CI Outlook - Archives

March 2007

March 2, 2007

March, “in like a lion out like a lamb”.  That may well be the way it is remembered this year.  In early February we reviewed the technical condition of the market and then watched it go higher.  In late February prices stopped rising.  February probably set the short term top in prices.  Although we still believe the underlying long term trend of prices remains higher, we believe that in the short term, prices will remain volatile and may trend lower.  Before we can resume the short term uptrend the market will need to finish out this “correction”.  Before this “correction” is finished it will deflate speculative confidence.  Investor attention will be focused on negative news, such as a slowdown in China or trouble with sub-prime credit risk here in the United States.  Since growth in the US economy remains slow, these worries may become magnified and some investors may panic.  All of those events are normal and market corrections rarely end without this type of activity.  However, as we pointed out last month, the long term trend of the market is higher and we believe that trend likely remains intact.

Last month we mentioned that high volatility is needed to signal a change in the trend of prices.  We did not discuss that a violent correction in an ongoing bull market signals the psychological move to the next stage of that bull market. The loss of speculative confidence caused by a correction is the catalyst.   Without confidence in the future investors move out of lower quality, more speculative investments, into safer securities.  During this correction you can anticipate money moving from smaller to larger stocks and from speculative bonds to higher quality bonds.  This “flight to quality” is a normal part of market dynamics and is likely the reason why some observers call market corrections healthy.  Anticipating this process is why we have already made those adjustments to your portfolio.  Now we will wait to see the depth of this market correction and make the necessary adjustments to your portfolio as the situation dictates.

Please call us with any questions or comments.

CJ Brott                                                                 Karen Burns

 


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