Risks Remain Our Primary Focus

	Paul Rabbitt Rabbitt Analytics.com
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We are maintaining 40 percent cash and have a few short positions. Monetary conditions are no longer accommodative. The Fed has not signaled it will soften its tightening phase. The economy is slowing. Stocks are overbought and near the tops of their trend lines. Additionally, these trend lines are downward. Because of the slight rally off the most recent lows in late April, stocks now have a small positive expectation built-in to their prices.

Relief Bounce Probably Not Tradable

Our view is that the stock market's trend is still down for the next few months and the recent strength is nothing more than a temporary relief bounce. Near-term upside may be a few percent. We are looking to contra-trade any up-moves.

The old adage to sell in May and go away has a ring of truth to us. We are maintaining our cash levels at 40 percent and are in a significant capital preservation mode. Our average portfolio beta is currently .75, meaning we have reduced volatility well below that of the S&P 500. We will buy no stock with market caps under $750mm or with a beta greater than 1.2x.

Our trio of market forecast regressions is mixed. While the Fed said they feel rate policy remains "accommodative," our monetary analysis has turned negative for stocks due to increased cost of borrowing capital. Our technical regression is also negative. Our sentiment regression is positive due to a recent increase in skepticism.

Stocks have struggled in 2005 with losses averaging over four percent.

Energy prices slipped under $50 barrel, the takeover game is heating up, Q1 earnings were a pleasant surprise, and jobs data was far above consensus expectations. Still, nothing in the above data changes what is on the horizon. The fact remains energy prices have risen fiercely in the past year, global investors are trend followers and will not bargain-hunt US assets, as long they remain fearful of the dollar's trend. Earnings have peaked and Q2 will fail to achieve the level of Q1. The Fed maintained its language supporting the policy of a measured pace of interest rate hikes in the future.

Paul Rabbitt will be available to take your questions until Monday, May 30. Please use the form below to submit your questions.