High Exposure to Equities? Be Careful Out There

I just wanted to hop on tonight and issue a warning to anyone who has participated in this rally or has a high exposure to equities.

The price action Friday was absolutely frightening! I guess it was perfect timing considering Halloween was Saturday night. In my opinion it is time to lighten up considerably if you are on the long side.

As most of you know, this blog focuses more on the macro/long term outlook on the economy. I have remained consistently bearish because we have not fixed the problems that continue to plague the economy.

When I see nasty sell offs like we saw Friday, I feel compelled to at least warn everyone that in my opinion the market is not reflective of the economy. I really don't want to see anyone get hurt like many did in 2008. I remain convinced that we still haven't seen the final capitulation sell off that will finally end this nasty bull market.

I recently have rarely discussed trading because the market simply hasn't traded based on any fundamentals. I tend to run away from markets like this because it's easy to get slaughtered when the bottom drops out! 2000 ring a bell?

The problems remain the same: We are not doing the things that are needed to fix this economy over the long term. We continue to spend money we don't have in an attempt to stimulate the economy. This approach has been a colossal failure. Consumer spending which is 70% of our economy continues to contract as the economy tanks.

Making matters worse: Banks continue to refuse to lend, unemployment continues to soar, and the end of the housing collapse appears to be nowhere in sight.

Here is a perfect example: Fannie Mae announced today that their 90 day delinquency rate has tripled:

NEW YORK, Oct 30 (Reuters) - Fannie Mae (FNM), the largest provider of funding for U.S. home mortgages, said on Friday that delinquencies on loans it guarantees accelerated in August, while its mortgage investment portfolio grew in September from the previous month.

The delinquency rate on loans in its single-family guarantee business gained 0.28 percentage point to 4.45 percent in August, the most recent data available. A year earlier it was 1.57 percent.

Quick Take:

B-b-but Wall St said the recession was over! Yeah Riiiight. Are you all tired of continually being lied to yet? Only a fool would believe that a recovery is right around the corner.

By the way, we had 9 more bank failures Friday night. Here is the list in case you are worried about your deposits:

• North Houston Bank Houston TX
• Madisonville State Bank Madisonville TX
• Citizens National Bank Teague TX
• Park National Bank Chicago IL
• Pacific National Bank San Francisco CA
• California National Bank Los Angeles CA
• San Diego National Bank San Diego CA
• Community Bank of Lemont Lemont IL
• Bank USA, N.A. Phoenix AZ

The Bottom Line:

Things are bad and getting worse. We have now had two 90%+ down days on the S&P in the last three days. This is a sign of panic selling folks. We also broke through the key resistance level of 1042 on the S&P after closing at 1036.

This could possibly set us up for another sell-off on Monday. I am starting to believe that the market technicians may be back in control of this market. This market is folding like a tent after seeing a 50% retrace.

Many TA traders are now worried we may be seeing the beginning of the famed "cataclysmic wave C down". I am not sure we are there yet because the bulls become emboldened after this retrace. They may believe a 10% pullback will create a "buying opportunity". Yeak OK, Good luck with that one!

If wave C down has really arrived we could see a devastating collapse in the market. I have said since day one of this rally that there was no liquidity behind it. It was a government backed stimulus rally.

The stimulus is now done and there is no money left for round two. We are trillions in the hole and the dollar will get crushed if the government attempts to go on another spending binge.

If you have been long I think now might be the time to take some profits. Cash looks like the best option in the near term because there may be some buyers on this pullback.

I will be taking a long dated short position on the S&P via SPY PUTS on any rally because I believe this will be the bulls' last stand. Once the Fed stops buying MBS in March it's going to get really ugly.

One last point. Take note that gold and silver held up rather well despite the sell off. Does this mean the world is continuing to lose confidence in the dollar despite its recent rally? This is certainly something worth watching.

Disclosure: No new positions at the time of publication.

Comments

[Michael Clark:]

Markets tanking? Quite a bit of damage in the charts, technically.

seekingalpha.com/insta...

China looks better than most other indexes. Europe looks bad. Take profits in oil and coffee. Timber ETF seems to be topping also.

HGX, Housing Index, bad. Nikkei and Korea turned very negative.

Nov 01 07:09 AM

[Mad Hedge F...:]

drt ) If someone mentions the word “decoupling” to you, turn around and walk away, delete their number from your Blackberries and I-Phones, delink from their Facebook page, and block their Tweets and e-mails. Knowing this individual will be seriously injurious to your wealth. When the stock market rolls over, don’t expect to be able to hide anywhere, except in cash. The way all assets classes simultaneously piled into the “down” elevator at exactly the same time last week is proof of how highly correlated markets are these days. The causes are mega hedge funds with newly tightened risk controls and itchy trigger fingers, vast quantities of stock electro shocked by computer algorithms, and too recent memories of the bloodletting earlier this year. I have always viewed diversification as a great way to lose more money in varied places with more exotic sounding names. Remember the old saw that when America sneezes, the rest of the world catches cold? Now when the US says “katchoo”, the everyone else catches the H1N1 virus, AIDS, and the bubonic plague. The US has become on the canary in the coal mine that warns of deadlier global contagions. There is really only one trade these days. Is the world getting better, or not? Only the volatility will vary across instruments and countries. As much as I love China (FXI) and commodities for the long haul, when the US markets drop, I expect them to plummet twice as fast.

Nov 01 08:16 AM

[KFC007:]

THIS IS RUBBISH. THIS CORRECTION CAME JUST AS EXPECTED. ANOTHER ONE OF SIMILAR MAGNITUDE IS LIKELY. IT IS HEALTHY CORRECTION AND SIGN OF RECOVERY TAKING PLACE. OVERALL TREND IS POSITIVE AND SHOWS START OF THE NEXT BULL MARKET.

Nov 01 09:24 AM

[Snitzer:]

If wave c down (whatever that is) takes us down then we go down, and no matter what we all go down, and then it's time to make nice to all the guns and biscuit hoarders out there and see if they need help planting cucumbers or something. But until then, when the market drops then it's due diligence time whilst swooping out the sweet spots.

Nov 01 01:48 PM

[CLH:]

I disagree with anyone who missed a 60% rally. The fundamentals were wrong? Maybe you can't see well. Last year was a total panic as everyone left the market at the exact bottom making and incredible opportunity for the few investors who bought the bottom. What now? I have been cutting back as the easy money seems to be over. Wake up bears there are nice rally's in bear markets.

Nov 01 02:39 PM

[Frugal Joe:]

Bill Gross said exactly what this author says here. No fundamentals and there will be a correction.

The real question is, "How big a correction" not if a correction.

As for China, pretty much the same despite their bogus numbers. Most of their metal factories are idle and all that copper, aluminum and steel they bought is piled up on the dock ir in warehouses.

Both there market rose due to "hot money" i.e., money from the stimulus directly into the markets with out improving basic fundamental problems.

Check out Steiglitz's Bloomberg article today, Bill Gross interview last week and John Galbraith's interview with Bill Moyers. They all say the same thing..nothing has changes and it anything, it's worse since we increased the deficit billions of dollars.

GL!

Nov 01 05:09 PM

[The Recusant:]

KFC007 wrote: "IT IS HEALTHY CORRECTION AND SIGN OF RECOVERY TAKING PLACE."

The stock market is not a living entity out there somewhere but merely the sentiment and confidence of the people around the world. And that can change on a dime. It is a mistake to envision the market as an independent organism that is "healthy" or "sick" or in a "recovery" or even a "correction". Applying these terms to the market for convenience somehow distracts us from perceiving the basis for the movements in the market, the attitudes of the investors.

Nov 01 05:45 PM

[TheHague:]

I must say that since I have been trading this is the most hysterical I have seen from the bears! Rush must be writing this article incognito hoping that Armageddon happens just so he can be right and the rest of the world gets trashed! Rush says after the end of time! "Oh well too bad they did not listen to me! If they had we would be in better shape!" Then he turns to his producer and says "lets run another add"! My question is why run another ad? No one will have any money to buy your sponsors products because you were correct! Remember? Idiots, quit poisoning the world with your spew! Try being productive in a positive way instead of trying to be "First" with the EOW predictions! If you say a lie long enough and loud enough eventually it will become truth! Hitler loved that idea!

Try speaking something positive instead of the negative all the time! Just maybe it will have a good effect instead of the negative one you all seem to want!

I guess it is more important to be right instead of helpful!

Here's to good trading! Watch your own back and you will be fine!

Nov 01 10:41 PM

[TheHague:]

Your # just got deleted from my book!


On Nov 01 08:16 AM Mad Hedge Fund Trader wrote:

> drt ) If someone mentions the word “decoupling” to you, turn around
> and walk away, delete their number from your Blackberries and I-Phones,
> delink from their Facebook page, and block their Tweets and e-mails.
> Knowing this individual will be seriously injurious to your wealth.
> When the stock market rolls over, don’t expect to be able to hide
> anywhere, except in cash. The way all assets classes simultaneously
> piled into the “down” elevator at exactly the same time last week
> is proof of how highly correlated markets are these days. The causes
> are mega hedge funds with newly tightened risk controls and itchy
> trigger fingers, vast quantities of stock electro shocked by computer
> algorithms, and too recent memories of the bloodletting earlier this
> year. I have always viewed diversification as a great way to lose
> more money in varied places with more exotic sounding names. Remember
> the old saw that when America sneezes, the rest of the world catches
> cold? Now when the US says “katchoo”, the everyone else catches the
> H1N1 virus, AIDS, and the bubonic plague. The US has become on the
> canary in the coal mine that warns of deadlier global contagions.
> There is really only one trade these days. Is the world getting better,
> or not? Only the volatility will vary across instruments and countries.
> As much as I love China (FXI) and commodities for the long haul,
> when the US markets drop, I expect them to plummet twice as fast.

Nov 01 10:44 PM

[The Housing...:]

Bobby

Doug Kass for the record is now short after this bear market rally.

GL

Nov 05 01:59 AM

[bartpr:]

two points. bull markets do not end with the 10 year and 2 yrs treasury spread at a max out. the end comes with the yield inverted. short greater than long.

the leading indicators are rising. this would be the shortest bull market in history based on the short time the indicator has been rising. wait for it top start a top.

the market is overpriced today. a correction will cure that. but a crash. no excesses yet. when excesses start developing then watch out. also, the next phase in stimulus has to start soon. infrastructure spending is coming.

Nov 25 08:19 AM