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2006-07-16 :: The Week Ahead

Last week was a bad week. All three major markets fell victim to Middle Eastern violence. The Dow , the S&P 500, and the NASDAQ lost 3.2%, 2.3%, and 4.4%.  With no improvement over the weekend, more missles rained into Israel from Lebanon and more Israeli airstrikes hitting strategic targets in Lebanon, there is no reason to expect next week will be much better for the markets. What’s more, there is enough other downbeat news regarding interest rates, oil prices and trade to keep the markets struggling.

The big economic announcements will be  the producer price and consumer price indices for June. They’re due out Tuesday and Wednesday, respectively. We will also get a look at the minutes from the last meeting of Fed policymakers, and Chairman Ben Bernanke will testify before congressional committees on Wednesday and Thursday.

As you can see from the VIX Volatility Index Chart above, we are in the area where we could see a bit of a relief rally in stock prices.  But the war in the middle east will weigh on things heavily for the near term, at a minimum.  From a strategic perspective, we will use any rally to increase our cash positions in accounts, generating 10% to 20% of equity allocations in cash.  As things progress, we will continue to press our energy positions in selected names that are seeing strong returns (DrilQuip, Helix, Frontier Oil, Valero), the streetTracks Gold fund, and add long-term bond positions through the Vanguard Long Term Bond Index fund.  I usually hesitate to use mutual funds but the bond position will hopefully be a short-term strategy to protect capital, and we can avoid brokerage commissions with this index fund.  The bond fund won’t come into play immediately as I want to see if the war is negotiated to a settlement and it becomes a non-event.  This is not likely, in my opinion, but until then cash, energy and gold will be our emphasis.

Check back as the week progresses for updates on my strategy implementation.

More later!