CONFUSION?
Question --

Your Hotline last Wednesday had so many conflicting indicators that I sort of lost the message! Are you short-term and long-term cautious, but intermediate-term hopeful or just plain confused?


Answer --

A so-called neutral strategy is sort of a thankless position because one is wrong on days the market rallies and wrong on days it declines. It is only after looking back a number of weeks or months that one can say the trend really was neutral.
Moreover, a neutral strategy is particularly difficult currently if the Dow is really going to be in a projected 8000-9800 trading range because these are very wide parameters. But when the main indicators are mixed, I have historically gone neutral. Since the market goes sidewise about a third of the time, sometimes a neutral stance with buying weakness and selling strength is, in fact, helpful.

But if I had to take a more decisive position, I would be short-term cautious, intermediate-term hopeful and cautious longer-term just as you suggested.
To confuse you even more, in my Hotline Wednesday I talked about the massive bullish stimulus from Fed liquidity and government spending and tax cuts. And, of course, the further sharp drop in interest rates will help many borrowers as well as those who can refinance mortgages. But that is not the whole picture because, according to the Rockefeller Institute of Government,"tax revenues to state treasuries suffered the worst quarterly decline on record (data goes back to 1991)." The decline was 3.4% and that could cause significant declines in state spending. Moreover, the bulls keep pointing to those $2.3 trillion in Money Market Mutual Funds, but a 1.5% decline in short-term interest rates, like we've seen in the last eight weeks, reduces the interest income for savers.
Speaking of money market mutual funds, chart S703 below uses M3 as overall liquidity or cash and M3 includes all of these money market mutual funds which, by themselves, look like a"mountain of cash." By using M3, the broadest measure of money, we get around the problem of people simply moving money around from say savings and checking accounts or CDs to money market
mutual funds. These transfers are really not new money, just money shifting around. What chart S703 (which used M2 as cash and the NYSE market value as assets prior to January 1973) does is look at overall cash versus overall equity assets, and the current ratio, while greatly improved from the"Bubble of 2000" peak, is still somewhat low. In conclusion, I am not too proud to say I find the indicator evidence mixed and confusing. In such an environment buying
should only be done selectively on weakness and rallies should be used to cull out either very high P/E or poorly performing stocks.
--Ned
www.ndr.com





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