I follow a lot of commentary about the "general Markets" because when they are slipping people frown away from higher risk investments...below is an except from a newsletter I subscribe to from one of the most accurate market readers around and the best I have followed over the last 12 years....
"It looks to me that the stock market will be testing long-term support for the major indexes at the 200-day moving averages. For the S&P 500 index this support is at 1043, which most probably will be tested by the end of this month.
What makes this market dangerous is that the Fed must drive commodity prices down as fast as possible before they have chance to rise during the spring and summer months. This is why the money supply is plunging which is helping to cause stock prices to fall. As the technical underpinnings continue to weaken, the risk for a sharp decline in stock prices is all the more real.
Caution: We Are Now About to Enter the Bust Cycle
President Barack Obama said in his State of the Union address that the “worst of the economic storm has passed, but the devastation remains.” What the president didn’t say is that financial storms happen with regularity in a secular bear market, as we’ve seen over the past decade.
Economic growth is not linear; it’s cyclical in nature and there are economic cycles. Recoveries die and new economic storms follow, in boom/bust cycles. This recovery is much different than past recoveries in that the consumer is not really participating.
More than 70% of the gross domestic product (GDP) in previous recoveries has come from consumer spending. But this time it’s different, as we are surely not seeing that happen now.
In the 4Q09 GDP, consumer spending contracted from the previous quarter. In spite of that contraction, GDP rose sharply because the government spent money like a drunken sailor on payday. There was a sharp increase in business inventories, adding significantly to the GDP number, which was the result of businesses anticipating an increase in demand by consumers.
Last, the Fed’s strategy of undercutting the dollar gives a boost to U.S. exports, which also pumps up the GDP. That trick is really a game of smoke and mirrors, because pushing down the dollar does nothing to whet the appetite for goods and services by the consumer.
As long as unemployment hovers around 10%, consumer demand for goods and services will be anemic. Without consumer demand, businesses will cease stockpiling inventory and eventually cut back, causing a hit to GDP.
Keep your eye on a rising dollar. Our GDP is now much stronger than Europe’s GDP. But as the U.S. dollar strengthens, our exports will no longer be attractive to European markets, and that, too, will cause a further hit to GDP. Government spending, which has directly given money to banks so they can support the stock market, is coming to an end. As President Obama wants the banks to pay for their past misdeeds, investment banks are starting to sell stocks into rising markets and trying to further add liquidity to their balance sheets.
All the economic reports I’m reading lead me to one conclusion: we are now about to enter the bust cycle. And that is why I am so focused on risk.
R-I-S-K is not a dirty four-letter word
Risk is defined as the effect of uncertainty on objectives. My objective is to build wealth and to keep it. In order to do that, we need a plan to manage risk so that we can protect ourselves from the coming financial storm and try to profit from it. Risk management can be considered the identification, assessment, and prioritization of risks followed by the coordinated application to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.
If you are blind to these risks, you can’t manage them, and this is why greed is so damaging – because we ignore risks and the laws of probability, and that’s when you start to really lose money. The first step is to identify risk, and in addition to the risk I see in the stock market, the energy market is also bubbling over with potential pitfalls.
At the end of December, a number of risk factors in my technical models were flashing. They were indicating that the month of January was going to be a tough month for energy. In the early part of January, crude oil prices traded at $84 a barrel. If we have a repeat of surging oil prices this coming spring, it will really destroy our economy. It will act as a weight, just as the housing market dealt a blow to the economy in 2008.
When crude oil prices reached $84 a barrel in January, a chain of events was set in motion. It started with the Fed talking up the dollar, followed by a series of speeches to the markets that interest rates might need to be raised sooner rather than later. This had the effect of driving down commodity prices. In addition, the Fed sent a letter to the banking community stressing interest rate risk management in the event the Fed is forced to raise interest rates in the near future.
In late December, the Fed began aggressively cutting the money supply in order to undercut oil prices. This tells me that corporate earnings for the first quarter of 2010 will not look pretty. As a consequence, the U.S. dollar reversed its decline and is now trending higher. Crude oil prices have also retreated more than $10 a barrel since trading at $84 in the beginning of the year. Gold is down more than $120 an ounce, and the S&P 500 is off close to 6.5% from its 2010 high.
China is keenly aware of the risks of soaring commodity prices and the impact of increases on food. The government has informed Chinese banks that it wants them to restrict lending in the next few months. The iShares MSCI Emerging Markets Index (EEM) fell 11.2% in 13 trading days in January.
I have been sharing with you since last September these risks should crude oil prices begin to decline. If crude oil were allowed to continue to rise, the table would be set for a very possible double-dip recession. That is why the president’s economic team is burning the midnight oil while trying to find a way out of this mess.
As a sector, the financial sector is lagging most sectors and is clearly breaking down and testing its 200-day moving averages. A breach below this long-term support could lead us into the next bust cycle.
Be Prepared: The Technical Indicators Are Deteriorating
At the end of December, a number of technical risks presented themselves. The charts showed that bullish sentiment of investment advisory newsletters had reached extreme bullish levels. As a contrary indicator, this was a clear warning signal that a sharp correction was soon to follow. Whenever the herd is on one side of the market, the predators begin to sell into the bullish enthusiasm.
Over the past few weeks, I have pointed out the MACD (moving averages convergence divergence) indicators were maxed out and beginning to roll over. We see this on both an intermediate-term and a long-term basis. The monthly stochastic is extremely overbought, suggesting market risk is extremely high right now.
In January, these indicators continued to deteriorate, with all the major indexes now trending below their 50-day moving averages. As long as the 50-day moving averages are descending, market risk is increasing as the technical underpinnings of the market break down. This was not a great way to start the year.
We have to accept the situation – that it is the Fed’s and the government’s job to spin the economy in the most favorable light possible and continue to bang the gong and tell us that the economy is on the road to recovery.
It is something we all want, but keep this in the back of your mind: the government is a master at psychology and motivation, and in an economy like this, psychology is a big part of getting people to feel better about things.
Yet, the inescapable fact is, we have seen an enormous loss of wealth over the past decade and especially the past couple of years, and regardless of the spin, this wealth is not replaceable. People have considerably less wealth, and their access to borrowing has been cut off. That is one of the main reasons why big banks are charging 30% for credit cards loans and have ceased lending money. They have a bird’s-eye view of the economy and see that it’s in dire straits regardless of what the GDP numbers are.
For those of you who believe cash is trash, I strongly disagree. I would rather make nothing on money than lose 10% of it in a bad investment. My goal is to minimize, monitor, and control the probability and/or impact of unfortunate events damaging our portfolios. If I do that successfully, at the start of the next boom cycle we will have cash to take advantage of the bargains the market will give us.
From my perspective, shorting the stock market should only be considered in a bear market, and the technical conditions have to warrant such a situation. My technical indicators are telling me that we are not in a bear market just yet. But as soon as my indicators give me the signal, there are several stocks and ETFs that are ripe to be shorted.
Are You Prepared for the Bear Market Ahead?
It’s imperative that you’re prepared for a moderate – or even significant – market pull-back that could begin at any time.
The technical indicators have continued to deteriorate over the first six weeks of 2010…and there is significant risk in the market right now."