Market Commentary:

Just call me Scrooge!

As I pen what will most likely be the last ‘Jo’ for the year, my befuddlement continues to expand as institutional investors, and money managers alike, attempt to guess the move for the last remaining days of 2007. Considering that the SPX is attempting to slug out a 2% gain for the year, it would almost be humorous if it were not affecting so many individuals’ portfolios. 251 days the US Equity markets were open in 2007 and it all comes down to this? That doesn’t exactly portray the warm fuzzy feeling one would look for on a below zero day. “No Hot Cocoa for you; come back one year.”

Honestly, all the sarcasm aside, this last year’s technical action in the Four Sisters is beginning to look a lot like a train wreck yet to happen. Ya know the old adage about the light at the end of the tunnel? It’s now appearing to be another train rather than a clearly defined path one would have hoped for. As it may or may not be the case, many just don’t seem to care. Liquidity is still plentiful and it will continue to buy risk, regardless of the consequence. The attitude is... “Worry about that later.”

In the November 7th ‘Jo’ – To Jibe or Heave-To – we boldly went where so few were willing to discuss the potential break of the secondary bull market trend and the ramifications if this happened. Needless to say, it happened. Not only did it bust the aforementioned trend, but the SPX went up and re-tested the bottom side of the trend break (the latest Fed Day) and confirmed the new bearish action.

However, the big issue, going into the New Year, is no longer the secondary trend; nor is it how 2007 will pan out. The question which needs to be asked, and ultimately answered, … “Is the Cyclical Bull Market, which has been in place since mid-2003, going to give way?” We have been examining this Cyclical Bull over the last few years and because of 2007’s technical action it is imperative we increase the magnification of our scope.

By looking through the trend lines drawn you can see that the SPX is forming a two-headed monster (a head and shoulders formation with two heads) with a 1360 (or so) neckline. However, if the market drops below the recent November lows it is more than likely there could be an end for the Cyclical Bull. As the equity markets are the most efficient prelude to the economy, only time will tell.

As such Fed officials, economists, financial institutions and yes, even politicians are now jumping on the “R” word band-wagon and placing percent probabilities to its outcome. If this was Vegas, the action would be greater than the Super Bowl. Nonetheless, as we have been discussing, it will ultimately be – on a fundamental basis – the debt market that will underscore the tone of the equity markets going forward.

We can plainly see in the following 4-year corporate spread chart that there has been a massive re-pricing of risk because of the CDO debacle and continued deterioration in housing. This remains as evidence on how fast things can turn sour. Across the board, but particularly in the financial complex, the cost of borrowing has risen dramatically. At the same time, access to capital markets has been closed off in the last few quarters. That leaves all eyes on our “over scrutinized” rookie Fed Chairman to help navigate the turbulent waters.

Our good friend Tony Frezza, CEO of Asset Architects Inc., recently commented on some further concerns since his allocation shift, mentioned back in early November. “Volatility is not just the predominate theme in the equity markets; the debt markets are also seeing historic levels of volatility. The evidence is plentiful and can been observed by watching the 10-year Treasury. In one given week the yield has gone from a low of 3.84 to a 4.25 high (a 10% change in yield in a week). Currently there remains to be no real buying opportunity in the bond market and probably wouldn’t be until we see a much higher yield on the 10-year.” Nevertheless, he continues to remain cautious in his asset allocation stance – in both equity and debt – until further evidence is prevalent on the condition of the economy, financial sector, consumer spending and employment.

Whichever avenue one decides to take and analyze, the technical destruction of the tape in recent months, highlighted by the financial complex, can not be ignored. For now it is more than probable that the October closing high of 1555 will serve as major resistance while the latest credit crisis unfolds. On the other hand, given the fact that the SPX continues to reside (for now) above its cyclical bull market, dating back to spring of ’03, the current trend has to be respected.

It is truly a split tape and heightened volatility will continue to be a major theme in 2008. Patience will be rewarded for those who do not chase the beaten down themes such as financials and homebuilders. For the long non-hedge investors, our thought is to stick with the sectors that are working and most likely do not have any direct correlation to the debacle within the financial arena. Overall the general market is working in relation to the lemming’s theory (momentum) – everyone chasing what works and dumping what is not. As bad as it may sound, this mentality does create some trading opportunities for those that are not faint of heart.

Keep your wits about you and have a Wonderful & Joy-Filled Holiday and a Happy New Year!!!!

In addition, we wish Kevin and April Tuttle a Happy 10-year Anniversary this New Year`s Eve!

Stay tuned & good luck!

Until next time…

Tuttle Asset Mangement Team

• Kevin Tuttle
• John Dubrule
• Greg Collins
• Cecilia Schiffer
• Frank Walden
• Tony Frezza - Asset Architects

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