Wednesday, September 06, 2006


After Tuesday evening’s announcement by INTC that they were going to reduce their workforce by about 10,500 by sometime next year, the market opened weak.  Although the analysts were bullish on the INTC news (please), the stock still dropped several percent over the course of the day.  Another report about productivity and labor costs did get primary billing during the day due to the increase in labor costs.  Some would think that the Fed may have to raise rates again if labor costs start moving up too fast.  At least that’s what the media thought all day.

We, on the other hand, have been waiting for a day like this for a few weeks and don’t really think the news was the driver of prices on Wednesday.  Instead, we see the sheer overbought nature of the market as being the best indicator of a turn being at hand.  As the title implies, could you hear a bear growling on Wednesday like we did?  

Whatever the reason, the stock market was down and we think it is just the beginning of what could be a long downtrend.  One of our reads suggested that the current environment seems a lot like the summer of 2000.  You may recall the situation was that the major indexes all peaked in early 2000 and suffered a fairly substantial decline going into the early summer.  Then they bounced strongly into the late summer just like we have seen the last few months.  After that we saw about two years of declines with the worst of it happening between September and the end of the year with further selling most of 2001 culminating in the 9-11 reversal to the upside and then a further decline into the fall of 2002.

We see the similarity even though the prices are not quite as outrageous in the major indexes that we were seeing back in 2000.  The smaller stocks today do show similar signs of over priced conditions, such as the Russell 2000, RUT.  The RUT bottomed in that fall 2002 period at about 325 and in May this year had risen to nearly 785, a magical run of nearly 150%.  We would be very careful if we were in small cap type mutual funds, as we think there could be a huge retracement of this incredible rally.  Understandably the participants have been enjoying the obvious benefits of the small cap boom in the face of relatively less movement in the major indexes.

The stock market should be avoided near term as we sort out how this next drop will affect the major averages.  At the moment we could speculate but we prefer to get prepared for the fall that is coming.  We have thought that there might be a rally point for us sometime in the next few months but we are going to put those thoughts on the back burner for now as we concentrate on the near term drop in prices.

The time for caution is here and we recommend a very low risk deployment of funds.  What this means is that we think the time is right for selling rallies.  Yes, we know that one day does not a trend make but we do think there is clear warning in the technical indicators to warrant our positions: low volume, inability to take out recent old highs, overbought technical indicators which are weaker than the past overbought situation back in May.  We could go on but you get the basic idea.

Dow Industrials:  11,406.20  -63.08
QQQQ:  38.67
RYVNX:   21.73
RYAIX:  24.16
RYCWX:  41.38
TLT:  87.09
BEGBX:  13.71

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