Market Commentary for the week of September 17, 2007

The markets closed out a mostly successful week, the best since April, on speculation that the Fed might lower interest rates this week in response to the disastrous credit crunch and its reverberations throughout the rest of the economy.

If the index is any barometer, that hopefulness might be misplaced.

Caution is the name of the game. I urge investors to pay heed to the difference between reflexive giddiness and secular trends. To lose that distinction is to be caught up in the emotion of day-to-day volatility.

The contradiction that last week’s activity highlights is to forget that the Fed, or the President, or the local cleaner, has impact upon turning, or magnifying, the direction of more enduring trends.

For example, an infusion of bail-out capital into the markets might quell, in the short run, fears about illiquidity or bankruptcy. But to turn around and use that capital for speculation or leveraged gain would defeat the purpose of those “rescue” funds. Further, since inflation and price acceleration are the problem, short term capital, without strings attached, becomes an enabler to the problem, not a solution. Might not higher interest rates diminish the appetite for speculation and price-push faster than ready cash?

Investors, after all, are inspired by greed. Any “infusions” must be designed to diminish speculation, not to provide it.

Last week’s events feed into our innate need to see markets go up. I, too, would rather buy than sell, own rather than be in cash.

Yet, the significance of a strong week is overshadowed by the downtrend that developed earlier this year. The statistics bear out the fact that the aging bull market, begun in 2002-2003, needs a rest and more likely might test its current support than to break-out above its current resistance.

Borne out by the fact that earnings acceleration patterns are diminishing, and by the defensive leadership of the market’s sectors, it will require more than hope or hype to reverse the current intermediate consolidation.

I wrote back in March of this year that the biggest threat to market performance was the unusually low interest rate environment that contributed to price speculation in real estate and equities (March 19^th 2007). As profit and earnings patterns dissipate due to rising inflation and price creep, the likelihood of a market surge diminishes, too.

Perhaps overwhelmed by the lack of safe haven, investors might feel better off “selling it all”. That, too, would be an inappropriate response. Despite the negativity, I still see pockets of acceleration.

Basic Materials (commodities), Energy, and Bio-Sciences are performing well, if not relatively better than most. It is important to find trends which resonate cyclically to their time. In the long term it is most important to find those equities whose probability of outperformance is relatively and absolutely better than most.

With options expiring at the end of this week, and the potential for a Fed disappointment, I do not believe this week will mirror the success of last week.