Wednesday, August 22, 2007

Time to Update

The market has continued to churn upwards on the heels of last Friday's rate cut by the Fed. We saw that many of the big financial institutions used the opportunity to add cash. The market seems to be anticipating more cuts. I'm wondering what event cause the Fed to shift their focus? I mean clearly they are looking to protect against a "credit crisis", but just a week ago, their primary focus was on inflation. We've had a few news pieces that could have driven this, whether it be Countrywide, Capital One, or BNP Paribas. I personally think Bernanke was taking heat from some of the heads of major banks and brokerage houses that were seeing their clients start to panic.

The housing and mortgage issues aren't going away, or so it seems. Many of the resets on the ARM's don't kick in for another 3 to 6 months. But by this time, the news will be already priced into stocks, as Wall Street is always looking forward. I think there will still be some nice opportunities in stocks for the rest of the year. The third year of a presidential term typically is a good one for stocks. The industries that have led the charge (oil, miners, many blue chips) were the first to drop hard when the market corrected during the past two weeks. They also appear to be the first to lead us back up.

We will see more uneasiness in trading, as I don't see an end to the panic type news headlines coming out of the financial sector. But they shouldn't be enough to drive us into a recession, at least not yet. If it gets worse, that could become the case. For now, I think investors should take some prudent risks, but limit their overall exposure to this market. I've advocated using short ETF's to limit exposure, and they have worked well for me. I don't see now as a time to abandon your favorite stocks or funds. Although you may want to cut back a little, especially if you've been in sectors that have experienced volatility, and if they are causing you to much stress.

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