March 31, 2008

Dear Investors:

I have provided the following report for your information. The opinions voiced herein are for general informative purposes and are not intended to provide advice or recommendations for any individual.

This information is provided for informational purposes only and is not a solicitation, or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is not a guarantee of future results.

If Daily Market Action Can Spoil Your Day...

By Martin Goldberg, CMT

Let’s look at some long term charts. First is the 3 year weekly chart of the S&P 500.

From afar, the pattern is clear. Until October of 2007, it paid to play a bounce off of a correction because such bounces were both profitable, and fast. However, since that apparent market top, the pattern has changed distinctly. Instead of a consistent uptrend, the market has been in a steep downtrend. Now it is easier to get whipsawed by playing a rally.

More importantly, the US stock market has followed a consistent pattern since August which goes like this:

1. The market sells off and volatility spikes upward.

2. The fed/government does something to make the financial markets and the public think that everything is going to be just fine.

3. After an initial rally, the market sells off and the process repeats itself.

Within this pattern, it is becoming more evident that with each “save”, the magnitude of the corresponding rally becomes smaller, and the duration becomes shorter. It makes one wonder what will happen to the market if Tuesday’s action turns out to be a mere one day wonder. For those who believe that the market will always favor those who are long term investors, a look at the longer term chart would be helpful.

The 10-year chart shows that the S&P 500 made a double top, and then it decisively failed to hold its 2000 highs. Now in spite of all talk that the fed will save the day, the market is steeped in a clear and steep downtrend. While the rallies have been exciting, they bear an eerie similarity to those knee jerk rallies that occurred in the S&P’s trip from over 1500 to less than 800. I can think of no reason why such a “correction” cannot happen again. The last top was accompanied with a bubble-burst. This one also has its own bubble-burst to cope with.

Don’t listen to the noise. It would not be logical for a 5 year rally to hit a bottom in about six months. This suggests that there is more downward pressure in this market. If the market fails here, what rabbit can the fed pull out of their hat that hasn’t been pulled already?

Whatever the rabbit is, the reality is that “the rabbit” will contribute to inflation. Inflation means higher gold prices in terms of the US dollar. So what does the long term chart in gold look like?

This chart looks pretty good to me. Of course, it can correct back to near or even below its 10 month moving average (in blue). But, as I said before, if the market’s action can spoil your day, then your commitments are too great.

The following is the long term perspective of the Gold Bugs index ($HUI). Even though the correction over the last couple of days was rough, the index is still in the third wave of a third wave, and the bull market is intact. But, if the daily action can spoil your day, your commitments are too great. (The short term action suggests that the correction is likely to last longer than just a few days.)

In the past, I suggested that the staying power of the rally would be indicated by the action in the market leaders. Here’s the long term chart of the emerging markets ETF, showing a long term uptrend break.

In the shorter term, it would appear that the late January lows are probably in jeopardy.

In summary, the market is in a downtrend. The pattern of intervention in the financial markets has been one that has produced rallies that are shorter in duration and smaller in magnitude. Former market leaders now lag. The market action is such that if it can spoil your day, your commitments are too great.

Today’s Market

The market was led higher today by a host of stocks that are clearly in a bear markets. Consider the bullish action in such sectors as homebuilders (up double digit percents) and financials where our old friend Countrywide was up double digits, Merrill Lynch up double digits, Bear Sterns up double digits, a host of broadline retailers all up more than 5%. At the same time, gold, silver, oil, and commodities were down. Emerging markets were an under performer, up 1.7%. While gold, commodities and commodity stocks were down, bonds were up. This has been pretty typical of the action over the last week or so. Is this the bottom for stocks? In my opinion, it isn’t. Is this a top for bonds? In my opinion were near it. Have we seen a top in precious metals? In my opinion, not.

Still, I’m keeping my commitments where the daily action of the market cannot spoil my day.

Best of luck to all.

Martin

Please call us if you have any questions or if you are interested in a review of your portfolio at NO obligation or expense.

Sincerely,

Jack M. Schwartz