First up, it's interesting that the money trade in the stockmarket works again. The money trade as long term readers will know is that buying weakness in stocks since 2003 has always worked. And until it stops working it's very dangerous to dismiss this simple and highly profitable trading/investment strategy.

But whereas we've been taking advantage of the money trade since 2004 (especially in the summer of 2006) we didn't really buy any stocks on the recent savage sell-off (apart from nibbling slightly at Google below $500 and Marchex below $10 - See links below for why we like these 2 stocks) and this was indicated in last month's newsletter.

But why didn't we buy? Simple, we got scared by the recent market turmoil. But not only that we also chose to disregard one of the most significant of all the trading/investment rules -

Trade what you see and not what you think

It just proves why this investment game is so hard. We know what to do, we know when to do it but when we let our emotions come into play we tend to take the easy option by again choosing not to follow another simple but extremely effective trading/investment rule -

Always do the hard thing

The hard thing was of course to bite the bullet and buy and there was a pot of quick money to be made for those disciplined and generally contrarian investors. The alternative to doing the hard thing is of course doing the easy thing which meant playing it safe and doing nothing apart from watching the FTSE 100 power higher by around 800 points off the lows.

Whatever the case there must be no regrets. Instead we're looking towards the future and as indicated in last month's newsletter have used the recent stockmarket strength to sell a lot of our holdings due to two main reasons -

1. The Central Banks along with the major investment banks and funds will have been working like crazy behind the scenes to try and bury as much bad news as possible. The banks are also pushing for the creation of a $100billion pool of cash to avert another credit crunch - My take on this is simple, they're doing everything possible to keep this Ponzi scheme (what is a Ponzi scheme) afloat as the consequences of it unravelling are too frightening to even contemplate

2. You can't stop a financial Tsunami with standard flood gates/protection. And as more and more easy money has to be pumped into the mess to keep things afloat (or at least give the impression that things are alright) it's only a matter of time before we have another serious jolt to stock prices. I'd also hazard a guess that next time the Fed cuts rates to ease the pressure that will be one hell of a shorting opportunity. It's only speculation but bear it in mind.

Whatever the case the risk of owning equities now has increased dramatically and will continue to increase over the coming years. The question of when will the next vicious storm approach is of course a billion dollar one. I wish I could offer some advice to zero in on the correct month or at least calendar quarter but I can't.

All I do know is that stocks generally aren't that safe a place any more but this doesn't mean they can't continue higher after all the long term trend is still up.

Quality Stocks Are Most Probably King Right Now

But if you do still want to be long stocks then go for real quality and be highly suspect of any company operating in the financial markets like banks and of course mortgage brokers.

It's also fine to hold stocks where you've done research into their prospects and/or have a good understanding of the sector(s) they operate in. This is why although we don't really like the risk associated with the overall stockmarket we do like holding Google, Marchex and our long term Gold holdings.

• Why we've been buying Google (GOOG)
• Why we've been buying Marchex (MCHX)

Don't forget that with the Sterling/Dollar exchange rate so high at the moment UK investors in UK shares are getting an excellent deal. Although as we indicated back in June 2007 virtually nobody is suggesting that the exchange rate could go as high as $2.30 which most probably means it's got a good chance of achieving that level.

What Clues Can The American Broker Dealer Index (XBD) Offer?

We've been using the Exchange Traded Fund (what's an ETF) the American Broker Deal Index (ticker XBD) for the last few years as a leading indicator for the health of the overall stockmarket.

To put it simply the investment banks and brokerage houses have been the main thrust of the bull market since 2003. This is mainly due to 4 reasons -

1. The never ending flow of cheap money into the economic system
2. Their superior speculation skills (assuming normal markets and not panic)
3. They generally know how the market is placed (ie, who owns what, who's looking to buy and sell etc), and
4. Enjoy massive order flow combined with making the markets which is an easy way to get rich

But as you can see by the chart below the XBD is no longer a leader in the stockmarket and that I believe means only one thing - stocks cannot advance significantly until their leadership mantle is re-established which at the present time looks highly unlikely.

American Broker Deal Index (XBD) - 3 Year Weekly Chart

Expect plenty of up and down movement in stocks but prices have a very good chance of finishing right where they started. Also, as we also suggested, look to buy on weakness and sell on strength.

Short Term Trading Idea

A short term trading idea might then be to sell the FTSE 100 short (or at least take profits) if/when it breaches the high for the year.

This strategy has already worked in the Dow and S&P 500. Basically when the financial TV channels and the Papers make a big thing about it (which they will), take this as your que to look for short selling opportunities or at least taking profits on present long positions.

FTSE 100 - 1 Year Daily Chart

Wall Street/London Stockmarket - They're One And The Same

Finally, we know that the majority of our readers are from the UK but while the majority of the time we talk about US stocks. We do this because Wall Street is the dominant global market and to us it's easier to analyse that market and then translate our findings to the UK market.

So whatever our views are on Wall Street these translate almost perfectly to the London stockmarket as well as almost every other Western market.