Dear Subscribers,

Yesterday I laid out the case for the potential need to get more defensive in a hurry with the following statement:

"If we flush below Dow 12,000, then we are under significant technical and psychological support and could head 5-10% lower in a hurry…we need to watch things very carefully here and change strategies accordingly."

Personally I took yesterday's move under 12,000 as a clear sign to alter my portfolio from the previous 100% long status to 0% long (meaning my longs and shorts equal out to 0% net long exposure). That neutral stance is the most defensive I have been since March 2009 and is a serious statement about how bad it looks out there. Not just from a technical perspective. But from the more important fundamental perspective.

Simply, the economic data is not good. The final straw for me was the hefty negative revisions to GDP plus an ISM Manufacturing survey that is teetering on a negative reading. This now has me contemplating a 50% likelihood for a recession on the horizon. That leaves 50% likelihood of Muddle Through Growth which would provide modest gains for stocks going forward. The problem is that far too many investors were expecting better than Muddle Through Growth for the 2nd half of the year. As those investors ratchet down their expectations, they will also decrease their risk appetite for stocks.

Barring some significant improvement in economic data (like Jobs or ISM Non-Manufacturing, both on tap this week) then I foresee a trip down to Dow 11,000 as an almost certain event. Hopefully the Muddle Through case does emerge victorious after that and there is no need for more pain. Unfortunately if the economic data continues to sour, then Dow 11,000 is not the last stop on our downward descent.

So yes, I do recommend that each of you consider a more defensive strategy at this time. As the new data unveils itself I will share updates on that strategy.

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Best,

Steve Reitmeister
Executive VP, Zacks Investment Research

Today's Top Stories: Wednesday- August 03, 2011

ZACKS RANK BUY STOCKS

• Aggressive Growth - Town Sports International (CLUB) blew away expectations with its second quarter results. Earnings per share came in at $0.16, a nickel better than expected, and giving them 9 surprises in the past 11 quarters. Read More...
   
• Growth & Income - DuPont (DD) sales rose 19% year-over-year to $10.493 billion, well ahead of the Zacks Consensus Estimate of $9.951 billion. Sales volume rose 2%. Sales in developing markets jumped 29%. Read More...
   
• Momentum - Crocs, Inc. (CROX) second-quarter revenue was up 29% from last year to $296 million. Earnings also looked good, coming in at 61 cents, 39% ahead of the Zacks Consensus Estimate. Read More...
   
• Value - Lithia Motors, Inc. (LAD) has a P/E ratio of 12. The low P/E ratio combined with the strong earnings growth results in a PEG ratio of just 0.5. A PEG under 1.0 usually indicates a company is undervalued. Read More...
   

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Best,

Steve Reitmeister
Executive VP, Zacks Investment Research

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