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September 23, 2008

Duking It Out In Congress

I typically don't like to guess day-to-day moves on the market, but I'm going to take a stab at how I see the week unfolding. My guess is for a couple of narrow-range days in which the market drifts slowly higher, followed by a slaughter on Friday which many will deem as the test of the low. If the first part of this guess unfolds (the two mildly higher days), I will take a stab at playing for a Friday slaughter. Otherwise a reassessment will be in order. In the meantime, I find myself in quite an unfamiliar position: that of having no trading positions at all!

One may question the usefulness of making guesses such as the one above. The idea is to set expectations multiple steps ahead so that if the first set of expectations unfolds, confidence for the remaining steps grows and proper risk-controlled entries can be made. It is not necessary to be in the market at all times. If I traded every time I had an opinion, I would be broke. The idea is to take the higher-confidence trades, which is exactly why I am not currently long for the expected two-day bounce.

Commodities pulled back a bit today with mild moves that appeared consolidative in nature. This rally probably has a bit of gas left in it, but I anticipate several more days of consolidation before any further upside action will be seen. The big picture can be summarized on the CRB chart:

index chart

There is a lot of focus on the bailout package proposed by the Dukes, and I am happy to see more resistance from Congress to the blank check idea than anticipated. I certainly hope their reluctance is genuine rather than simply posturing. Of course, it is highly unlikely that the bailout will be unequivocally rejected. The banks will receive handouts. The questions are of what size the package will be and of what conditions will be tacked onto the bill. If the banks get what they are asking for, I'd expect a tenuous rally in stocks followed by more erosion. If Congress delivers them a crippled bailout package, stocks will tank immediately. These expectations may or may not fit into those I proposed in paragraph one. We'll just have to stay on our toes and see how things unfold.


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