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BEING STREET SMART 

by Sy Harding

WHAT A YEAR SO FAR - WITH MORE TO COME! September 5, 2008.  

Market professionals, money managers, hedge fund managers, traders, and newsletter editors I speak with are increasingly saying they don’t recall a year when the lack of lasting trends made investing so difficult.

They complain that this year each time a trend seems to begin in stock market sectors, housing, mortgage-backed assets, oil, commodities, or currencies, by the time it is analyzed and positions are taken, that market soon reverses again, catching them on the wrong side more often than not.

Meanwhile, buy and hold investors have experienced their worst year since the 2000-2002 bear market. The market has experienced two bear market rallies this year, but neither brought the S&P back to within even 10% of its level of October, before failing and dropping to new lows. Even ‘best investor in the world’ Warren Buffett’s holding company is down 17% so far this year.

The market produced its first bear market rally off its low in March, after it became very much oversold as a result of the panic selling in the aftermath of the Bear Stearns failure, and fear of a meltdown of the entire financial system.

That rally was worth going after (Street Smart Report issued a buy signal March 24). The S&P 500 gained 12% from the March low to the May peak where the rally ended. The Nasdaq gained 18% in that rally.

However, as expected it was only a bear market rally. When it ended (Street Smart Report issued a sell signal on May 26) the market plunged to a lower low for the year. The S&P 500 declined 15% and the Nasdaq 13% to that July low.

The market was then able to produce its second bear market rally of the year when oil reached $147 a barrel and was supposedly headed for $200 within weeks, but instead began tumbling. (Street Smart Report issued a buy signal on July 16, just 3 days after the low). The S&P 500 gained only 7% in that rally, to its high last month, but the Nasdaq gained 11%, and the Russell 2000 gained 15%.

On August 18, Street Smart Report came off the buy signal to a neutral outlook, and I said that downside risk exceeded upside potential, and recommended moving to cash. The rally ended, but the market only entered a volatile but neutral sideways trading range.

However, narrow sideways trading ranges are usually followed by big moves in one direction or the other. And it looks like that move is the downside.

The market provided an early warning of that outcome on Tuesday of this week, when it suffered what in technical jargon is known as a key reversal day, a day when the Dow rallies to a high higher than the previous day's intraday high, and then reverses to close lower than the previous day's intraday low. On Tuesday the Dow was up a big 247 points in the morning, apparently on relief that hurricane Gustav had not damaged oil rigs in the Gulf of Mexico . But it immediately rolled over to the downside, gave back the entire 247 points and more, to close down 26 points.

The market managed to close basically flat on Wednesday, no follow through to the ominous key reversal day the previous day.

But then on Thursday the bottom fell out again, with the Dow plunging 344 points or 3.3%. The rest of the market indexes closed down to about the same degree.

The market’s problem is that while it focused happily on the plunge in the price of oil in its most recent rally, it was ignoring the continuing deterioration of the economy. It was popped out of that trance this week by bad economic news from Asia and Europe early in the week, and ugly economic reports in the U.S. later in the week.

The bad news is that we are now in the month of September, which historically tends to be a negative month even in bull markets.

So the market does seem to be shaping up for the low of the year to be seen in October, maybe November, as I have been predicting all year in this column. That in turn would set the market up for a timely re-entry signal for our Seasonal Timing Strategy into its favorable season, and the typical biggest rally of the year from that buy signal to the end of the year, and probably well into next year.

But first we have to get to that low. Stay tuned.

Sy Harding is President of Asset Management Research Corp., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market, and 2007's Beating the Market the Easy Way - Seasonal Strategies that Double the Market!

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