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After two weeks of seeing indications of potential short covering, values are finally lifting. On the plus side we have Technology, Finance, Retail, Capital Goods and Healthcare leading the charge. This strength is about six weeks earlier than the normal bull seasonal tendency .On the negative side our model continues to give major vulnerability alerts in the defensive areas of BONDS, REIT’s and UTILITIES. Profit taking in these “safe “ sectors has begun. Most importantly, these three sectors are now in a negative seasonal bias until mid-October.

Our model remains bullish, however, there is a high probability that another buying opportunity is around the corner. August has historically been the worst month of the year for the S&P 500. Adding to this is that the recent rally has been generated by the fence sitters jumping back in forcing weak shorts to cover. With this past week’s option expiration out of the way, this week should provide better opportunity to enter long positions.

Our view is to avoid being chopped up by trend following techniques and instead go with seasonal tendencies. We are of the opinion that using strength to liquidate defensive strategies and during extreme weakness buy the more aggressive areas of Retail and Technology is prudent at this time.

Caution is urged – Energy prices are still being driven by Geo-political tensions and weather patterns. Liquidity remains a major issue and any type of surprise (bull or bear) will certainly knock this market off balance. The past two week have given the bulls plenty of reason to buy, however, prices were not able to sustain rallies and fell sharply on fears of a significant drop in air travel after a terrorist threat to blow up trans-atlantic flights. Our model has flashed short term sell signals in the XOI and XNG. The OIH has been in sell mode for the past 5 weeks.

The liquidity situation in gold is being maintained by smoke and mirrors. It is completely based on the trend in oil. Our model is flashing a short term sell on the GLD (gold - etf) with major resistance at the 65 area. Our short term target is in the mid to low 50’s area.

Conflicting signals from inflation and the economy are likely to keep the Fed on hold.

The trading implication of this view is to avoid being chopped up by trend-following techniques,

instead go with seasonal tendencies.

We are of the opinion that using strength to liquidate defensive strategies and on extreme weakness

buy the more aggressive areas of Retail and Technology. Bottom line we are still in a broad trading range.

Once into October the deciding factor will definitely be the “January Effect”.

The following information has been provided for informational purposes only and should not be used or construed as an offer to sell, a solicitation, or an offer to buy, or a recommendation for any security. Securities mentioned reflect the author's independent opinion.. Equity Letter does not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. Equity Letter may own or trade investments discussed in this column.