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Making Lemonade Out of Lemons

The bounce from last weeks selling hit resistance at 1325 yesterday on the S&P 500 index. Despite the reassurance by Mr. Bernanke that inflation does not exist, he sounded like President Clinton during the testimony about Monica. Investors reacted to his comments, the issues in the Mideast, and the price of oil ratcheting higher. The bias remains to the downside as we have discussed, and the 1304 support will be tested today. What is the plan? Do you have one? If not, dont’ sit there believing this is just another dip in the uptrend. Take action to protect your assets and focus on your goals.

The S&P 500 index closed at 1306 and is poised to move below support and test 1274 near term. Now we watch to see how much selling is generated by the current sentiment in play. We have taken money off the table, we have set our stop according to the risk we are willing to accept, and we are evaluating the next opportunities (see Watch List). The short opportunities are in play, but we have to be cautious not to make assumptions that the long term uptrend is done. As we stated last week, it is a traders market, respect the risk.

The NASDAQ has been the leader to the downside and support is 2725. The downside could reach 2580 if the negative momentum picks up. However, we can’t assume anything. We can only take what the market gives us day to day. 2700 is the next level of support to watch. Volume is picking up with the selling which not a good sign for the upside plays. Monitor the SOX index for more insight to the direction of the index. The SOX fell 2% yesterday taking out the 30 day moving average. The downside is in play short term, but is a trade and nothing more currently.

The VIX index spiked higher again yesterday in relation to the rise in fear. Watch the 22 and 24 level on the upside. If the index breaks through these levels and holds the downside risk of the market will increase relative to investor fear rising. Fear creates irrational action by investors resulting opportunities for those willing to be patient. We fall in the patient camp!

There are upside opportunities in the precious metals. Gold was up 1.6% and silver gained 2.3% yesterday. Crude was up more than 3% and if fear escalates it will rise further. Gasoline was up 3.5% and heating oil rose 3.2%. Watch the balance of the commodities as well. The agriculture components are consolidating near their highs and could break higher. The base metals are in a similar position to rise.

Inflation was the topic of choice yesterday in the media as Mr. Bernanke swore inflation was not impacting the U.S. economy, “yet”! I am not in complete agreement with that view, but we all have opinions. What is important is the data and making our investment decision to make money not being right about the economy or any other issue. Manufacturing data was better than expected yesterday, hitting a seven year high, (lost in the noise). There are shortages showing up as demand is driving the recovery and thus, low inventory is driving manufacturing as it is behind. Yes, this is a result of too much liquidity in the system (thanks to the Fed). For now, we take what the sector will give on the upside, use our stops and keep moving forward.

Plenty of issues and opportunities facing you and I as investors. Now is when the fun begins. Be focused, keep it simple and don’t over stay your welcome in any one sector, up or down!