ground at the 13,450 level. This is where the market "took-off" after Fed Chairman Bernanke lowered the prime and discount rates by 50 basis points and shot the market straight up for two plus weeks.

Click to enlarge

Soon after, we began to hear the rumbling sounds of more "sub-prime" problems and a potential consumer slowdown. Hence, back to the 13,450 mark. If this level was to bust we do not believe, on a technical basis, it will be disastrous. Actually, given a few assumptions and suppositions, it may be a trading opportunity off 13,200 (the 200-DMA). However, if the 13,450 bust continued and broke the secondary bull trend from June of 2006, there is quite the downside to contend with. A retest of the August low would not be out of the question.

To combine my firm's technical stance with the markets' long-term fundamentals, we discussed the current situation with the president of one of our affiliate companies – Asset Architects Inc. Tony Frezza, President and CFP® who does our clientele financial planning, agrees with this potential scenario and mentioned the unknowns surrounding the financial sector of the equity and debt markets. He also believes the risk level has increased relative to the potential reward within these instruments. Therefore he recently recommended a slight shift in allocation. This, more so today than in the past four 'year-end' situations, is becoming more prevalent.

The key now is to plan accordingly and watch for opportunity. I realize I don't have to remind readers but; make sure you see the whites of their eyes before pulling the trigger; otherwise you could end up with a big "bear" in your lap.

Stay tuned & good luck!

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No positions in stocks mentioned.

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