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    Friday, July 18, 2008

    Now what?


    Almost everybody expected a rally after the beating stocks have taken for the last 6 weeks or so, and it's finally materialized. The question is, "where do we go from here?" It has been my experience that the stronger the move (in this case lower), the more likely it is to continue in the same direction, or at least damper the reactive bounce. So far this theory seems to be holding, as stocks will need time to work higher. I remain long stocks via the EWZ etf.

    Regular readers know my trading is based more on expected direction than price levels, and that I feel most financial instruments are highly correlated with each other. Lately we've seen many disconnects in traditional relationships, and this means I might have to examine individual ideas in more detail. Importantly, when this occurs, it typically spells less opportunity overall in the markets. It's probably a function of decreased momentum in specific asset classes. In any case, it's not a healthy market when the weakest names (financial stocks) rally the hardest, while the recent leaders sell off sharply. Rotation like this makes trading more difficult, as I refuse to buy US financial companies at this time. This simple rule has spared me lots of capital.

    There continues to be a lack of rational discussions in the current turmoil. I've been well served with my reduced positions, observing from the sidelines. That said, trading accounts briefly hit all time highs Wednesday. This results from my utter refusal to "chase" or pay up for stocks. Patience is rewarded. If you feel out of control, or that you're "slipping", sit tight until you are able to trade from a position of strength and confidence.

    Regarding specific ideas, I continue to be long stock (EWZ) with my stop in place. For now, I am not adding to this position, but if it gains traction I might get heavier. I intend to get involved in agricultural commodity futures in the next several days (corn and/or soybeans). Bonds have treated me decently lately, and I'll look to re-short on significant bounces, with my eye on that long term setup I've discussed before. If stocks can continue to rally a bit, I'm also keen on re-shorting equities such as the IYR and IWM (via the etfs SRS, and TWM). Keep an eye on the ticker, as I report trades there first. Honestly, I got started on the wrong foot this last time around, as I missed the huge decline the last 6 weeks. As my system dictates buying weakness and selling strength, I was forced to consider my "next best ideas", which are reflected in my current positions. That's how I got long stock when I'm really leaning towards the bearish story. When account equity hits all time highs, it's best to have it explode higher, and this was not the case. As my accounts hover around the high water mark, I hope to have more to share with readers. It should stay interesting, if unpredictable.

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