After taking some time off for an out of town trip and some personal business, I am getting back to writing today and apologize for the lack of communication the last week.

The overall market has certainly been volatile which seems to be the theme of 2007. While my personal trading style takes an intermediate-term view of the market, daily swings have been strong enough to catch the eye of traders on any time horizon. The unwinding picture is beginning to cause more and more concern as it seems we are now set up to begin working through the economic excesses of the last 5 years.

While the S&P 500 is only 6% off its all time high, the rapid decline of the last week coupled with the inability to hold a breakout point in October causes concern. Volume has picked up considerably during the rapid decline days last week and Monday. While the distribution days may have set up a climactic selling point that made Tuesday’s rally possible, it appears to me that this is just another leg in an unfolding bearish pattern.

There are two important forces for traders to be wary of for the next 6 weeks. The first is performance anxiety in the form of institutional managers striving to improve their performance and post a good year. With many of the most respected funds lagging the indexes, it would not be surprising to see managers bidding up the prices of their largest holdings simply to prop up the performance of their funds into year end. This could then lead to massive unwinding of those positions at the beginning of the year as managers seek risk control ahead of a difficult environment.

The second force involves the macro issues our economy is dealing with in the form of credit concerns (both for corporations as well as individuals), housing prices, inflation (including oil, metals, and broad non-discretionary categories), and currency issues. These stars appear to be aligned to point to a very challenging period. The difficulty lies in timing just when the overall market will deem that these issues are important. Bear in mind, there will likely be very little warning and very large price swings when macro economic issues come to the forefront. I believe we have seen some early warning signs, but have yet to see the large fear inducing, cataclysmic trading ranges which are so common within an overall bear market.

The good news is that the spoils go to those left standing and if investors do a decent job of risk control, there will be ample opportunity to reap substantial rewards when the dust settles. There is disappointment in taking losses in a year like 2007, but often stepping off the field with manageable losses in order to preserve capital for another day is the wisest choice one can make. Opportunity presents itself to those who are patient and studious. Do not step out of the markets and let the research process go dormant. Instead, build a stable of fundamentally sound investment ideas so that when the opportunity is right, you will be ready to take full advantage of the situation.

Over the next several weeks I will continue to highlight stocks either long or short which appear to offer opportunity. Readers should know that I am keeping most of my capital safe until the picture clears up, but am offering ideas to research and plan for more stable markets. If you use my research to trade, please use caution and adjust size to reflect the broad volatility in the markets right now.

All the best,

ZDS