It seems like we've been watching the market 24/7 for the past 3 weeks.  Oh wait, we have.  I think the best thing for everyone would be to have a nice quiet trading day followed by a weekend with no news out of Europe, Washington, or New York.

The market hit a near term peak on Friday, July 22, although at the time, few knew that was the peak.  There were signs -- our economic outlook system had issued a warning signal and went to cash on July 12.  The debt ceiling circus became the main attraction the weekend of July 22 and our Price Divergence System issued a sell signal on Monday, July 25 as the market began to fret that our AAA rating was in jeopardy. 

The market struggled all week as politics controlled the market.  The weekend of July 29 we endured another weekend of watching the news out of Washington and how the market was reacting.  After the professional can kickers waited until almost the last minute to raise the debt ceiling, the selling in the market accelerated.  It seemed that investors woke up to reality; a reality that would see the dossage of pain killers no longer increasing.  Comparisons were made all week to 2008 and 2010 and the market ended the week with everyone asking, "Where do we go from here?" 

Then Friday night the earth shook as S&P downgraded U.S. debt and we once again spent the weekend asking, "What does the debt downgrade really mean?"

On Monday the market had a mini-crash, followed by a series of sharp up/down/up moves.

The news behind Thursday's rally was telling.  Before the US stock market opened, Europe was again getting crushed (as were the US market futures) on rumors of too much French exposure to Greece causing a liquidity crisis in France.  Then a story hit the newswires that France was considering a ban on short-selling either all stocks or just financial companies.  From there the market was off to the races in Europe and it the US futures went from being down over 2% to up over 1%.

At mid-day the Treasury department auctioned off 30 year bonds and it was a disaster -- the worst received auction since 2009.  Massive amounts of money came out of bonds and poured into the stock market.

A Near Term Bottom?

While certain people (especially the loud, bald one along with the skinny guy with glasses) on CNBC have been calling the bottom since the beginning of August, there is a chance we have seen a near-term bottom.  Look back up at the chart and pay attention to the last 4 days following the large drop.  Notice that the market is bouncing around and volume is declining each day.  This is very typical following a large move in the market.

Thursday was the 6th day in a row of a 4% trading range as the market has been stuck in the 1120-1172 range.  The move this week has put us right back to where we OPENED on Monday and the next hurdle is to fill the gap down from 1200 that we saw on Monday morning.

If the market can fill the gap up to 1200, then it could go as high as 1250 -- the same area it closed at last Wednesday.

What about the intermediate-term?

Whether this consolidation pattern leads to a recovery back to 1250 or it is just a temporary break before the market heads lower doesn't change the bigger picture problems the market has facing it. 

Yesterday's rally was sparked by the rumor that they were banning short-selling in Europe.  After the market closed, they announced in France, Belgium, Italy, and Spain that they were indeed banning this practice.  This of course has been done before and while it could lead to a couple day bounce, check out this article from Todd Harrison written in the aftermath of the SEC's ban of short-selling in 2008  This quote is chilling:

This unprecedented step by the government is the dawn of a new—and dare I say unfortunate—era. While it will flush a few abusive folks out of the system, it will forever alter the integrity of the free market system. There will be many consequences.

Besides the obvious STRUCTURAL problems our economy is facing, I believe there are two things that underscore our country's ability to ever get back to the type of growth that we all desire:

1. There is a REASON American was downgraded & we must address those reasons, not blame S&P for telling the TRUTH.
2. American's have been running from the TRUTH for too long.  Until we address that TRUTH we will be stuck with these short-term solutions that push present day pain into some point in the future.  The problem is that the more we push it back, the shorter the "good" times become and the longer it will take to eventually fix the problems.

This isn't just an American problem.  Our entire global financial system is running from the TRUTH.  It's not the short-sellers that are the problem in Europe.  They have figured out the TRUTH -- the French banks (and many of the banks in the other countries) took on too much debt and have not kept enough in reserves to get through the crisis.  The fact that the policy makers do not see the real problem is the problem.

Like 2008, they can continue to place blame on everyone but themselves, but eventually there is only one person to blame.  Unlike 2008, there is neither enough money or the political will for the taxpayers to once again bail out the banks or the politicians that failed to see the crisis coming.

How can you buy & hold this?

This week has certainly been a reminder at how tough it can be to stick with buy & hold investments.  The market may be able to break out, but even if it does, is buy & hold investing really worth it?  We're told to be long-term investors and to ride things out, but let's look at the long-term.  This is what happens when policy makers try to avoid short-term pain by constantly flooding the market with "stimulus".

The Value of Active Management

As the market tries to get back to where it closed just before America was downgraded, many people are ignoring how large the losses have been since July 22.  Here is a snapshot of where we are at:

No matter which way the market goes from here, we have a plan in place to Sail Through the Hurricane.  The key is to find shelter from the rough waters and then head back out to sea when everything has calmed back down.

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