Market Commentary for the week of July 28, 2008

Headlines
In a rather “Alice in Wonderland” kind of week, in which down-was-up and up-was-down, the markets last week stumbled into a paradoxical response rising on bad earnings in Financials but faltering later as energy prices jostled somewhat.

For whatever the reason, the market was ready to halt its week’s-long slide to find justification for going up, but faltered nonetheless.

While turmoil in the Middle East was temporarily put on hold during Democratic Presidential-nominee Obama’s foreign fact-finding trip, energy prices started dropping as worries about supplies diminished. Rising stockpiles didn’t change many traders’ opinion, however, about the long-term impact of diminishing reserves and limited refining capacity. The sell-off was simply an indication in the short-run that money chases opportunity, not morality. In last week’s case it was the much maligned financial sector.

Sometimes, the absence of a long term perspective can be a fateful reminder that Wall Street is certainly not Main Street nor, in most cases, a surrogate for the economy at large.

Markets
The reduction in fear temporarily put a halt to investor’s aversion to buying stocks. Many equities trading at or near critical support levels picked up some buying support. However, there exists just as many reasons as equities for reducing exposure to a vapid earnings landscape. Net for the week, I took money off the table and raised some cash.

It is likely that the reflex “bounce” we saw in the markets last week will be contained and understated. I see no tremendous appetite for stocks, worldwide, except for a clarion call to “get out whole” on any upswings. The crisis of confidence lingers even still, and until we see a turnaround in the earnings picture (unlikely) the markets will remain negatively range-bound for the foreseeable future.

Technicals
The predominant current secular trend is negative. Upside bounces and rally efforts are knee-jerk responses to valuation depreciation and should be seen as false starts within a deepening “top left to bottom right” configuration.

Too many sectors are unaffected by these rally attempts, so much so that the quantifiable validity of these efforts is negligible, at best.

I believe that most upcoming earnings momentum advisories are negative, and likely to dissuade investors from loosening their purse strings to indulge in a flight of fancy in stocks, particularly when the intermediate capitulation is not complete.

As I have said in earlier missives, however, we are closer to the bottom than when the bear began almost one year ago. Although this might seem self-evident, the facts are that as valuation decline worsens, the market’s RSI readings come closer to emptying out the pain, and gaining an equilibrium from which it will be possible to buy inexpensively and profitably. But not just quite yet.

No portfolios are bulletproof in this environment. While the bottom is not yet at hand, the early signs of a bottom juncture are perceptibly more likely than they were five months ago. Led by equal parts fundamentals and inspiration we will know when the trend reversal is upon us by utilizing inflection point methodology to quantify the position of cyclical events and their probability of reversing course upwards.