Last week’s lows must hold, here’s why

This week investors globally got a whiff of the type of volatility that could
well be the tip of the iceberg to the market environment ahead IF policy errors
are exacerbated here. I wish I could do justice to summarizing why the markets
and global policy are at such a MAJOR MILESTONE POINT in history here, but I
actually have trouble doing the subject justice in a 30+ page report.

What I can say is that the most massive policy stimulus in history is being
removed from the global system right now and the effects are just beginning to
be felt. Nearly all markets are affected and will continue to be. There has
already been some noticeable damage to say the least. Dubai Index is down 63%
from its highs; Columbia is down 58%; Saudi Arabia is down 54%. Even some pretty
major markets are very hard hit — such as Japan’s JASDAQ down 35%, some
European markets down 15%-20%, Korea down 34%, India down 47%, Turkey down 47%,
Argentina down 31%, European indexes down over 11%, and NASDAQ down 15%.

In short, a combination of Japan ending its stimulus efforts (the largest in
post WWII history), the US tightening policy and trying to prevent a real estate
bubble, and China trying to squeeze bottle necks is wreaking havoc on markets as
the risk premium that was wrung out of markets since 2002 must be placed back
into them quickly to adjust to a new world.

In the short-term Thursday’s lows will probably hold for at least days to weeks
and some sort of rally attempt will develop. However Thursday’s rally was not
what one would hope for. Breadth was negative and downside volume swamped upside
volume. It is fairly critical for the markets to not fall apart Friday or else a
panic Monday could develop. We suggest watching these markets very closely,
mostly from the sidelines. WHEN IN DOUBT STAY OUT AND DON’T GET BACK IN UNTIL
YOU’RE SURE.

All is not lost, but investors must understand clearly WHAT is happening, WHY
it’s happening, and WHAT to watch to know what to do, and that’s what our
reports highlight.

I would still say that it is not yet clear whether this is a REAL bear market or
not. But to not have a clear understanding of what is behind this volatility is
foolhardy in my opinion and we continue to advise a very defensive posture until
higher odds safer returns return to the marketplace. IF the central banks can
engineer a soft-landing here over 2006 and perhaps into 2007, some of the great
buying opportunities of a lifetime will likely develop. However a policy mishap
here could be fatal for the markets for a long, long time. Knowing what to watch
and understanding possible shifts has NEVER been more critical.

Our US selection methods, our Top RS/EPS New Highs list published on
TradingMarkets.com, had readings of 34, 32, 29, 5 and 10 with 12 breakouts of 4+
week ranges, no valid trade meeting criteria, and no close call. This week, our
bottom RS/EPS New Lows recorded readings of 12, 6, 24, 510 and 32 with 12
breakdowns of 4+ week ranges, no valid trades and no close calls. The “model”
portfolio of trades meeting criteria has exited all positions and is 100% in
cash.