of rocks and hard places

Despite gapping higher on the open, all three major indexes broke down and closed near their daily lows. The Dow Industrials Closed down 171.44 points to 12,207.17. The Nasdaq Composite, which had gained 2% on the open, suffered a 3 1/2% swing and reversal of fortune, Closing at 2326.20 which was pretty much the low for the day. All of the other major indexes pretty much played out the same way. Volume was lower across the board, both on the Nasdaq and the NYSE, though very erratic volume patterns can be a classic bear market trait.

The trade over the next several days will most likely be marked by anxiety over what the Fed is going to do at this weeks meeting: Do we get a quarter point, a half point, or nothing at all? There are good arguments for each of those scenarios, the least likely in my opinion being no cut at all. Much to our (The American People's) misfortune we seem to have a Fed that is paralysed by the tricky situation it finds itself in. Since we no longer have a real economy, but one based upon services and consumption rates need to be kept low so that homeowners and business' have the easy credit they have grown so used to having. On the other hand the lower rates are leading to a terribly weak dollar and inflationary figures not seen in decades. Of course in the next report they might come up with a new calculation and say “ Well since housing is down so much, its offset everything else and so there is no inflation.”. After all, if they can get away with including food and energy prices in their numbers, I would not trust them to anything. The Saint Louis Fed recently published a study that states that the United States government is very near insolvency. I downloaded the PDF of the report, because I doubt they will keep it on their site very long. If anyone is interested in having a copy of it (its about 25 pages long) email me brandonfredrickson@globalccs.net and I will get you the report.

Each weekend I start off looking at the 197 leading industry groups according to Daily Graphs. I try to spot sectors and groups that are starting to show signs of life, and I must say I did not have a lot of luck this weekend except in one place, and it was an unexpected one: Homebuilders.

With rates back down near historical levels and the Fed eager to bail out Wall Street yet again the fate of many of the homebuilders looks better now than it did just a few short weeks ago. The S*P has a Homebuilders trust which trades under the symbol XHB which traders can keep an eye on. Personally, I have my eye on PHM and TOL. I'd like to see them pullback on light volume to some support. If this occurs I will enter a small position in both of them, possibly offset with some XHB shorts to reduce exposure. Obviously I do not feel this is the time to be aggressively pushing to pull money out of the markets. I know that when brokers are trying to cheer up investors and give them some rah rah rah you hear the saying “You have to buy when there is blood on the street”. Well, I'm here to tell you that I've had a very successful decade long run in the market, and whenever there was blood on the street the only way I did not end up contributing my own blood to the mess was to walk to the next block. Good Risk management and Money Management must always be your primary goals: You won't make anything tomorrow if you go broke today.