I fear that we are nearing a tipping point in this market - that moment where enough critical mass accumulates to start a significant decline. Sounds like gloom and doom talk (even to a “negative” guy like me) but that is what I saw in my review of 3000 stocks this holiday weekend - so take it for what it’s worth. Last week, the indices gained about 1% and even managed three consecutive up days to seemingly achieve a calming effect. I wish I was calm, but after my analysis, that is the opposite of how I feel. One of the scariest aspects of last week was the percentage of the move that came from GM and its positive impact on the market’s overall tone. Even though Hedgefolios has had an Up signal on GM since 5/8/06, I just cannot get excited that this company is representative of what we need to lead this market forward. The majority of the rebound came from previously strong stocks that recovered some of their recent declines but there was an almost total absence of new leadership. What I had hoped to find in my analysis was a broad based move in stocks that were ending a decline and looking like they could turn higher for an extended period of time. No such luck - very few weak stocks got stronger. Good luck with your portfolios this week - it’s crunch time.

My best friend used to tell me - “Never say ‘I told you so’ to an investor client.” I used to argue that we should use these opportunities to inspire confidence and promote our abilities to make money for clients. I lost the arguments and over time, I have appreciated his wisdom. In investing, “I told you so’s” are major failures. For the past several weeks of the market’s selloff, I have heard far too many smarties telling anyone who will listen about their prior calls for a correction. I am not doubting their claims of prescience because they are usually armed with a time-stamped written publication or audio/video soundbite to verify any claim. But it is amazing to me that people take pride in telling someone else that they were so right and yet no one listened. And that is where the failure comes in. It is far too easy to blog or get quoted, and it is much harder to get people to listen. When we tell people the market, a sector, or a stock is going to go up or down and very few in our audience takes the time to do their own research and take action, we have failed them. So going forward, I am going to stay focused on what I am saying now and what I will say next….not what I said 6 weeks ago. I’ll do my best to make people listen, but you will never hear me say “I told you so.”

Apparently the jurors in the Enron trials of Skilling and Lay had no doubt about their guilt on the majority of charges against them. I have no doubt either - but not about their guilt (or innocence for that matter.) I have no doubt that this has very little or no market impact and is only worth a few more lines of my typing time and your reading time. It doesn’t change fundamentals or stockcharts. For those people that want to believe that these trials somehow evidence the end of corporate wrongdoing and improve investor confidence, I only wish it was that easy to change human nature. If the opposite had happened and Skilling and Lay had been acquitted, it wouldn’t have meant that corporate fraud would be acceptable or that it would now send a signal to execs that they can do whatever they want. As for my investor confidence, I am confident that bad behavior will be in the minority and some of it will be uncovered and eventually punished. For the life of me, I have no idea what that means for future stock prices and my willingness to pay for them so rather than trying to price a “fraud discount” into my investing decisions, I think I’ll just go back to looking at everything else.

First off, my apologies to all of you that either hate sports or hate sports analogies being interjected into normal life. I’ll keep this brief but cannot help myself. For years I have slipped away from NBA basketball. It’s a little much to watch multimillionaires who too often spend their time on the court with minimal effort and then spend their time in the postgame interviews making great efforts to blame someone else or suggest that they need to be motivated better. It’s as if they aren’t playing for anything and aren’t having fun. The bulls in this market seem to be mimicking this behavior - minimal effort during the trading day, they don’t seem to be having fun and then in the post-bell interviews I hear a lot of complaints about not being able to get motivated to buy stocks. OK - so the bulls have made a lot of money lately but now is no time to lose sight of what they are playing for and it should never be the case to forget how fortunate we are to be able to play this game. This NBA postseason I decided to adopt the Mavericks and I wish the bulls would do the same. And to be fair, the bears would benefit from it too. Ok, I admit it - I want everyone to support the Mavs and if you can’t, please just watch a few minutes of one of their games and you’ll get something out of it. The Mavs’ effort is intense and it is non-stop. They are focused and yet, they are having fun. So if you really need to get motivated to play in this stock market, tune into the Mavs on TNT tonight at 8:30 EDT and watch the kind of intensity that would do us all some good every trading day from 9:30 am to 4:00 pm.

This is dedicated to all the financial advisors who treat their clients’ money as if it was their own…

I admire your willingness to offer opinions. Over the years, I have reflected on giving advice and have come to the conclusion that I shouldn’t do it. It really isn’t worth it to me and it’s one of the reasons why Hedgefolios is about helping people make their own decisions. So here goes my jaded philosopy…

1) If you give someone good advice and they take it, they will usually take credit for it as their own idea.
People love to be right.
2) If you give someone good advice and they don’t take it, they will usually forget that you gave them the advice.
People don’t like to be wrong.
3) If you give someone bad advice and they take don’t take it, they might forget that you gave them bad advice.
No harm, no foul.
4) If you give someone bad advice and they take it, they will never forget that you gave it to them.
People love to blame someone else.

At the end of the day, the advice doesn’t matter much - it only matters if the investor made money or lost it. In the words of the author named “Unknown” - “It is amazing how much you can accomplish when it doesn’t matter who gets the credit.” If this market gets any tougher, investors will likely start to put some heat on their advisors. For that I have come up with a converse statement… “It is amazing how little you will accomplish when it matters who is to blame.” So if you start becoming tempted to blame your advisor for what is happening to your portfolio, please remember that they are doing the best that they can to make you money - they aren’t looking for the credit and have way too much experience getting blame.

Selling pressure has declined over the past 3 trading days and this is definitely the condition that is required for a bounce in the market. For it to actually happen, we need to see more than a decline in selling pressure - we need buying power in the form of new capital. This morning, the futures and a lot of experts are giving a bunch of reasons why investors should jump back in and provide that new capital - are you going to do that? If a bunch of other people tell you to jump into a freezing lake, does that make you want to do it? If you see them actually jumping into the lake, does that make you want to follow? And to the extent that short sellers are willing to help fuel a rally by covering their bets, does that entice you to declare an “all clear?” For all those investors that love to tell everyone that they are long term buy and holders, is this the great dip to buy into and average down? Has this 5-percentish decline really made so many stocks fundamentally cheap bargains? I don’t believe any of these are credible reasons for calling a return to the long term bullish move, but it really doesn’t matter what I think or for that matter, what anyone else thinks. The market doesn’t “think” - it only matters to me what the market does. I’ll take whatever it gives me and since I am near 50/50 with UP and DOWN signals, I have no problem going either way. However, if there is a bounce, I doubt it will repair the damage that has been done and when it is over, I fear that this bounce will contribute to a much larger decline that I believe began the first week of April. If you are a short term trader, this is a great opportunity to trade. But let’s not confuse this with a great entry point for a long term investing thesis.

I can feel them coming…the technicians will be here shortly to try to save the day for the bulls. Except they really aren’t technical analysts at all. For 99% of the bullish move in the markets, these pseudo techies are heavy-duty fundamental investors. They love to bash technical analysis any chance they get and constantly harp about low PE ratios, fantastic earnings seasons, forward guidance, blah blah blah. And then, when the market sells off they go to a lab somewhere and transform into the market’s version of Jekyll and Hyde. Suddenly, I hear these same people talking about support levels, fibonacci’s, and when it’s really urgent… the end of the current Elliott wave. So tomorrow or the next day or sometime in the near future, if my suspicions come true and you hear a lot of people talking about technical analysis and the great reasons to buy this market, please consider the sources. Were they cautious technicians who warned you to get out weeks ago or were they spending their time hyping the fundamental reasons for DOW 12000?

This market has a serious case of the “flations.” Just listen to the financial media and you can diagnose it. INflation, REflation, DISINflation, DEflation, STAGflation…. I’ve heard them all lately and with a frequency that reminds me of the last time they were ringing in my ears - early 2000. Whenever I hear so many credible economists proposing that we are currently in different flations or simultaneously fearing that we are heading towards multiple forms of other flations, I get worried about the markets. It’s not that I am afraid of where we are economically or where we are going economically. Hearing so many flations at the same time, I start suspecting that the Fed, the economists, and investors really have no clue and that is very problematic for the markets. The competing statements of various Fed members over the past few days and weeks has been a sample of this confusion. The interpretations and projections of economists with multiple (and conflicting) views has only made it worse. It is no wonder that we get investor behavior like the past week and a half.

Historically, flations are phenomena that last for years, not weeks or months. In fact, they are often associated with decades - the 1930’s for DEflation, the 40’s, 50’s and 60’s for REflation, the 70’s are largely known for STAGflation, and the 80’s and 90’s for DISINflation. For the current decade we seem to be in a state of confusion to define what we are experiencing or more importantly, what we will experience next week. The rapid changes in the global economy are presenting fast moving challenges for monetary policy and in my opinion, they are the most likely reasons that Chairman Bernanke has gone from deflation fighting commentary in 2002 to inflation fighting in 2006. These changes will take years (maybe decades), not weeks or months to work themselves out. While I would like to stop hearing so many flations so we can have a more peaceful investing climate, I doubt that it will happen for a long time. I think I will coin the term for the 2000’s and beyond as a period of CONFUflation.

Yesterday’s action caused me to do something I rarely ever do - I looked at charts during the middle of a week. Last night I ripped through all 1,411 UP signals to get a feel for the market. As you can imagine, spending 3 hours is not as thorough research as I do over the weekend. But, I found a few things that are worth sharing.

Of the 1411 UP signals, I am concerned about 642 of them. I reviewed the performance statistics on this subset and found that they are entirely consistent with what you will find looking at the ANALYZE - PERFORMANCE section. 67% were winning signals with average gains of 30% over 24 weeks while the losers had average losses of 9% over 10 weeks. Given the extremity of the market action, I was expecting some aberrational figures but am pleased to see the consistency in my performance. My point here is that this selloff is not particularly different than what I have seen over the 3 years I have been doing Hedgefolios.

Prior to yesterday, most of the experts’ chatter suggested that this was all about commodity stocks that were going through a normal correction. They may have been the first to get sold, but yesterday was extremely broad based with no bias towards size, style or sector characteristics. More importantly, the charts on the commodity stocks do not concern me as much as the others do. For what it’s worth, I think the bulls who say “this was just a normal pullback in the metals and there is a good probability they will return to previous levels” are probably correct. On the other hand, the other stocks are much more likely to get DOWN signals this week. As I mentioned in recent posts, I held back on about 500 stocks that had been experiencing weakening technicals for the past several weeks and for the most part, these are the same ones that showed up this week. Shoulda, Woulda, Coulda…. but what I am saying here is that the vast majority of the selloff is coming from a diverse set of stocks and I doubt that they will bounce back until they have gone through a normally-shaped decline and leveling off. That takes weeks, not days.

I spent a lot of time looking at the stocks that either did well or didn’t do so poorly this week. In light of the fears of increased interest rates caused by the CPI data, I was struck by the number of small and mid cap regional banks and REITS that did reasonably well. I have no idea what this means, but the newspaper stocks also looked encouraging to me - maybe people like to read about stock declines. Other than a general sense of the expected move towards defensive stocks, I didn’t see any other sectors to highlight.

The futures are indicating a positive open this morning, but to be honest, they really don’t mean much to me. In a future post, I’ll have to write about my opinion of the usefulness or lack thereof in looking at futures. Regardless, I suspect that we will not go straight down as much as we have gone straight up. It is remarkable for me to hear financial advisors on CNBC who don’t hesitate to suggest that it’s immediately time to get back in. Even though I don’t feel it, I guess there are some that will always be willing to try the “buy the dip” mentality to get back to the good old days of early last week. Wow - was it that long ago?!?!?

For my part, I will be waiting to see a decline in selling pressure first. Then we can start talking about increased buying power. If we get a decent up day today, it will have to be close to 200 points for me to believe that the psychology is shifting back to bullish. Other than that, I expect to see more two steps back and one step forward. This market is still hanging on but a little more weakening and it will be much worse than what we have seen over the last 5 trading days. Good luck with your portfolio decisions.

In last Tuesday’s post “Calm Before the Storm,” I said, “While I hope I am wrong, I expect the second half of this week to be the most volatile trading environment of the year so far” and that a poorly received Fed policy statement would likely result in a “downward move that will be tough to hold back.” To be honest, while those guesses turned out to be correct so far, they were not based upon any belief that the commodity-based stocks would precipitate the move. I really wasn’t expecting it and usually don’t try to forecast which catalyst will show up at any particular moment. I also have no clue when those situations will abate.

I get a sense that many market experts are believing that the worst is over, it was all just about commodity stocks, that the “correction” is healthy for the market, and we are about to head higher. I hope they are right, but other than blind faith, I see no reason for that to be true. It could come in the form of a reduction to the 10-year Treasury rate towards 4.7% or a reduction in oil towards $64 per barrel, but I really doubt that it’s going to come simply from a decline in selling pressure on the commodity stocks. I don’t see the same “buy on the dip” mentality that has been apparent during the past few years.

My focus at Hedgefolios is to evaluate what the market gives me and keep or change the signals accordingly. I have no bias other than I hope UP signals will go up and DOWN signals will go down. Look at stocks in the MANAGE section this week and you will find over 314 new DOWN signals versus 67 new UP signals. In addition to stocks, I changed 30 ETFs to DOWN signals without a single new UP. And while that seems a bit much, I actually contemplated changing over 900 UP signals and decided to tone it down expecting that the bulls would make some effort to hold up this market. As I suggested last week, it’s going to be tough to hold back additional selling with a tepid amount of new buying power.