August Newsletter

WOW! Just when you think the market is in a free fall, the Fed comes in and attempts to prop it up. It will be interesting to see if the market interprets this attempt as worthy or as simply an undersized band aid on a large flesh wound. As of this writing, the market is still undecided. It will be interesting to see if the institutional investors take their profits later in the day or decide to stay the course. The lows of the Dow yesterday left it at the same level it was at the beginning of this year. The lows of the small caps yesterday (Russell 2000 index) left it at the same level it was in February of 2006. That is a year and a half of no increase, but plenty of volatility. The small caps help determine the health of the overall market. The institutional managers are the cause of about 80% of the markets movement. It stands to reason that small caps are the first thing they begin to unload when they become nervous about the market, since the small caps are the most volatile part of their portfolio. It has been shown that when small caps are being unloaded from these portfolios, plenty of volatility lies ahead for the entire market, not just the small caps. Small Caps have underperformed large caps consistently this entire year. This has been a partial cause of our conservative stance this year. The other factors have been the fact that a majority of stocks weren't enjoying the same rise the Dow was. When a healthy market is increasing, a majority of stocks in that market should be participating. When only a few stocks are enjoying the rise, we need to be cautious. One of the lessons I have learned this year is to make daily portfolio decisions based on the technical indicators and not the fundamentals. The technicals tell us how the market is interpreting the fundamentals. My interpretation doesn't count. I can disagree with the market, but must always remember that the market is always right. It will go up or down whether I think it should or not. I have promised myself that my decisions will be based on these technicals although the fundamentals will always be near to my heart. This way I should be able to move quickly when the technicals show the market is beginning to re-think it's interpretation of the fundamentals. I bring this lesson up due to the correction we saw in the market in February this year. I was totally unaware of a key fundamental point. The carry trade was very extended and in troublesome territory. I didn't see the unwinding possibility ahead and was totally unaware when it occurred. The only thing that makes me feel better is the fact that very few others saw it coming either as evidenced by the 500 point skid in the Dow. The correction in February and the beginning of the unwinding of the carry trade, was like putting the frog into the pot of water and having the heat turned on. The current correction shows that the water has now begun to boil and the frog should soon be cooked. You could tell that the frog (the Dow) didn't know the hot tub would get so hot! It kept climibing like there wasn't a care in the world, hitting an all time high of 14,000 before pulling back below the current levels below 13,000. The market doesn't always have to make sense. As they say. . . it is what it is. I must also reiterate, it is ALWAYS right. WHAT'S NEXT? According to my cyclic analysis, this market should be able to climb out of this correction. Valid trend lines have been drawn which should indicate if and when this actually begins to occur. If so, we will begin taking long positions as they look appropriate. If the market determines to treat this Fed attempt of a fix as merely window dressing, then we will remain conservative and maybe even put on a short position or two. I will let the market decide our next moves from here, and will let you know what it decides.

Check out my website at 401k plan facts