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Good Riddance, Third Quarter


Where do we go from here?

The third quarter was certainly forgettable for the equity markets. The stock market remains locked in an ugly downtrend and it certainly looks like volatility will remain a central theme for the rest of 2008. I think we're finally starting to see some capitulation as leverage continues to be unwound. This should lead to a low in the stock market in the fourth quarter. However, volatility will remain elevated and I still think caution is prudent in this tricky environment.
Minyanville's Why Wall Street Will Never Be the Same
The election will certainly take center stage as we grind through October, and therefore I continue to think the US dollar will be the most important market to watch in the coming quarter. We have quickly gone from an inflation-driven, commodity-led market to one that's on the edge of a deflationary spiral. The US dollar will be the battleground market to focus on as we walk the fine line between inflation and deflation.

Here's a quick review on some calls for 2008, and then we'll check out some technical setups that will be important to keep an eye on as we round the turn and head down the stretch to the end of 2008. Time flies when you're having fun!

Call #1: Long PHO (PowerShares Water Resource Portfolio) – While I've been bearish on equities in general, the PHO has continued to outperform and I continue to like the solid long term macro theme. So far, the PHO has outperformed the S&P 500 by over 7% this year-if you must have some long equity exposure, this vehicle should be on your shopping list for a potential low in Q4. Notice how the PHO is finding support at the spring lows. If I had to buy something, this looks like a decent add below $18.

Click to enlarge.

Call #2: Long Japanese Yen – The yen continues to be my favorite way to hedge against the credit crisis and leverage unwind. I would add to long yen positions in the low .90's, and I think ultimately we'll see new highs, maybe by the end of 2008.

Click to enlarge.

Call #3: Gold – Gold has definitely proved to be one of the more dynamic markets in 2008 as inflationary fears have given way to deflationary worries. The recent strength in the US Dollar has certainly kept gold under pressure, and the 1980 analog for the price action in gold is starting to reassert itself. In early July, it looked like gold might decouple from the 1980 pattern and move higher, but instead gold rolled over sharply and traded straight down to $750. Recently, we've seen a flight to safety bid in gold that has pushed it right up into $900 resistance. I would now look to trade gold from the short side into this $900 resistance level for a move to new lows. Be careful and manage risk because this certainly will be a volatile market in Q4!

Click to enlarge.

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No positions in stocks mentioned.
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