Prepping for Monday

October 20, 2007

Hi, Friends,

Not a good week last week, made worse by the media's incessant fear mongering about the 20th anniversary of Black Monday on October 19, 1987.

But, for us, the market action and talking heads' speculations are nothing more than background noise. And that's the terrific advantage of having a proven, non emotional trading plan in place that we can depend on in good times and bad.

Since September 4th, we've been on a heady roll with our portfolio up as high as 19%, to drop back this week to 14.7% compared to 1.8% for the S&P 500.

Year to Date we stand at +20.61% realized and unrealized gains compared to +5.82 for the S&P.

Our indicators accurately called the beginning of this run, and now are flashing some short term weakness. The S&P looks decidedly high risk short term, and although most of our positions are not S&P components, in stressful times, all markets around the world move as one.

To respond, we'll be tightening our stops for Monday morning. Subscribers need to watch for your Stop Loss Update later today and have your stops in place before market open on Monday. The closer you are able to follow the system's entry and exit points, the more likely your chances of success.

In spite of the short term weakness, all up trends in our positions remain firmly in place.

The View from 35,000 Feet

This week's sell off was prompted by the poor earnings reports from the financials and industrials. Everyone knew there were big hits coming due to the sub prime morass but the reality of billion dollar write offs was a staggering hit to the markets, sending the DOW down 360+ points on Friday and -2.64% for the day and -4% for the week. The S&P did no better, down -2.56% on the day and -3.9% for the week.

A strong whiff of fear was in the air as investors mulled over the weak earnings, the weaker dollar and oil breaking the $90/bbl. mark.

More and more the talk is of recession as the housing woes spill over into the general market. And this story isn't over yet as the majority of the sub prime resets to higher interest rates are scheduled for first quarter next year.

Reflecting this reality, Fed Chairman "Gentle Ben" Bernanke on Monday said that the negative pull of housing on the economy was getting worse and would hurt growth for the Fourth Quarter and into 2008.

As I wrote last week, Benny and his Merry Band of Feds are between a rock and a hard place, worrying about inflation while having to cut interest rates to prevent a recession in a Presidential Election year. All indications now point to the rock getting bigger and the hard place getting harder. As the bad news unfolded this week, the Fed meeting on Halloween looms ever larger in the background.

The Week Ahead

Next week will have more than 160 companies reporting earnings. More than 120 have reported so far and earnings growth is in the negative column.

We'll also see some important reports with September Durable Goods, weekly jobless numbers and home sales reports that will give investors plenty of data to chew on.

What It All Means

Clearly, the economy is slowing. The sub prime melt down is spreading past financials, and since financials are widely represented on the S&P, that broad indicator will experience downward pressure. Oil and the high price of gasoline will act like a tax on the consumer and so it's hard to make a case for robust growth over the next few months.

All of this points to Benny and his Merry Band of Feds and their Halloween meeting. More bad news this week could easily lead to a rate cut and a month end rally. Will it be trick or treat? No one can make that call, but we'll be ready for either eventuality.

My view is that a recession in 2008 is so politically unpalatable that we'll see plenty of Fed intervention in hopes of making the proverbial soft landing.

There has not been a losing pre-Presidential year since 1939, and I think it's likely that this year will hold true to trend.Sector Spotlight

The hot sectors this week were energy, commodities and gold, but most sectors ended up in the negative column with Real Estate, Financials and Home Construction being the bottom feeders. The rally in Real Estate and Home Construction proved to be short lived as "Gentle Ben" gave his outlook for more problems ahead and sent those sectors into the basement for the week.

This weekend we're in Hood River, Oregon, for a swim meet with my young son and the Hood River Fall Festival. If you've never been here, Hood River is a quaint little town on the banks of the Columbia River with a rural valley setting affectionately known as "the fruit loop" to sightseers.

The fall foliage brings a ton of "leaf peepers," and from the valley you can see the snowy volcanic peaks of Mt. Hood to the south and Mt. Adams across the river to the north. Framed in brilliant yellows and reds, it's truly a spectacular setting.

For ten years we've come here, watching the kids swim and stopping at Rasmussen's Farm for pumpkins, caramel apples, boxes of pears and spruce beer, a local "delicacy."

It's always a fun time, and as the leaves blow across the wet ground, the salmon return home to their spawning grounds in Hood River and goblins start showing up on front lawns, one knows that deep autumn and harvest time are here.

Wishing you the best for a great autumn Sunday and week ahead,

Your partner in prosperity,

John Nyaradi
Publisher
Wall Street Sector Selector
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