Double Dipping

As impressive as yesterday’s rally was, there are two factors that continue to argue for a two-wave correction to take place – history and upcoming events.

To understand the history part of the two-wave argument all one has to do is look back over every prior correction (even the milk-toast variety investors have become accustomed to in this bull market) and the pattern of decline, rally, and test (often making a token new low) is quite evident. The question then becomes, “why would this time be different?”

As for the upcoming events portion of the two-wave (which can serve as either a catalyst or justification), there are several items to be sensitive to.

First, I suspect that 1Q07 earnings season will contain far too many downside surprises for those who have become accustomed to the regularity of double-digit gains. Negative surprises are always unwelcome. And downward pre-announcements also fall into this category.

Second, the unwinding of the carry trade and the lingering effects of a bursting housing bubble (with all its accompanying issues such as the still to be worked off inventories, lower prices, and sub-prime loan problems, to name a few) should still fill the media and occupy the minds of many investors.

Lastly, an anticipated spring offensive by the Taliban in Afghanistan will likely bring bad headline news reminding everyone of a job that is far from complete.

Investment Strategy Implications

The damage done by the market plunge this past week always takes time to repair. That is unless you are willing to cite the four most dangerous words in the investment language, “This time is different”.