Weekly Strategy

Please note: This weekly strategy is being written Sunday morning without knowledge of how the Lehman situation will evolve but regardless of the outcome it does not change my approach.

I am operating under the assumption that we are still in a Bear Market. It may seem late in the Bear cycle, as consumer weakness, credit card delinquencies and housing problems usually manifest at the bottom of the cycle. However, this time around these problems started before unemployment rose, whereas in a normal cycle they are the result of unemployment. Unemployment is now just starting to accelerate to a recessionary level and these problems are likely to worsen before they get better. In addition, S&P earnings estimates have yet to come down. I believe that once the slowdown in global growth, weaker consumer spending and further credit contraction manifest, estimates will come down in a big way. Anecdotally, I speak to a lot of small business owners and almost all are saying that business is as bad as it has ever been. Smaller companies are leading indicators as they more often deal with the end user and have smaller lead times and backlogs.
However, nothing goes down in a straight line and it is certainly possible that we could witness a Bear Market rally. Sentiment surveys are showing that bearishness is at the higher end, while not yet extreme. Put buying picked up at the end of the week despite the higher market. The energy and materials sector are deeply oversold and certainly have room to rally. In addition, the market ignored bad news at the end of the week and rallied.
While a case can be made for a rally I will take a pass. If I miss it there will be other opportunities. In a Bear Market, I am only willing to get long when the market is severely oversold and sentiment is extreme. By my measures they are not. The surprises in a Bear Market are usually to the downside. If I am going to take that sort of risk I want a fater pitch.

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