Equity Market Comment - 6/11/2008

Today is a clear cut example of the dangers of trying to capitalize on the long side during a bear market. Although we had some fairly strong signals that today should be an up day, the power of a secular bear market is the deciding factor. It is this type of environment that requires a selling of strength and adding to short positions as the prudent course of action.

The chart below is the wedge pattern I had spoken about last week and it looks like the S&P 500 cash index is getting quite close to the wedge target of 1315.

We also have a 1.618 ratio target of 1300 even for a downside target as well, so it would appear that we may very well be getting close to some type of short term low that could lead to a trade able rally. However, as I stated in the first paragraph, during a bear market we need solid evidence that a counter trend rally is indeed a higher probability and from this point we can look to establish some type of long positions to capitalize on such a move.

At the very least, these signals warrant our short and put positions to be reduced and/or closed out in waiting for a point to re-short the market after a counter trend rally. Our short positions have paid off very nicely and it looks like there should be just a bit more on the downside before we exit these positions. I anticipate exiting 2/3's of my positions on any early weakness Thursday as the daily trading pattern calls for a continuation of lower prices early Thursday with the final low being put into place in the 11:00am to 12:00 Noon time frame. Should we see the 1315 to 1300 price level during this time then I will exit all of my speculative shorts and remain neutral until I get strong confirmation that in fact a short term low has been put into place.

Intermediate term traders should continue to hold their hedged positions as should longer term investors. This decline in full could very well be a long ways from being over. Caution remains the most prudent word for equity allocation at this time.