Did you know that 80% of the price movement in a stock or a mutual fund is determined by the overall market conditions and by the company's sector? This is the reason we use the top-down approach in managing your money. We look at the market conditions and at how the sector is performing before selecting individual names.

The average investor, however, spends most of their resources analyzing company risk instead of market and sector risk.

Market and Sector Review

October 24, 2005

The market is down 6% in the last two-plus weeks. Six percent is a fairly usual market pullback, in the big picture. However, its a little unsettling seeing that kind of move in just ten or eleven trading days (and one of those days the market was UP 120 points).

So, are we done with this pullback? Or is there more to come?

First, lets address if we are done with the pull back.

Lets look at the possible reasons weve had a drop lately:

This past week was option expiration.

The Feds apparent decision to keep raising interest rates.

Poor earnings announcements and lower forecasts of future earnings.

News that inflation is significantly higher than the Fed expected.

This last item was news apparently only to the Federal Reserve. Anyone who drives a car can tell us about inflation.

There have been some in the market hopeful that the Fed would shortly announce an end to rate hikes. But whether right or wrong, the rate hikes dont appear to be ending soon.

OK. So we have not really answered if we are done with the pull back.

Sois there more to come?

My opinion is yes, the odds are significantly higher that more downside is still to come.

Having said that, I feel there is a good chance we will see a bounce from these levels. It may just be a small bounce, perhaps a last chance opportunity to clear some non-performers out. But the trend, overall, is still pointing lower.

There seems no resolution to the problems facing the market and the economy at the present time. More importantly, the technical tools I watch tell me that supply is firmly in control of the football and currently has shown no sign of letting go, either. That does NOT mean that the market will go straight down, or crash. It doesnt even mean the market will go down at all. It means that the RISK of losing money is significantly higher today than in the past. And since my job is to protect your principal in times when the market is on defense, we need to exercise extreme caution right now, as we have done for the past four weeks. It would be very unusual for me to get you out of the market at the top (or in at the extreme bottom, either). The main objective, on defense, is to protect principal, so we have money to buy good assets when they go on sale.

Staying focused on principal preservation and your defensive game plan should be the primary objective at this stage of the game. To see where you stand, please call us at 877-223-7300 to set up a time to review. And feel free to check the Mullooly Asset Management hotline as well, where I outline the early indications I use to determine when the market may be starting to turn.

This article was posted on November 13, 2005