Welsh Investment letter – Update July 2009



As expected, the S&P has declined and found initial support between 875 and 885. A number of short term indicators are a bit oversold, and yesterday there were more puts than calls traded. This suggests that a bounce is likely that could extend to 900-910. However, it is unlikely that the correction from the June 11 high is over. The head and shoulders pattern that has formed in the S&P has gotten a lot of attention, even from non-technicians. Yesterday the neckline around 877 was briefly pierced, when the S&P spiked down to 869, before closing at 879.56. This is another reason to expect the market to bounce. Eventually the odds still favor that the S&P will pull back to 830-850, or lower.

When the May unemployment report pegged job losses at only -345,000, the conviction level in a V-shaped recovery mushroomed. As noted in last month’s letter, if one bothered to look under the surface, the labor market was weaker than that number implied. The July unemployment report of -467,000 lost jobs was certainly a wake up call, and definitely challenged the V-shaped recovery thesis. This means even more attention will be paid to guidance provided by companies for the last half of this year. On balance, the majority of corporations are likely to offer a fairly cautious assessment. This should weigh on the market.


The Dollar has spent most of the last 4 weeks trading in a fairly narrow range between 79.20 and 81.00. This increases the odds that it will drop below the early June low at 78.33 cash. At the risk of playing it too tight, use a stop of 79.15 on the long from 79.79. If stopped, go long again after a daily reversal once the Dollar has dropped below 78.33.


Gold has dropped near $900, which should represent some psychological support. If the Dollar does decline to a new low, Gold would experience another bounce. Lower the stop on Gold short @ $960.00 from $984.00 to $947.50, and cover if Gold falls to $890.00. Lower the stop on the short GLD @$94.00 ETF from $96.60 to $93.00, and cover if the GLD drops below $89.00. Raise the stop on the long DZZ ETF @$20.69 from $19.30 to $20.69, and sell DZZ above $23.25.

E. James Welsh

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