Sunday, September 28, 2008

The Week Ahead

Short term, for traders, I'm looking for a turn higher sometime in the next couple of days.

Longer term I am bearish. I wouldn't say "more bearish", rather I trust the basic indicators I'm using and they are not giving the right kind of signals I want to see at a bottom. Conservative investors should remain on the sidelines.

Additionally, I see the current fiscal crisis as being very different from any other similar event in my lifetime.

I just watched Paulson on 60 minutes. Whatever you think about him, I believe he is really concerned, concerned enough to resort to actions he would normally consider unthinkable. The fundamental risks to the US economy are unusually high. If you read through the lines in Paulson's remarks tonight he expects "continuing volatility in the financial markets" even with the current bailout package.

Uncertainty has been one of the primary causes of the credit freeze up, financial institutions refused to lend to one another. Apply the same psychology to main street, individuals and small businesses. I suggest they will behave the same way and act in a conservative manner, reducing spending and deferring expansion. This will cause a contraction within the economy putting increasing pressure on earnings.

Add to the above mix, the aging baby boomers who have been watching the value of their IRA's decline steadily over the last year. Fear will induce them to shift money from riskier investments like stocks and mutual funds into safer instruments. The money being diverted from the stock market will not return over the next few years at best.

This means that the high cash levels on the sidelines cannot be viewed as it was in the past. Some of this money will never return to the equities markets and should not be counted. In other words the "cash on the sidelines" number is fudged, or over-valued since it is counting funds which are no longer actually available to the markets. As a result I expect the "cash on the sidelines number" to go higher.

Conservatively, I expect the final lows will be values 30% to 50% off the last market highs.
For the SPX 30%= 1100, 40% = 950, 50% = 800 (rounded to nearest 50)
For the DJIA 30%= 10000, 40% = 8600, 50% = 7200 (rounded to nearest 100)
I realize that at the moment, my lower values may seem extreme but the sizes of these decline are within previous ranges.

I also will be on the lookout for evidence the government is rigging the markets. I expect this to happen, it is the only way to re-capitalize the financial system by inflating a financial instrument. If this is to occur, it will have to happen at an appropriate time after the weak sisters have been thoroughly been flushed from the markets. I do not think this has occurred yet.

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