To get a Complimentary Special Report from Wall Street Sector Selector, click here:

Our inverse positions made slight gains for the most part this week and currently we have the following unrealized gains/losses in our positions:

Standard Portfolio:

Position #1:    -0.3%

Position #2:   +.02%

Position #3:    +1.8%

Ultra Portfolio:

Position #1: +0.1%

Position #2:  +4.5%

Position #3:   +5.5%

These were all opened on August 24th, this past Monday, and so represent one week's results.

Members can view full details of entry prices and stop loss points as well as weekly commentary in your Weekly Position/Stop Loss email.

The portfolios are currently positioned in inverse ETFs and cash to reflect our view that the markets are poised to decline going ahead in the short term.  We expect choppy action and so remain in the "Yellow Flag" mode.  When and if the decline is confirmed, we will add two more inverse positions to each portfolio with the goal of profiting from any extended decline.

The markets remain overextended and treacherous in light volume expected this week. 

 The View from 35,000 Feet

The current rally faces 4 major risks:

1. Overvaluations

2. The impending onset of H1N1 "swine" flu

3. Seasonal weakness

4. Consumer spending

A steadily growing number of analysts see the growing danger of overvaluation in the markets.  Estimates of overvaluation range as high as the mid-20% range to "just a tad," depending upon whom ou're reading, but well respected economist David Rosenberg reports that the index is currently priced for 4% GDP growth instead of the widely forecast 1-2.5% growth ahead.  Fair price based on projected GDP growth would be 850 on the S&P 500, or more than 17% below current levels.

The swine flu has been declared a pandemic and estimates are that as much as 50% of the U.S. population could catch the disease this winter with as many as 90,000 deaths which would overwhelm the health care system and certainly put a pall on consumer spending, commerce and transportation.  Apparently smaller numbers of the vaccine will be available than forecast and so this appears to be a growing danger.

Seasonality is now working against the market, with September being traditionally the worst month for stocks and with October harboring a penchanat for stock market "crashes."  Short interest is up in August and investor sentiment as measured by  Investors Intelligence Advisors Sentiment index,  is at its highest level since late 2007 which was the market peak just before the onset of the bear market. 
 
The consumer remains weak with consumer confidence falling to a four month low on Friday.  Since we consumers represent 70% of GDP, this lack of confidence and continued deleverging presents a significant threat to recovery prospects.  Due to the reverse "wealth effect" of declining property values and stock portfolios, people are feeling less well off than before and more and more economists point to a "U" shaped recovery rather than a "V" shaped recovery and even perhaps the possibililty of a double dip recession.

The Week Ahead

It will be a lightly traded week as Wall Street vacations continue but Friday's Non Farm Payrolls Report could easily provide some fireworks going into next weekend's long Labor Day weekend. 

  
Monday: August Chicago PMI

Tuesday: July Construction Spending, August ISM Index, August Auto Sales
 
Wednesday: ADP Employment Report, July Factory Orders 

Thursday: Weekly Jobless Claims

Friday: August Non Farm Payrolls
 
Sector Spotlight
 
Leaders: Silver, Homebuilders, Agriculture
 
Laggards: Brazil, China, Oil

We had a great visit to Washington, D.C., this week where we toured the Mall and the newer Air and Space Museum out near Dulles Airport and the Manassas Battlefied at sunset.

We went to a great restaurant in Annapolis where the Chesapeake Bay crabs were a delight and whenever I travel, I always try check on my "cab driver" index which goes like this:

"How's business?" I asked.

"Very slow," the driver answered.

"Many tourists?"

"Not many."

So maybe the "cab driver" index confirms our assessment of a weak consumer and perhaps more difficult days ahead.

In any case, have a great last week of summer and let's get ready for a surge of activity after Labor Day.

To get a Complimentary Special Report from Wall Street Sector Selector, click here:

All the best,

John

John Nyaradi

Publisher

Wall Street Sector Selector

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