The US equity markets remain in correction, and the the surprise big
trading loss at JP Morgan (NYSE: JPM) reported on Friday and the
resulting Fitch downgrade on Friday night has sent a new shiver into the
The lowering of reserves in China this weekend may send a temporary
stimulus into the Asian markets, but this also gives strength to the US
dollar at a time when US growth is slowing.
Continued unrest in Europe, including new demonstrations in key European
cities this weekend puts the European economy and its currency under
In the short term, it appears that the US dollar will continue its new
move higher this upcoming week, and in this day and age, a stronger
dollar actually serves to hobble the US economy due to its large
deficits and debt situations. It’s the wrong medicine for a reserve
currency that represents a country with huge imbalances in trade and
debt with the rest of the world as well as debt within its own borders.
In short, ACE suggests staying mostly to cash and other liquid
investments. If you’re invested in stocks, stick with high quality
stocks, particularly ones that have positive cash flow and pay dividends
and have relatively low PE ratios. ACE does believe that a bounce may
occur in the markets later this week as the Facebook IPO approaches.
However, the bounce may be short-lived.
ACE also suggests that this is a good time to accumulate new positions
in gold and silver (GLD, SLV and CEF come to mind as well as physical
coins) even though the precious metals are in a precipitous fall at this
time– ACE believes this is a temporary phenomenon and that 12 to 24
months from now, the precious metals may well double or triple in price
from today’s levels, relative to the US dollar.
ACE also suggests that starting long-term positions in the TBT
(Proshares Lehman Ultra Short Treasury Fund 20+ Years) is a wise
strategy now that bond yields are depressed and continue to fall. ACE
has invested in 2013 LEAPS, and may also choose to buy 2014 LEAPS in the
coming days as the price of TBT continues to bottom. The 2014 LEAPS are
the wiser strategy, but the 2013 LEAPS could deliver huge gains too if
the FED resorts to QE3 later this year or if Congress and the White
House choose to extend many of the Bush tax cuts which expire late this
year, in an attempt to goose the economy–with an election in November,
anything is possible. A simple investment in the TBT shares would make
sense for those who choose not to play the options.
So far, from a technical perspective, the pullback had been constructive
in that the key long term Moving Average lines on the major indices
remained supportive until late this week. Now, the SPY chart shows a perceptible negative direction in the benchmark 50 day moving average with the price trapped underneath. The Dow Industrials chart shows its key 65-day moving average line has flattened, which is generally a slightly negative situation. Further, a lot of destruction of growth
stock charts has occurred in recent weeks, and so one must remain
vigilant and conservative in this environment. Expect a bounce in the markets as the Facebook IPO approaches, but also understand that the bounce may be one final chance to close out profitable trades. ACE will continue to monitor the situation in the coming days for any change in forecast.
FOLLOW-UP: The market sold off in dramatic fashion, though it did find a weak bounce near the Facebook IPO launch date. Gold did manage its single biggest daily gain shortly after this blog posted. Nice calls, Ace! Editor.