Saturday, July 19, 2008

This Week's Government Intervention - A Two Edged Sword

The good news is that the government has prevented a meltdown of financial systems. From IndyMac to Freddie and Fannie, the Fed was able to restore enough confidence in financial markets, averting a major crisis once again, for now.

The bad news is the intervention confirms that financial systems are still very fragile and the economy is still weak, if not already in recession. As a result, the bear market is likely to continue, with further declines before a bottom.

In the meantime, it appears that the stock market will have another rally, as oil futures decline and financials rally. My goal is to avoid being suckered into this rally. I will keep repeating, "This is a bear market rally," until I see VIX rise past 30, as it did for the bottom in 2002

In my opinion, this is a trader's market, with short term opportunities to buy and then sell into the rally. If the rally is strong, I will also close out one managed account in our taxable savings, since it is duplicated in our tax exempt savings. Finally, I will continue to look for stocks to short as the market rallies, since I believe there will be another sharp decline in the future.

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

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