Wednesday, August 15 Market Assessment

I see a Light at the End of the Tunnel.

Yesterday's 208-point plunge caught me by surprise because I felt that we had seen the last of the triple-digit swings for the month. But I was wrong, and the market chased off the remainder of the weak sisters left over from last week's wild ride.

Credit concerns still roil the market, of course. We will see more downside in the next few weeks, especially among the homebuilders and their financial collaborators. This retracement in the market is clearly all about the real estate bubble, and it will be over soon for everyone but homeowners and their real estate agents, who will feel pain for at least another year.

It’s possible the subprime mortgage debacle and its fallout could spill out into the real economy. It's also possible the market will make even more dramatic new lows. But neither scenario is highly likely in my humble opinion.

I follow the odds, and the odds in this case are that the mortgage crisis will be contained. It’s always hard to fight City Hall, and in this case City Hall is the world’s central banks. As last week’s events showed, if you’re bearish right now, you don’t have just the Federal Reserve against you, but the European Central Bank, the Japanese central bank, and even the Australian central bank as well. Together with the Fed, these banks injected more liquidity into the system than they have at any time in the last seven years! Also, I assume all the other central banks would make it a priority to keep the world financial system running smoothly, and will step in if needed.

With this kind of effort from central banks, and a lack of weakness in the economy, I have to put my money on the Bull, but not just yet. Even if we get a new low, it should be a shallow low, followed by a nice rally in the Fall. If that seems a little optimistic, I have to confess to keeping a sharp eye on the DOW, because a big step down to 12,800 makes sense from a technical point of view. That's the next level of support, not 13,000, where the market is slowly churning as this is being written.

Right now, I'm sitting tight on cash and equities (MDT, VZ, GRMN, BEAV, GOOG) and prowling the put listings for money-making spreads in the homebuilder and finance industries (XHB, MBI, LEN, MS, CFC). Bargain-hunting begins next week if the volatility starts to return to more moderate levels.

Summary: Short-term neutral, long-term bullish.