Trading Diary 10-7-07

By on October 11, 2007

Dow 14,066
S&P 1,557
NASDAQ 2,780

The market has had a ferocious rally since the middle of August when the Dow briefly plunged below 12,500. The ultrashort ETFs (SRS, SKF, and TWM) purchased over the past couple of months have been hammered. We are now approaching the seasonally favorable 6 month period and I’m more conservatively positioned than ever. It seems that all news is good news for the market, and this will continue until it doesn’t, and it could be a lot sooner than the majority of pundits believe. A lot of this move was fueled by Bernanke’s ½ point cut in rates, which weakened the dollar, benefiting companies with international sales. It remains to be seen whether inflation is stoked by the easy money and long term interest rates rise.

The market can be likened to the boy who cried wolf too many times. The market swooned in the early summer of 2006 and again 7 months ago; only to stage incredible comebacks. Now that there is a real problem (wolf at the door), the market is just shrugging it off, with the masses believing the past is prologue. However, I believe this problem with insolvent credits, weighed down by weakening housing, is much worse than the LTCM crisis in 1998 or even the tech stock meltdown in 2000. These lingering problems could eventually result in the market deflating by 30% or more.

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