Commentary below from TIMER DIGEST’s #1 Intermediate Market Timer for the 10 year period ending in 2007 – Mark Leibovit

STOCKS – ACTION ALERT

The market fell sharply yesterday at exactly 10 a.m. after an extremely weak new home sales report with the Dow down 66.28 at its worse level. The market recovered those losses, then rallied to its highest level after the Fed left interest rates unchanged, with the Dow up 74.52 at its best level. The market finally closed little changed in a day of back-and-forth trading. The Dow gained 4.92 to close at 10298.44, but the S&P fell 3.27 to 1092.04 and the NASDAQ declined 7.57 to 2254.23. Breadth was negative on both exchanges and volume was up slightly, but still at low levels.

So how did the market finish little changed yesterday in the face of record low new home sales and a bleak outlook from the Fed (see economic news section below)? Cheap money!!! The Fed also noted that inflation is of little concern and interest rates fell. Easy money and low interest rates certainly helps the consumer and Consumer Staples rose (XLP +0.65%) while Consumer Discretionary (XLY -0.06%) fell only slightly.

A number of indexes (Russell 2000, S&P 400, NASDAQ Comp) found support at their 200 day moving averages. But the more closely followed indexes (S&P 500 and Dow Industrials) are already below their 200 day moving averages. Another thing to watch on the charts: the 50-day moving averages are quickly approaching their 200-day moving average. This negative crossover is considered very bearish by many technical analysts. It has lost some strength recently because everybody sees the crossover long before it occurs, but that just leads many to front run the signal.

Despite all the negatives, both economically and technically, and you know I am bearish here, I must admit that yesterday’s flat trading amid all the negative news was quite impressive. I suspect it is just a short term delusion, but I am on the sidelines for now. Remember, we were short for Tuesday’s big decline and ready to go short again if the situation presents itself. For weeks we’ve been playing the short side only. Yes, we missed some rallies, but we were smart enough to close out our positions before each of those rallies. We’ve also been sitting on the sidelines for most of the days where the market does nothing. However, we’ve caught just about every down move recently and, as you’ll see in the portfolio section, we have a long string of winners dating back to May.

Looking at the S&P 500, we have defined a broad (nearly 100 point) range between 1042 and 1131. My guess is that a breakout or breakdown on either side of this range will define the near-term market between now and the next critical cyclical time period in mid to late August. Afterwards, regardless, in my opinion, we’re headed south, possibly BIG TIME! Could we take ut 1131 and trade higher first? Sure, we could. We have an election in the fall and the Plunge Protection Team could be busily at work trying to goose up this market first. We generally don’t see market crashes during the summer barring some external negative trigger.

The play is to to short big rallies when a top is confirmed and to buy following the next big crash. In the interim if I see a long trade confirmed by volume, I will consider taking it. As you know, I try to catch the swings when I can WHEN THEY CONFIRMED WITH VOLUME. If they are not, I will pass.

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