Yes, it's worrisome to be a short-term bear while so many in the financial media are calling for a pullback. Hard to be happy when you're so closely aligned with the consensus.
That said, we see little reason to retreat from our bearish stance on equities. Sure, the VIX could drop to zero and bullish investor sentiment could rise to 100%. Sure, there could be three calls trading for every put on the CBOE. And, yes, it might all persist for who knows? Forever!
That would surely make it a 'this time it's different' market.
And perhaps it is. After all, there's no shortage of unprecedented action being taken in the financial world. No shortage of government involvement in markets. No shortage of devalued currencies floating through the firmament. And certainly no dearth of unpayable debt – and leveraged derivatives being traded on the same.
Is this time really different?
Investors of a less cogitative bent know that the answer to that question is immaterial.
The real issue facing us now is how much risk to load up with while we try to figure out the investment future. And figuring out where that risk lies is also no mean feat. That's why spreading risk and investing for all foreseeable contingencies is imperative in our current reality.
We're now entering the equivalent of investment outer-space, and know one quite knows if the climate there is conducive to wealth preservation. As far as we know, there may be nothing even approaching oxygen in that vacuum.
So let's begin with a review of some of our recent trades before moving on to some general portfolio building recommendations.
1. Let's start with our last trade recommendation of 2010, for which we offered readers two options. The first was a straight purchase of the Direxion Daily Large Cap Bear 3X ETF (NYSE:BGZ) at $8.81 with a stop at $8.65. Anyone opting for that trade was stopped out for a loss of 1.8% the following week. (It pays to place tight stops with these sickly leveraged animals.)
For those who opted for CALL options on BGZ stock (we recommended the February 9 strike), we're down, but not fazed. We say hold on to these (now trading $0.15 to $0.20), because the triple leverage could turn this play around in a jif. We'll keep you updated.
2. Our penultimate trade recommendation was a zero premium number that matched SLV against the Barclay's long bond ETF, TLT. Last week we reported that the trade was in the black $50 per pair traded, with more to come. The spread has now widened to $70 per pair traded, and we're more convinced than ever of the momentum behind the move. A look at the charts is instructive.
Here's the last six month's truck in the iShares Silver Trust ETF (NYSE:SLV):
There's lots to say about this chart.
· First, the bullish channel has been broken on the downside – not a good sign. Even those that argue the channel was broken twice on the upside (see above, red) and just snapped back to discipline before continuing the move higher, the current move has also broken below the short term moving average as well, with that indicator now apparently rolling over (in blue, above).
· Second, the very altitude to which SLV has clambered above its longer term moving averages is also problematic, and, we're told, has even occasioned bouts of acrophobia in even the most die-hard of silver-loving deviants.
· Couple this with Relative Strength and MACD weakness and several distinct bouts of distribution (all depicted above) and you have the very picture of near-term weakness.
[Incidentally, since the beginning of November there have been twelve clear distribution days and only six accumulation days, the latter of which were dwarfed in scale by the former.]
As for the other side of the trade, the long bond ETF – TLT – here's the chart:
The long bond's mid-December lows have held, while the RSI and MACD indicators are developing constructive, bullish divergences, often indicative of a turn in trend (see in red, chart bottom).
While the downtrend that began in August is still in place, no question, it looks tired to us. A couple of stabs at the short term moving averages have born no fruit.
Maybe the third time will be a charm?
Bottom Line?
Hold on if you can bear the urge to cash in now. But if you swung a big one on the trade– say, 100 contracts per side – we say close out and go home with your 7K.
And take the following to heart, too...
Much of this year's investment success or failure will be predicated on what happens beyond the shores of America. Specifically, the daily saga of the European sovereign debt mutants, as well as rising interest rates in the developing world, where inflation is beginning to gallop in important markets like India and China – both of whom have had struggling markets of late.
The Indian central bank has already raised short term interest rates seven times over the past year and is still contending with better than 8% inflation. The Chinese have ratcheted up their short term lending rates four times in just three months and are currently showing inflation rates persisting above 5%.
It's important to note that those two countries have some of the most robust economic growth on the planet, so expecting similar action at home is unlikely. There will be 2% - 3% growth domestically in 2011 with a 4% surprise possible should the labor market pick up toward year's end. But the current American penchant to save, as evidenced in stunning drops in both bank lending rates and consumer credit levels, means we're unlikely to see any meaningful spikes in the CPI.
Instead, the global trends of more stable economic growth, higher interest rates and fiscal austerity will likely dampen investors' desire for riskier assets, viz. precious metals, energy and cattle futures. Now is not the time to go on a futures buying bender.
The following is just one, tiny bit of chart-arcana pointing to further commodity weakness:
China National Petroleum Corp reported last week that crude imports could fall by as much as 23% this year.
We say scale back on your precious metals and energy exposure to base levels, that is, between 5% and 15% PM's, and no more than 5% and 10% energy, depending upon who you are, what your lot in life is, and how well you sleep at night.
Traditional value stocks, preferreds and high yield bonds will likely be the year's winners. But this is a more complex topic – one we'll address in more depth in the next issue of Wall Street Elite. In the meanwhile,
Wall Street Elite recommends reducing broad exposure to commodities to base levels for the near term.
With kind regards,
Hugh L. O'Haynew,
Analyst, Oakshire Financial
