Wednesday, August 1, 2007

Important Month End Charts

The fact that this bar (July) is occurring right at this junction (the old high from Mar 2001) may be just a little more than mere coincidence. Remember whatever formation or pattern you are judging it absolutely must be given greater weight depending on the time frame. That means a weekly x is more important than a daily. I cannot stress enough how rare this monthly formation is.

This chart of the Dow, which has been the strongest of all the indices, offers little comfort with this ominous monthly shooting star.

The QQQ's which are the tracking stock for the Nasdaq show an almost perfect shooting star. Is it too perfect, well I don't know. Is it a trap, maybe. But given that most if not all major market problems (dislocations in strategist speak) occur in the credit markets so caution is warranted. Duh....Ya think !!

The IWM is the tracking stock for the Russell 2000 which is the small cap universe. This chart tells me there may be no where to hide.
Cash is not a bad place to be you must remember that there are times when return of capital is just as if not more important than return on capital. I firmly believe we are going through a major investment thesis shift. This shift is tectonic in nature and will take years if not decades to unfold. When there is a change in long term investment thesis, (ie. from commodities to financials in the early 80's and like bonds currently),there is much contempt and disbelief by investors at large regarding the new thesis' worthiness. Not to mention outright derision and ridicule of it's couriers. We are in the midst of another such shift. The bond bull market, rising bond prices and falling interest rates, is over. The financials and the consumer who have been the primary beneficiaries of the bond bull will take it on the chin as a result. Rates are now headed much higher than any sane person may be prepared to admit. Just like 1982 when Volcker slew the inflation dragon and commodities were DOA and equities, while persona non grata, were ready to embark on a dream run that very few foresaw, we are at a similar juncture. Imagine telling someone in 1982, with rates in the mid teens, that rates were heading to where we are today. Suffice to say men in white coats would be at your door.
You must prepare yourself and by doing this you must be prepared to entertain extremely contrarian ideas and concepts. It is at times like this during major shifts that the foundations of new fortunes and the ruins of others are laid down. Remember cash IS an investment decision contrary to what your advisor(of course he doesn't make a commission on it or in the least a reduced revenue if its fee based), friends, and associates may say. It does not mean you don't know what to do, just as buying something doesn't signify you do. Just ask the many sophisticated investors in Bear Stearn's now worthless hedge funds what they think of cash as an investment choice.
Good trading to all of you.

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