Simplespread

I once had a history professor who liked to remind his students that consistency was the main attribute of fools and dead people. He took pride in his lack of predictability. Ralph Waldo Emerson also said something about consistency being the hobgoblin of small minds. Who knows how successful these disparagers of consistency were at investing, but I'd bet they weren't very good.

We, here at the Simplespread Institute, revel in consistency - consistency in thought and consistency in action. If you don't approach investing with consistency, you'll soon be separated from your money by those who are consistent. The markets rise and fall continuously, but the goal of investing always remains consistent - buy lower, sell higher. There are few things more cyclical (read: repeating) than the markets. Good investors look for the same things day in and day out. We react to the same things the same way we always do. We know what we're going to do regardless of what happens. We have our strategy laid out long before we put it into action.

Consistency in thought: We look for the same attributes in a potential investment everyday. Strong performing sectors and stocks present us with potential profit opportunities. Price patterns either jump out at us or they don't. When they do, we pause to consider additional factors. Are there call options available for selling against the purchase of stock? Are the calls giving us a sufficient combination of risk and return? Are the stock market averages at a level that it is prudent to enter the arena?

Consistency of action: We enter orders the same way each time. We fill out the "Getting In" Simplespread Sheets the same way each time. Then we sit back and let the market tell us what to do. We know what our strategy will be if our stock rallies, declines, or goes sideways. We are never confused by the market. We know all the possibilities, and we know our reaction to each and every potentiality. When it comes time to act, we calmly enter our orders to modify the position or exit the market totally. At the conclusion of the trade, we fill out the "Getting Out" Simplespread Sheets the same way each time.

We repeat the above actions day after day, week after week, year after year. We would prefer a bull market because it is easier to make money when prices are rising steadily. But we also have no fear of bear markets because we know strong stocks will rise during bear market rallies.

Our consistency enables us to constantly review how we entered and exited a position, what we did right, what we did wrong, and how we might improve the next time (what have we learned?). Whereas 40 years ago Ronald Reagan repeated GE's motto of "Progress Is Our Most Important Product" during each week of Death Valley Days, we repeat, "Consistency (in profits) Is Our Most Important Goal" each week of the rest of our investing lives.

We accept the fact that we aren't smart enough to know when a bull turns into a bear, or when a bear turns into a bull. We don't need to know which is which to achieve our goals. We just need consistent thought and action. And that's what the Simplespread Strategy is.

After last Friday's key reversal day (big rally in the morning, then big selloff in the afternoon), albeit on relatively mediocre volume, this week was a downer. Recent leadership is wilting away faster than an un-watered azalea plant in Houston's August heat. Machinery and Transportation have seen their better days. Even Energy and Metals & Mining are finding it hard to catch bids. So what's getting hotter? The defensive issues - Utilities, Drugs, Health Services, Food & Beverage. With the exception of the medical sectors, nothing attracts our attention. Energy and the metals have had good runs, but the spotlight is on them to continue leadership. If not, the torch passes to healthcare. And that will present us with many profit opportunities, we trust.

Tobacco continues in the #1 position. Energy climbed rapidly back into the #2 spot after taking July off to rest. The #3 position belongs to Utilities, which has been gaining strength ever since the market got in trouble back in May. Food & Beverage, in the #4 position, tracks very closely with Utilities by coming alive starting back in May. In the #5 spot is Metals & Mining, making it 46 straight weeks in the Top Ten, and gaining some 30% during that time.

The #6 spot goes to Real Estate on the strength of REITs. Let's hear it for income, but anything to do with homebuilding or mortgage activity ranks near the bottom of the list. Aerospace/Defense comes in at #7, its worst showing since spring. Automotive remains in the Top Ten at the #8 position thanks to Fiat, Volvo, Honda, and Toyota. Oh, and GM too. Go figure. The #9 position is in the possession of Drugs, a sector that appears to finally setting its house in order. We'll see. Rounding out the Top Ten is Banking, which is in its average position since last October. A consistent performer, but a lousy buy-write.

The summer rally is getting tired. It wasn't much of a party so far. Our loss of dynamic leadership (Transportation and Manufacturing) makes things a little dicey right now. The old leadership still hanging around (Energy and Metals & Mining) is not the things bull markets are made of. New leadership must evolve for the broad market to work its way north. We have high hopes for Healthcare, Media, and Telecommunications, but they have to show us some rallying power before we can get interested.

Sector	11Feb06 to 11Aug06	Week of 11Aug06	Visual Chartist Commentary
Tobacco	+16.23%	+0.48%	An all-time new high for this group again. Up 13% since the middle of June.
Energy	+8.29%	-0.17%	Up 16% from June lows, but still pretty much marking time for the year. The stocks need to get going if they want to continue to defy gravity. There's enough public bullishness about this group to make a person very cautious. Some charts look interesting, but many look uninteresting. A lot of stalling going on here. Congestion. And again, how much do geopolitical factors account for current prices? Storytime: If a geopolitical/natural disaster event drives oil through $100, what effect does that have on the consumer to go on consuming? An oil shock at these prices would undoubtedly throw a monkey wrench into worldwide growth, and with it, demand for high-priced oil. That doesn't sound bullish, does it? Imponderables galore.
Utilities	+7.60%	-0.29%	Doing what they do best - providing a safe haven in times of trouble.
Food & Beverage	+7.41%	-0.26%	Bounced off supports in June. Now back up to the May highs. Either go and go now, or drop back down in weakness.
Metals & Mining	+7.15%	-2.58%	Still working on the right shoulder of a bearish head-and-shoulders formation. Several higher lows are just about all you can get excited about with this sector. The stocks need to rally strongly to overcome the current resistance area.
Real Estate	+5.28%	-4.09%	Very bad week across all areas. Finally, somebody is waking up to the fact that the real estate boom is weakening. REITs got hit hard.
Aerospace/Defense	+5.18%	-1.85%	Still strong relative strength. Didn't sell off that much during decline, but didn't rally with the rebound either. That's not good.
Automotive	+3.09%	-2.72%	Okay, we've had our little rally. It has run into resistance. Next move? Should be downward.
Drugs	+2.08%	-2.27%	Certainly one of the better looking sectors around today. Higher highs, finally, and higher lows. Should be a source for new Simplespreads, if and when.
Banking	+1.99%	-1.58%	The recovery rally has run into resistance. Not much of interest here anyway.
AND THE REST...
Dow Jones Ind. Avg.	+1.55%	-1.36%	The third trip up to 11250 has failed again. That means another probable test of 11000, then 10700 if the market continues downward. If this summer rally is ever to get going, the Dow has to break decisively up through the 11250 resistance, and do it now. Otherwise, hold onto your wallets. Last year's overhead resistance at 10700 which was overcome and turned into support after it was breached this past November, and has proven solid. It was successfully tested in December, January, February, June, and July. It must be getting tired by now. Total return since August 11, 2000 = + 0.55% (excluding dividends). What a waste of time.
Media	+1.13%	-0.33%	The good relative strength is the main story here. The charts are all over the place, giving few signals. We'll have to wait for this sector to make up its mind.
Insurance	+0.79%	-0.34%	Absolutely nowhere since last November.
Consumer Non-Durables	+0.72%	-0.64%	A sector that should be doing better than it is.
Telecommunications	+0.08%	-1.05%	Double tops and double bottoms. Stuck betwixt and between. We will wait for a clear signal as to which way this sector wants to go.
Conglomerates	-0.64%	-2.08%	Failure to rally from the market's June bottom is not healthy.
Retail	-1.11%	-0.76%	Ran into overhead resistance and stopped. Expect it to continue its trek downward.
Chemicals	-2.25%	-1.31%	Also ran into overhead resistance and stopped. Not much of interest here.
Health Services	-3.66%	+0.78%	Now that there is support beneath, maybe this sector can get its act together. There is overhead resistance above, but the sector has been "bottoming" for about half of the year. Let's hope it can continue higher so some opportunities come into view.
Consumer Durables	-4.91%	-2.39%	One of the worst-looking sectors around. Stay away.
Computer Software & Svcs	-5.09%	-0.95%	The selloff from May highs appears to simply be consolidating before heading lower.
Financial Services	-5.32%	-2.05%	Significant support about 5% lower. This sector needs to firm up its relative strength as it drops down to support before these stocks will get any attention again.
Transportation	-5.32%	-4.73%	The run that started last November has fallen upon hard times. Support sits some 10% lower. This is the sharpest selloff for this sector since the bad old days of 2002.
Specialty Retail	-5.57%	-0.69%	On the downward tilt. Ran into overhead resistance and stopped cold.
Manufacturing	-5.77%	-4.27%	Like Transportation, it has seen its better days. Looking the weakest since the bottom in early 2003. Lots of overhead resistance. Three lower highs and three lower lows don't bode well for this sector.
Diversified Services	-6.01%	-2.43%	Has bounced off the current support twice. Now it sits right on it. If it drops much further, it has indicated lower prices for awhile.
Wholesale	-8.82%	-1.85%	Support exists just a little lower. This has been a severe selloff. A lot of damage has been done to a lot of stocks. Recovery will take time.
Leisure	-9.30%	-1.94%	It broke supports as if they weren't there. Any more weakness seals this sector's doom. It has a chance to firm up here. But relative strength will take time to regain, and now there is plenty of resistance overhead.
Computer Hardware	-10.76%	-0.29%	This sector has gone exactly nowhere for three years. And it isn't doing anything to act any better.
Materials & Construction	-14.01%	-3.90%	We've now had the second attempt at a short-covering rally. It, too, fell to pieces. Looks like the sector will have to work its way lower to find more buying power.
Electronics	-14.21%	-1.30%	It couldn't mount much of a rally when the market rebounded. So, it sits.
Internet	-15.94%	-0.37%	Any rally will meet with stiff overhead resistance, meaning we're weeks away from any meaningful recovery.
Statistical Data: TeleChart 2005