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Dear Fellow Investor,

Our inverse positions slid backwards on Friday with the strong pre weekend rally and currently we have the following unrealized gains/losses in our positions:

Standard Portfolio:

Position #1:    +0.6%

Position #2:   + 1.3%

Position #3:    +0.7%

Ultra Portfolio:

Position #1:  +4.4%

Position #2:  +2.4%

Position #3:   -2.0%

The portfolios are currently positioned in inverse ETFs and cash to reflect our view that the markets are poised to decline going ahead in the short term.  We expect choppy action and so remain in the "Yellow Flag" mode.  

The markets remain overextended and treacherous and next week will mark the beginning of the autumn season with all market participants back from vacation and so volumes should increase.

We stay in the "Yellow Flag" mode and expect choppy prices ahead as the bulls and bears struggle for control of the direction going into the autumn.

Strong arguments can be made for either side based upon fundamentals and we'll review some of those in a moment.  On the technical side, the view is mixed, as well, as the markets remain overbought and MACD in the major indexes are on "sells" while many point and figure charts remain on "buys" but with short term negative momentum.  Overall, the market remains very overbought but the VIX declined this week which could indicate higher prices ahead.

 The View from 35,000 Feet

The big news this week was the jobs report on Friday with unemployment rising to 9.7%, the highest in 26 years and the 20th straight monthly decline.

65% of employers are still shedding workers and there are now fewer jobs in this country than there were ten years ago although we have added more than 30 million people to our population in that time.

The July unemployment number was revised upwards and there are an additional 9 million involuntary part timers.  These numbers show improvement over the bottom of this recession but are still worse than the lows of recent recessions.

Also on the bearish side, a summary of newsletter writers puts bullish sentiment at levels last seen just before the beginning of the bear market in October, 2007, and insider stock selling ran far ahead of insider buying in August.  Both of these would be considered bearish indicators going forward.

On the bullish side, the ISM manufacturing report crossed 50 this week, indicating a return to growth and retail sales were mixed but slightly better than expected.  The bullish view of the employment report is that the numbers are declining which should be the precursor to job growth ahead.

The big question remains as to whether this rally is sustainable after all the stimulus runs out in light of the fact that the economy is facing extraordinary deficits, credit is still tight and the consumer is still under extreme pressure with prime mortgage loans now being the trouble spot and the commercial real estate debacle still lying dead ahead.

The Week Ahead

Tuesday: July Consumer Credit, Fed Beige Book
 
Thursday: Weekly Jobless Claims

Friday: Michigan Consumer Sentiment, July Wholesale Inventories

Sector Spotlight
 
Leaders: Silver, Taiwan, Korea
 
Laggards: Agriculture, Real Estate Oil

We can talk all we want about the fundamentals of the bull or bear argument, but in the end, the only truth is in the tape.  Technical trading takes the emotion and subjectivity out of trading and our main task is to have the discipline to stick with what the signals tell us.  The problem with this year has been, that like the fundamentals, the technical signals have been contradictory and confusing but we'll continue diligently in our efforts to interpret them correctly and make profitable trades.

This week my family and I have been on the beach just north of Naples, Florida, and truly this is a scary scene as whole strip malls sit vacant, many malls sport vacancies and residential foreclosures are rampant, even in the high end beachfront properties.  The face of the recession can be more clearly viewed here in this post bubble crash landscape than anywhere I've seen.

But people are still out enjoying the Gulf on this last weekend of summer.  I'm heading down to the beach now and then later tonight one more round of mini-golf with my son and a "last supper" before heading home and the start of the "new year" as summer draws to a close.

To get a Complimentary Special Report from Wall Street Sector Selector, click here:

All the best,

John

John Nyaradi

Publisher

Wall Street Sector Selector

All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.