Short Term - Cash is King
After two weeks the character of the market has changed significantly. Two weeks ago, my last update, the markets seemed to be tenuously holding above the key support levels identified as the May 14th lows (Nasdaq~ 2100, S&P 500 ~ 1248, and Dow ~ 10,870). Last week all support levels were broken, many of our protective stops were hit on positions purchased in early April and we are now sitting on the sidelines in money markets. The short-term picture does not look great. The ONLY strength in the market right now is in healthcare, small cap value, financials, bonds and real estate. Two weeks ago the Chart-o-the-week showed a very strong real estate fund, Stratton Monthly Dividend (STMDX). While real estate funds have continued higher, I believe the sector is now overbought and I would not recommend new purchases at this point. The short-term interest rate environment is sill positive which should support the financial sector in general and real estate funds in particular at least until the next Fed. meeting. However, I believe the sun is setting in the financial sector. Why? The Fed is likely to drop rates again at their next meeting but the market seems undecided as to the extend of the reduction in rates. The majority is factoring in a .25% drop and the minority expects another drop of .50%. This may be their last rate cut based on historical trends. Many of my colleagues, who track economic fundamentals better than I, feel that Alan Greenspan and the Fed. have already gone too far in reducing short-term rates. In fact, they feel that before year end, inflation or even worse Stagflation (no growth AND inflation) may become the new talk on the tube. In a nutshell, the market is trending down now and the few strongholds, namely interest sensitive sectors, are overbought and vulnerable.

Intermediate Term
The Intermediate term perspective (3-6 months) is shaping up to be a very profitable for those of us with our investment capital intact. You may not agree but the relatively severe selling thus far in June has been a very healthy event. Given the extend of the declines since the highs of February and March of 2000 and the trillions of dollars lost in the markets, a series of successful retests of the lows forming a rock solid technical base would be about the best thing we could hope for. A “V” bottom like the one off of the April lows with no re-tests would be very suspect. These basing periods in the last 10 years are getting shorter and shorter (now ~3-6 months) as information is digested at the speed of computers. As I’ve said in many of the updates this year, the market is technically ready to move strongly higher. Richard Band of Profitable Investing, did a recent study of the MZM (Money with zero maturity or CASH) in which he concluded that recent growth falls within the top 3% of all such growth periods since the bear market of 1973. Historically, whenever the money supply has accelerated at this rate, “the stock market has responded with a brisk rally, followed by an upturn in the economy soon after”. Furthermore, in periods of strong monetary growth such as these, the S&P 500 has produced an AVERAGE 27% in subsequent 12 months. One more piece of evidence that we are nearing the end of this bear market and beginning of a very profitable phase in stocks and stock funds. The big question of course is when will it all begin. Your patience will be rewarded. Have a great week
Sam Jones

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