Was That a Bottom? Let's Get Real

by: Fritz Hottinger

You got fooled if you thought you heard the fat lady singing last week when the Dow dropped 519 points in 2 days (7/24 and 7/28), then gained back 450 of those on the next 2 (7/29 and 7/30). Why? Because the Grand Old Index finished out the week by giving back 250 of its hard-earned points - - - and it is not done surrendering value.

The net effect of those six volatile days was a drop from 11,632 to 11,378. From all appearances, both technical and fundamental, there are further corrections to come. And before it all ends and the fat lady does sing her finale, you can expect the Dow to have tested the 10,000 level.

We write these notes of caution to keep you from becoming overly exuberant on days when the Dow posts a 3-digit gain. At most, these present a brief opportunity to add to your portfolio anchors, like SDS, QID, or other contra ETFs. But as the past week has shown, these bounces carry no momentum - - - gravity is still in charge of the ping pong ball.

Without repeating the mountain of world-wide facts and data that the market must scale to achieve some stability (see earlier postings), let us just add, from what seems to be an endless supply, the downside news from last week:

  • GM announced a $15.55 billion 2nd Q loss, more lay-offs, and if it were not so laughable with gas at $4 /gal, their plan (hope?) to sell the Hummer line. (ps: any buyer, if there is one, could make a good short.)
  • Unemployment rose to 5.7%, highest jobless rate since March, 2004. Obviously, not a good sign for the economy.
  • Inflation (based on CPI) hit 5.02% in June. Looking back 10 years, the previous high was 4.69% in Sept, 2005. We might want to read these numbers cum grano salis, keeping in mind they are prepared by the very same government that has a vested interest in keeping it low - - - there is a direct and immediate impact on CPI-based payouts and the budget deficit.

This last week also gave the public another reminder of the political uncertainties ahead, what with the turmoil over one candidate's speech in Berlin, and the awareness that things will not be settled in Washington until the election is over. Markets hate uncertainty, and there is nothing but that on the horizon.

However, all is not doom and gloom. Investors seeking income-producing stocks are being presented daily with increasing values. There are a multitude to choose from: Canroys like PWE, ERF, CEP (an MLP), and HTE (a hybrid); preferred stocks yielding over 5% are many, and those of FNM and FRE are enticing, once you apply the Paulson theory that these GSE's are TBTF (too big to fail).

The adage of do your own due diligence cannot be over-emphasized, especially with market volatility this high (the VIX is again reaching for an historic level which usually precedes a spectacular drop). Day and swing trading opportunities also abound in this volatility; and here short term technical indicators like AD lines, OBV, Channels, Bands, and E-Zones can be helpful.

We all understand the risk of the market. What we need to get a grasp on is how can we use it to our advantage. There is no "one size fits all" rule. Developing a personal strategy for these times is imperative, because these conditions will be in effect for many months. We do not foresee any change in the downward trend or in volatility until sometime in the 1st or 2nd quarter of 2008. Much help can be found here in the pages of Seeking Alpha. Best wishes to all.

Disclosure: Hottinger Capital and its clients hold long positions in SDS, HTE, PWE.