Batten Down the Hatches!

NOTE:  This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 2/29/2008 before the market closed.

This is posted here not as investing advice, but
rather as an example of a trading call for potential subscribers.

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Several weeks ago, we discussed the likelihood of a
tradable low being put in place. On January 23, 2008, we thought
conditions were in place that would allow agile traders to play for a
bounce — but advised that long-term investors avoid the sloppy tape.
At that time, we suggested an 8, 10, or 12% bounce trade was in the
offing.

That has come to pass. We now find ourselves in a situation where the
markets have rallied significantly on lighter volume, and have since
rolled over. This is a significant sell signal.

Consider: Over the past month we have seen one-day rallies of nearly
200 Dow Jones points on four separate occasions. A review of the
headlines shows all too infrequent arguments against the possibility of
a recession, or if there is a recession it being mild and fairly
discounted by the equity markets. The economic news continues to
worsen, while the Bulls maintain a steadfast state of denial. Articles
abound, explaining why there won’t be a recession, or if there is a
recession, it will be mild and is already priced into equities. My
favorite piece last week was “How to play the coming recovery.”  These
are signs that people are still speculatively inclined, are buying the
dips. The bigger fear is not any on stocks, but missing the rally. That
is not what you see at market bottoms.

These optimistic views are increasingly being proven false. We are now
in a Bear market and are in all likelihood in the beginning quarters of
a recession – one that is potentially deep and long lasting.  Housing
inventories are at record highs, the US dollar is at record lows, Oil
is over $100 a barrel, and Gold has set all-time highs.

These are not the sort of conditions that lend themselves to economic growth or stock gains.

As of leap day, February 29, 2008, you have several choices ahead of
you: a) you can try and catch the falling knife and, an activity that
in the past has proven to be dangerous and painful; b) You can sit
tight, watching your portfolio decrease in value, confident in the
belief that stocks will eventually return to their previous valuations
(What is unknown now is whether that will take months or years to
occur; c) Or, you can aggressively become even more defensive than we
have advocated in the past few quarters. Preserve precious capital,
wait out the storm.

We choose “C.”

We will go into greater details on the economy in a future missive, but
for now, from an investor’s standpoint, understand what your role is
today and preserve capital, and be cognizant of risks. Now is the time
to Batten down the hatches to preserve capital and to wait patiently
for the greater opportunities that will exist to play equity’s on the
long side. Rallies are opportunities to exit equities. We are
constantly looking for better opportunities to put your hard earned
capital to work, and today, the in a long side of US equities is not it.

-Barry Ritholtz
February 29, 2008

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