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From the desk of Robert Christy

Robert A. Christy, Pres/CEO

From the Trading Turret

September 27, 2005

Current Field Position

1. Offense or Defense 

NYSE Bullish Percent – DEFENSE

Optionable Stocks Bullish Percent - DEFENSE  

OTC Bullish Percent – Offense (barely)

2. Sector Bell Curve: Average Sector Bullish Percent is 57.38%

3. Favored Sectors: Precious Metals, Internet, Software, Semis, Telephone, Biomed, Bus Products, Waste Mgt, Oil Service, Building, Electric Utils and Oil.

4. Strategy: Last Friday, we moved the DEFENSE onto the field. In doing so, we moved from the capital appreciation mode to the capital preservation mode. Over the next few days, I’ll open up the playbook and let you know about some of the strategies that I’ll be using and recommending to my clients.    

This week’s comment …

The market staged a post hurricane rally and it appears to have run its course. This past Friday, the NYSE Bullish Percent ratio turned negative. This indicator is my primary offense/defense indicator and one that I do not take lightly. The DEFENSE has moved onto the field and we are now in the Capital Preservation mode.

Over the passed few months, I’ve been stressing that the risks are rising in the market and the current cyclical bull market is very long in the tooth.  Ned Davis Research (NDR) also shares this concern about the longevity of the current bull. In fact, NDR recently highlighted that some of the current market's characteristics are consistent with the later stages of a cyclical advance. In particular, later stage tendencies such as: growing momentum divergences, NASDAQ underperformance, “value” related relative strength, and more small-cap relative strength are present. These characteristics need to be watched very closely because we are close to key market support levels.  

So far this year the market has followed my expectations pretty close and I’m sure it has been more challenging that most had anticipated.

 The Federal Reserve raised rates for the 11^th consecutive time and signaled that they are not finished. Fed funds currently stand at 3.75%. Mark Olson was the only Fed Governor to vote against the rate hike.

It looks to me that the Fed considers the impact from Hurricane Katrina to be a "near-term" issue. The Fed's official statement said "Widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. It is the committee's view that they do not pose a more persistent threat." The Fed remains concerned with inflation and will keep monetary policy accommodative to that end. The Fed said "With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured." Nonetheless, "higher energy and other costs have the potential to add to inflation pressures." Inflation rose last month with the producer and consumer prices up 5.1% and 3.2% over the past 12-months. I’ve talked with several bond traders, who believe that another rate hike by year end is already priced into the market. They give it a 100% chance of happening.

The Fed has now hiked rates 11 times taking the fed funds rate from 1.00 to 3.75%. I’ve stated many times that the Fed has a tendency to overreact, and I’m convinced that this time is no different. Looking back, when the Fed has hiked interest rates three or more times, we’ve gone into a recession 12 of the last 14 times (86%). The Fed seems content heading down that same path. I look for something to give maybe as early as next year.  

Unfortunately, the ongoing Fed rate hikes (they aren’t done yet) and higher energy prices put the economy at risk. The flattening of the yield curve is that signal that the bond market is sending.

That’s about it for now.

Have a great week.

Bob

Robert Christy is a professional stock trader, an author and a money manager. Mr. Christy is also the President/ CEO of Christy Investment Group, Ltd., a registered investment advisory firm. At the time of publication, Mr. Christy may from time to time write about stocks in which he, Plato Advisors LLC, or Christy Investment Group, Ltd.  has a position. In such cases, appropriate disclosure is made.  Under no circumstances does the information in this column represent a specific recommendation to buy or sell stocks. Mr. Christy appreciates your feedback and invites you to send it to rac@christyinvestments.com.