Market Pullback Gathers Momentum: What to Do?

Risk aversion has re-entered the investment equation with risky assets such as equities and commodities bearing the brunt of the selling orders, while gold bullion, government bonds, the U.S. dollar and the yen are attracting safe-haven money.

The global stock market pullback seems to be gathering momentum with three markets on my radar screen now trading below their 50-day moving averages, indicating a reversal of the secondary trend. These markets are China, Hong Kong and Chile, with most others uncomfortably close to this intermediate support level (see table below). I am of the opinion that more markets will fall below the 50-day lines and that we will at least see some degree of reversion to the key 200-day moving averages (often used to distinguish between primary bull and bear markets). The table provides the key levels, as well as the declines since the recent highs.

Click here or on the table below for a larger image.

For some ideas regarding the short-term direction of the Nasdaq Composite Index, Adam Hewison’s short technical analysis (INO.com) provides valuable insight. Click here to access the presentation.

It was interesting to catch up on the views of Albert Edwards, global strategist of Société Générale, in yesterday’s Financial Times. Donning his familiar bearish colors, he said:

Once again, equity participants are missing the big picture. For despite clear signs from the business surveys of some sort of second half recovery, firm evidence is emerging that the global economy is sliding towards a full-blown deflationary episode once this recovery falters.

We heartily concur with GMO’s Jeremy Grantham who remarked recently that after 20 years of more or less permanent overvaluation of U.S. equities, we saw just five months of under-pricing through the March trough. Do bursting global equity valuation bubbles really end like this? Of course they don’t.

Doug Kass of Seabreeze Partners and a columnist at TheStreet.com, who accurately called the March bottom, is also now outright bearish, as discussed here with CNBC’s Larry Kudlow.

Source: CNBC, September 1, 2009.

According to Kass (via TheStreet.com), one should now do the following seven things:

1. Build up cash reserves by reducing exposure to equities and credit.

2. Upgrade one’s portfolio to quality. Eliminate secondary and tertiary stocks that have benefited the most from the second derivative and statistical economic recovery.

3. Longs: Concentrate on market-share-gaining multinationals that are self-financing, that do not rely on the kindness of strangers to fund growth and that will benefit from a lower U.S. dollar.

4. Shorts: Consider shorting stocks that are levered to the capital markets and the consumer - for instance, brokers, asset managers and retail-related stocks.

5. Err on the side of conservatism over the balance of the year, and recognize that, at times, it’s more important to place a priority on limiting the potential loss on capital above the possibility of sacrificing lost investment/trading opportunities.

6. Reread the books written by the old masters of trading, investing and even poker in order to gain a greater investment perspective. One should always try to learn more, and one can from George Soros, Jim Cramer, Barton Biggs, Jim Grant, Charles Mackay, Rich Bernstein, Doyle Brunson and others who have written of their experiences.

7. Gain or regain a better balance in one’s life. Whether it’s gardening, exercising, vacationing, going to sporting events or reading, it’s important to clear one’s head, step back a bit and gain a better perspective — it’s healthy food for the body and mind.

Kass concludes:

I believe that, similar to back in March 2009, we may now be at a fulcrum point in the U.S. stock market. It is, again, time for a variant market view. My advice is to reduce your risk profile by raising cash, upgrading the quality of your trading/investing portfolio, chill out a bit, read some books and words of advice from the best there is/was and, generally, to err on the side of conservatism in the months ahead.

Be cautious out there!

Comments

[pdtor]

Strange that gold and $US,seen as safe at these times.I do agree, name of the game for the next 3-6 months is presevation of capital. I like the idea of rereading books to help you through difficult times. I recommend 2 oldies and goodies. 1) The Battle for Investment Survival, by Gearal Loeb, written a long time ago but still relavant in many ways. 2) Investment Psycology by Martin Pring.......shows us that this is not the first time manias and bubbles happen, how to deal and recognise them.

Happy Capitalism

2009 Sep 03 08:38 AM

[Mad Hedge Fund Trader]

fgj. Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor. The bulk of the trading volume is now accounted for by worthless zombie stocks like Citibank (C), (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and not consumption. Puzzled CEO’s of every stripe are seeing no recovery in their businesses whatsoever. But bears who have sold into the summer rally have gotten a severe spanking. We are left with momentum players and chartists to grind out ever diminishing returns. I have used the big up days to sell short dated out of the money calls in small size which, mercifully, expired worthless, sometimes just by pennies. That’s because I keep my favorite quote from John Maynard Keynes pasted to my monitor; “Markets can remain irrational longer than you can remain liquid.” Better to wait for a more convincing break on the charts before piling on those shorts again.

2009 Sep 03 10:28 AM

[The Recusant]

Deans said in the interview: "Confidence is improving...Revenue trends have actually been better than expected...really positive earning surprises...Cost cutting has been significant." Superficial optimism abounds. Those "cost-cut" unemployed are somehow supposed to run out and buy, buy, buy to support the retail trade and boost the economy? She's in the dark. Buy gold.

2009 Sep 03 10:45 PM

[YoYoMama]

You need to stop copy/pasting your answers. It's getting old.

On Sep 03 10:28 AM Mad Hedge Fund Trader wrote:

> fgj. Never have I seen such a disconnect between the markets and
> the real economy. All of a sudden the world has gotten expensive.
> Stock prices have been levitated by vapor. The bulk of the trading
> volume is now accounted for by worthless zombie stocks like Citibank
> (seekingalpha.com/symbol/c), (seekingalpha.com/symbo...),
> Fannie Mae (seekingalpha.com/symbo...), and Freddie Mac
> (seekingalpha.com/symbo...). Cost cutting, not sales growth,
> has artificially boosted earnings above subterranean forecasts. Commodity
> prices have soared because of stockpiling and not consumption. Puzzled
> CEO’s of every stripe are seeing no recovery in their businesses
> whatsoever. But bears who have sold into the summer rally have gotten
> a severe spanking. We are left with momentum players and chartists
> to grind out ever diminishing returns. I have used the big up days
> to sell short dated out of the money calls in small size which, mercifully,
> expired worthless, sometimes just by pennies. That’s because I keep
> my favorite quote from John Maynard Keynes pasted to my monitor;
> “Markets can remain irrational longer than you can remain liquid.”
> Better to wait for a more convincing break on the charts before piling
> on those shorts again.

2009 Sep 04 09:24 AM

[PG13_Funnys]

Most Incumbent Politicians have & still continue to Bankrupt US with UnAccountable Failed Monopoly [The USA Government].
They ARE the slimy ex-Lawyers & THE failed Managers of OUR -
antiquated, UnAccountable, out-of-Control BROKE Government.

"We THE People" are the Government ! NOT Them !

PHONEY Tarp w PORK BARREL projects
with NEW GOVERMENT-RUN Medical expansion - - -
[ I thought we HAD a Dept. of Health ??? ]

STOP THE BULLSHIT !
Natural Gas prices are at an ALL time Low.
Truck / Car [$600.] Conversion is CHEAP ! ! !
[ Cash for CLUNKERS was $4000 ??? What BULLSHIT is happening ?! ]
The USA has 90% of WORLDs Natural Gas !
Why are OIL prices ALLOWED TO BE Shorted/ETF “traded”
and KEPT HIGH by Wall Street ?!?
"THEY" ARE ! PREVENTING our Independence !

2009 Sep 04 09:34 AM

[Albertarocks]

Alison Deans says we might have another year of "really great earning results". She also says that all the money lost in the stock markets during the recent plunge, has been "earned back" and therefore the consumer will return to his spending habits. Whatever money she's talking about being "earned back" was not earned back. It was stolen away from the original owners. If she really believes the consumer is right back in the relatively good position he was before the market plunged, then she probably thinks "manual labor" is the name of a Mexican jockey. What's wrong with her head?


I think I put a little more faith in what Mr. Kass has to say. That man uses logic and I understand logic. What I don't understand is how that woman deserves air time. This is what's wrong with the system... the media, period. At least Kudlow offered us two different perspectives, one from a logical man and the other from a gerbil.

2009 Sep 04 05:25 PM

[Old Trader]

"At least Kudlow offered us two different perspectives, one from a logical man and the other from a gerbil."

BOLMAO!!!!!

2009 Sep 04 09:17 PM