The follow through investors were looking for never materialized. In fact, some selling crept back into the market pushing the Dow below 10,000, again! The problem remain as more chatter about the sovereign debt issue facing Europe rattled investors. As much as you and I would like this issue to go away it is building. The EU will have to try something to subdue the sentiment and emotions building in the global markets. However, this smells much like the issues in the U.S. banks in 2007. It could be the tip of the iceberg. We all pray it is not because government collapse will be much worse than banks. Thus the rising fear.

I have read plenty of doom and gloom article over the last couple of days and it is enough to shake your strongest faith. What will happen if the EU helps/rescues Greece? It will act as a catalyst to the upside short term, but the assumption is that will fix the problem. Not hardly! The systemic problem of debt is everywhere and we have yet to take the necessary steps to fix the root of the issue. Without those steps we are essentially putting out the fire with gasoline.

We have to prepare our portfolio to address these concerns versus getting into political debates over who or what is right currently. Will Rogers said it best, “government, after it has exhausted all other avenues, will eventually do the right thing.” The right thing will be done eventually to address the issues facing not only the US, but the global economy. Until then you and I must defend our assets so we have money to take advantage of the resulting opportunities.

As our members know, we are heavily in cash at this point having hit stops on the way down. It is now time to be patient and wait for what the current activity will bring in the way of investment opportunity. I am being asked about the short side of the market. While there have been trading opportunities on the short side, the trend change is still in motion. I am not into being prophetic about the markets future, however, I do see the downside building steam. Markets don’t go straight down anymore than they go straight up. We will take advantage of the trend change as it takes root.

The markets are behaving badly and the economic activity isn’t helping matters. The question I have, “why is this happening now?” Economic recovery has not matched the price recovery in stocks would be my simple answer. The realization of that is resulting in pricing activity to correct the imbalance. Throw in a dose of over leveraged countries and you have the making of a correction.

This realization begs the question how low will we go? This is akin to being in a boat and wanting to take a swim. Without the aide of depth gauge you have to guess. You can simply stand on the side of the boat and dive in or you can step off the back and wade in. If you are right in your guess and it is deep enough to dive without injury you make more money than the cautious person who took time to see how deep it was. My view is to take some time and see how deep the problems are facing the global and US economies before diving in and being all out short. Risk management principles apply in either direction of the market.

The scales are tipping to the downside without doubt. The challenge is being patient enough to confirm the move. 1020-1030 on the S&P 500 is a level to watch. A break below this on accelerating volume would and could be the proverbial straw. Many were watching the 1070 level as a signal and we have seen the last few days the selling pierced that level of support. We have retraced 78% of the move off the October low or the last leg higher in the previous uptrend. Thus, the importance of the 1030 level. Break and we have a trend reversal in play and more downside on the horizon is likely.

I am not being pessimistic, I am managing my money in light of the potential risk facing me. There are no black boxes for managing money that account for human emotions. When looking at a chart they are a record of the emotions exercised by investors one bar at a time. However, predicting the next bar is impossible to do.

Be discipline, take inventory of what is happening around you, and stay focused on what you want from your money. Use stops to take the emotions out of the decision process. As we build a base or bottom from this selling you will have to use buy-stops to take away the emotions of buying. We will deal with that when we get there. Have a great day of investing. Be cautious!