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Wednesday, September 13, 2006

How About Industrials?

It happened.. the market rallied as we predicted with lower commodity prices easing inflation concerns. We believe this market has some more room to go before it calls it quits and concerns about a slowing economy set in. Rising most notably along with the market rally were the cyclical stocks that should benefit, namely technology (XLK) and consumer discretionary (XLY). The noticeable laggard is the industrials (XLI), mainly because of the likes of CAT and JOYG who serve commodity producers whose businesses may slow down due to lower commodity prices. However, a lot of industrials input costs will go down due to cheaper raw materials, and we believe they will play catch up. Just avoid the ones related to commodities businesses. I'm having problems posting the charts. I'll post them when I can.


Tuesday, September 12, 2006


with the breakdown in commodities...


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.


Monday, September 11, 2006

More Irregularities

More irregularities, or divergences, courtesy of Marc Faber at www.gloomboomdoom.com. The charts show that despite the upmove in the markets, key sectors which are vital signs of the economy (transports and commodities), are showing weakness. Thus both long and short trades are plausible at this moment, as long as these trends continue. This is specifically what COL fund is executing right now in the US market. Another divergence is in the brokerage sector which has lost its leadership status. Watch closely for further developments. Mr. Faber recommends shorting retailers, sub-prime lenders, brokerages, cyclical stocks (including resource stocks and oil). While he expects precious metals to go down with industrial metals, he is still bullish on gold and silver long-term.