Continue To Remain Cautious On The Markets— 20 July 2006

I am remaining cautious on the markets. The Thursday, July 20th version of the online Wall Street Journal has the following headlines:

• Apple's Profit Jumped 18%
• Intel's Profit Shrank 56%
• Yahoo Shares Tumbled 22%
• Motorola's Profit Jumped 48%

Clearly there are pockets of strength, notably Apple's iPod. But I continue to think that the market as a whole is looking tired and exhausted. On Wednesday, the S&P advanced 22.95 to 1259.81 for a gain of 1.86 percent. That is certainly a very healthy showing. But it came after a string of losses. Some have attributed Wednesday's rally to Bernanke's statement, but it might be as simple as the market was oversold and was due for a bounce. Although many pundits believe the rally will be short lived, for that reason alone, I think the rally might last longer than most expect. But once the short-term rally is over, I think the market will continue to struggle.

Housing is weak, and electronics—aside from iPods—are weak. Oil prices are high and are likely to remain so. Commodity prices in general are at healthy levels. Interest rates have risen substantially. Geopolitical risks are likely to make people more cautious. While the Israel and Lebanon conflict currently occupies the news channels, North Korea and Iran are waiting in the wings to take their rightful positions. Thus, the markets continue to face difficult challenges.

Although I remain cautious, I remain net long, so I am not completely bearish.