Batten Down the Hatches!

Friday, February 29, 2008 | 03:48 PM

NOTE:  This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 2/29/2008 before the market closed.

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers.

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Several weeks ago, we discussed the likelihood of a tradable low being put in place. On January 23, 2008, we thought conditions were in place that would allow agile traders to play for a bounce -- but advised that long-term investors avoid the sloppy tape. At that time, we suggested an 8, 10, or 12% bounce trade was in the offing.

That has come to pass. We now find ourselves in a situation where the markets have rallied significantly on lighter volume, and have since rolled over. This is a significant sell signal.

Consider: Over the past month we have seen one-day rallies of nearly 200 Dow Jones points on four separate occasions. A review of the headlines shows all too infrequent arguments against the possibility of a recession, or if there is a recession it being mild and fairly discounted by the equity markets. The economic news continues to worsen, while the Bulls maintain a steadfast state of denial. Articles abound, explaining why there won’t be a recession, or if there is a recession, it will be mild and is already priced into equities. My favorite piece last week was “How to play the coming recovery.”  These are signs that people are still speculatively inclined, are buying the dips. The bigger fear is not any on stocks, but missing the rally. That is not what you see at market bottoms.

These optimistic views are increasingly being proven false. We are now in a Bear market and are in all likelihood in the beginning quarters of a recession – one that is potentially deep and long lasting.  Housing inventories are at record highs, the US dollar is at record lows, Oil is over $100 a barrel, and Gold has set all-time highs.

These are not the sort of conditions that lend themselves to economic growth or stock gains.

As of leap day, February 29, 2008, you have several choices ahead of you: a) you can try and catch the falling knife and, an activity that in the past has proven to be dangerous and painful; b) You can sit tight, watching your portfolio decrease in value, confident in the belief that stocks will eventually return to their previous valuations (What is unknown now is whether that will take months or years to occur; c) Or, you can aggressively become even more defensive than we have advocated in the past few quarters. Preserve precious capital, wait out the storm.

We choose “C.”

We will go into greater details on the economy in a future missive, but for now, from an investor's standpoint, understand what your role is today and preserve capital, and be cognizant of risks. Now is the time to Batten down the hatches to preserve capital and to wait patiently for the greater opportunities that will exist to play equity's on the long side. Rallies are opportunities to exit equities. We are constantly looking for better opportunities to put your hard earned capital to work, and today, the in a long side of US equities is not it.


-Barry Ritholtz
February 29, 2008

Friday, February 29, 2008 | 03:48 PM | Permalink | Comments (0)
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