20080721 Timer Commentary

Both the drop and the rally last week in the S&P were underwhelming. It was good to see a 2.5% one day rise, but don’t bet the farm that a long-term low is in. A good reality check on the situation can be found by going back to April first’s gain of 3.7% which was called the “best start to a second quarter in 70 years” or mid-March when the market posted a 4.2% gain. What has the market really done since then? One long roll over-and-down.

Technicians are still looking hopefully for a follow-through day from last week’s pop. Most sentiment indicators are throwing signs that an intermediate low is in, but their subtle signals seem to be overwhelmed by the big picture items: credit, housing, jobs, oil. Speaking of oil, we read about the strong inverse correlation between oil and stocks – don’t be surprised to see oil come down and stocks not respond all that well. Several weeks ago, the world’s second-largest hedge fund estimated the credit crisis losses for just the financial institutions at 1.6 trillion. We do not see a large crowd arguing against this analysis. This size loss – about four times as large as one of the original “maximum” estimates – is not represented by stock price declines so far. A drop in oil prices will simply not make up for problems as large as described in the financial sector.

Current model positions: two models short, two models cash.