As far as I’m concerned, Friday’s action left no doubt that we have something at least as nasty as last May on our hands. That the general market recovered nicely from that episode and went on to new highs is actually a negative as far as sentiment and complacency is concerned. The astounding high volumes seen in the past week have all the hallmarks of institutional money exiting a crowded trade. Some out there are calling for a major bear market and worse. While I understand (and concur, to a degree) their macro perspective, I’m adopting the majority view that this correction will not be that ugly. I find this a beneficial posture that counters my natural bearish instincts which caused me to miss the rebound since last July.
For the first time, I’m taking concrete steps to reduce my equity exposure in my asset allocation accounts. I know it runs counter to the principle of passive investing but right now capital preservation trumps all other concerns. I have already switched a number of ETFs to John Hussman’s hedged equity fund HSGFX. In addition, I’m in the process of moving most of the 401(k) accounts into US government bond and stable value funds.
The majority of my recent trades have gone well. I’m actually expecting a short bounce early next week lasting a day to a day and a half. All my short positions, puts and inverse ETFs were closed on Thursday and Friday, I even went long a few calls on the Q’s. The indices sold off with some vigor at the end of Friday which caught me by surprise. It appears that traders are closing their positions for the weekend, quite a change in sentiment. If were not for the red ink currently showing in Asian markets (as of 10 pm EST), I would say a broad based rally on Monday was very likely.
Along with my other short positions I closed out my GDX puts Friday afternoon as gold dropped a further $22 to $640 an ounce. I also picked up more CEF. It’s obvious now that we are still in the midst of a wave 2 of III correction. A likely end is somewhere around May which would make wave 2 of III equal to 1 of III (May 2005 – May 2006) in time. That said, since as early as last September, I have transitioned into a dip-buying mode as far as PMs are concerned. I’ll continue to trade a small portion to reduce volatility while my core holdings only grow through time.
By coincidence I made a reference to Martin Armstrong’s article on business cycles on the 26th. The article was also reprinted at ContraHour. Note that Archive.org contains other Armstrong articles as well as the now-defunct website for the Armstrong defense fund. In another article dated Novermber 1999, Armstrong predicted that gold would peak in 2007 with the Economic Confidence model turning point. These words carry a lot of weight in view of his pin-point accuracy with the latest turning point. However, one might reasonably question whether the peak in business confidence should coincide with a peak in gold which is the anchor in a sea of fiat currencies. Boy, wouldn’t I want to pick his brains right this instant! For now, I’m staying with my PM positions but keeping my mind open.
That’s it for now. Good luck and be safe!