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Tuesday, September 12, 2006

Flexibility Counts

So commodities broke down.. now what? The markets will rally, possibly to a new high.. people will think that slowing commodity prices will lead to lower inflation and thus more reason for the Fed to pause at its next meeting. Of course we still have the inflation data that comes out at the end of the week, but a continued rally is the more likely case.

But what does the commodities breakdown really mean? It tells us that the economy is slowing down faster than anticipated, and when the market realizes this, it will sell off eventually. So take advantage of this rally and go long short-term in cyclicals, but get ready to short when the party is over. Expect all this to happen in the next month or so. But don't expect a long-term crash... the Fed will cut rates if it has to, lending support to the market.

Confusing? No it's not... learn to be flexible and see the bigger picture, and that is we are in a sideways trading market. Learn to go short AND long. This is the only type of market when you can do BOTH. Watch the signals and the data in the market everyday to tell you which side to take. You can't be too bullish or bearish until we get confirmation of a soft or hard landing.



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