While I believe we remain in recession and that the full impact of the banking and financial crisis has yet to be felt, the question remains: do we sell this May and go away or do we stay and play? The answer, as always, depends upon your individual time frame, investment objectives and investment style.

Many readers recall in November 2008, following several 300-500 even 900 point swings in the Dow Industrials, I cautioned it was not a stock market for the “retail” investor. As I explained, this was the message the professionals on the trading desks were advocating for all but the most nimble and experienced traders.

I believe their advice was timely and ultimately set up an excellent buying opportunity for investors like myself with a longer-term time horizon and the patience to allow the better buying opportunities to develop. And develop they did as the market tried to recover into the beginning of the year. This allowed us an opportunity to book profits into the beginning of the year before a vicious sell-off took us to  new market cycle lows on March 6 and new buying opportunities.  

We now find ourselves almost back where the year began and in a trading range I have documented repeatedly since the V’ish move and small consolidations off the S&P 500 March 6 lows and the early April breakout above 850. As I stated in the Yachtsman Market Update and on Minyanville.com on May 12:

“The cash S&P 500 daily chart below illustrates the trend channel I have followed since the mid-March move, correcting the straight V bottom move from March 6. The daily news flow and fundamental indicators have created a channel for the S&P 500 which currently runs between 950 on the top end and 875 on the low”.

As I noted at the time, some profit taking was to be expected as we reached the top of the trend channel which turned out to be around 930 on the S&P 500. We  were then unable to take out that level and move above resistance at the old high around 943 and ultimately the 200 day moving average (MVA) around 952.

Cash S&P 930 proved to be the top of the recent move technically, but I believe numerous fundamental indicators, including the recent Case-Shiller home index, unemployment, rising foreclosures, the pending GM bankruptcy and the prospect of lowering the U.S. AAA credit rating have recently impacted the markets.  

The S&P 500 chart below illustrates we have now sold off toward our former level of resistance, which now becomes support, at the 875 level. The question now remains whether this recent “earnings and news not as bad as expected” market rebound was a technical rally as the result of the 40% sell-off we endured since the bear market began in 2007 or the beginning of a new bull market?

As you can see, the 875 level on the S&P 500 and the 50 day moving average (MVA) at 850 provide short-term support and several traders on the desks have told me many “quants” are watching 832-833 on the S&P 500 as support for the rally. We are rapidly approaching a technical inflection point of significance.

However, I believe the fundamental indicators hold the answer to that question, led by employment, the housing recovery, debt to GDP growth, the consumer credit default ratios, bankruptcies and the solvency of commercial real estate.

These and other fundamental indicators, along with the political landscape, will  influence the financial news flow and investor sentiment as we proceed through the upcoming quarters and unwind the deflationary spiral resulting from the worldwide financial crisis.

For example, this week alone we will receive May Consumer Confidence, April Existing and New Home Sales, Durable Goods orders and May Michigan  Sentiment readings. The first quarter GDP readings on Friday may be the most significant  data of the week as it is expected to be revised from a 6.1% decline to a revised 5.5%. GDP growth and employment are at the heart of the recession as the consumer remains the focus of the stock and bond markets. 

In addition, it will be imperative for investors and traders alike to properly position their portfolios in front of the pending Obama legislative initiatives regarding new  carbon emission regulation, healthcare reform and increased taxation in multiple forms among numerous other economic and taxation issues.

While the Democrats control both ends of Pennsylvania Avenue, it will be very important to monitor the stance of moderate Democrats, or the so called “Blue Dog” group of House and Senate members. As long as the minority Republicans staunchly hold party lines, the Blue Dogs, with their liberal views on social issues and yet a more conservative view on fiscal issues, will be crtically determinative of the tax issues and the impact on the business and ultimately the stocks within those sectors.

A good example was the initial Obama Cap and Trade proposal to enforce the reduction of CO2 emissions by auctioning credits to allow power and industrial plants to emit CO2 levels above specified limits. The Blue Dogs, who primarily represent coal producing states and those reliant upon coal for generating their electricity, joined with the Republicans to block the proposal from being included in the 2010 Obama budget allowing the iinitiative and its pending economic impact as a stealth energy tax to receive full debate and congressional review.

I am continuing to structure my portfolio upon my original thesis relating to the reinflation trade. While I realize there are well-reasoned disinflationary arguments to the contrary, I continue to believe that unprecedented governmental deficit spending and historic levels of capital infusion into the economy by the Treasury and the Federal Reserve will result in increasing inflationary pressures.

As a fundamental-top down-sector oriented longer-term investor seeking income and growth of capital to off-set the anticipated inflation, I begin with the sectors I believe will most benefit from the reinflation trade. This leads me to ferrous and non-ferrous metals, precious metals, commodities, energy, agriculture, chemicals (especially specialty and agriculture chemicals) and technical, power generation and transportation infrastructure.

Non-ferrous metals and alloys are not based on iron (as are ferrous metal) and include aluminum, titanium, copper, nickle, cobalt, tungsten, tin and zinc, uranium and molybdenum. While ferrous metals include iron and extract iron ore needed for manufacturing steel. Precious metals include gold, silver, platinum, palladium.

I have recently added to my energy and agriculture chemical holdings around my core positions. I continue to avoid financials and underweight consumer stocks, both discretionary, durable and non-durable. My concern with the comsumer is based upon the employment and average wage figures.

Stay patient and let’s see what the market decides to focus upon as we enter the seasonally weak summer season. I expect to see some equally volatile downside and upside rallies and we must not let emotion enter into our long-term investing.

Smooth sailing and be sure to take some time to enjoy your summer.

Yacht