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SUMMARY Last week (3-31-06) we said, "Notice that the price of oil and the yield for the 10-year T-note are near their highs of the last two years. Consequently, we believe that over the next 1-2 weeks we have two possible scenarios ahead of us. 1) Oil and bond yields will re-test their highs and then they will pull back, in which case the equity markets will be under modest pressure over the next 3-5 days, and then they will rally as oil and bond yields retreat. 2) Oil and bond yields will advance decisively above their previous highs, in which case the equity markets will remain under pressure, and in all likelihood they break below support and they will decline to the first downside targets. The key point is this; the equity markets are in a "high-end" consolidation, the outcome of which is depended upon two different variables; oil prices and bond yields. Investors/traders should not attempt to take a bullish/bearish position with regards to the equity markets, unless they can determine with a reasonable degree of certainty where oil prices, and bond yields are headed. The equity markets are the wrong class of assets to focus on at the present time. Currently, the equity markets are not in charge of their "own destiny." They are at the mercy of two other markets--oil, bond yields--which in turn are both vulnerable to exogenous events! At times like these, equity investors who are risk averse ought to be mostly in cash or in hedged positions. Investors ought to be primarily concerned with preserving their capital instead of "catching" the next move. One of the lessons that we have learned in our 17 years of being students of the markets is to never worry about "missing" out on something that is coming, but to always worry about that "something" not missing us when it finally comes!" This week, higher oil prices and higher bond yields put the equity markets under pressure, and on the defensive. Given that all the technical indicators have turned down--assuming that we don't get a downside reversal in oil and in yields--we ought to expect a continuation of Friday's decline at least for the first 2-3 trading days of this week. Please also read: Market Timing
Ike Iossif
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