The stock market fell almost 800 points last week. And interestingly, gold and Treasuries also fell on Thursday, a day when the market plunged over 500 points. Seems like everybody is moving to cash. I just looked at Yahoo and came across the harsh drought in Texas and the Midwest and wondered if this could be a repeat of the Great Depression with people running to cash, the stock market tanking and the dust bowl in the Midwest. I certainly hope not.
Although I don’t like to give bearish predictions because I know stocks will ultimately go up, I must accept the market cycles. The path to higher stocks may take years, but some investors don’t have years. And for traders ... well, they trade. So I am saying now and thus repeating Jim Cramer’s infamous call, that the stock market is likely going lower. However, I will not say to stay out of the markets for five years. Instead, I advise shifting into alternative investments or safe havens in what looks like a bear market. How much could the market fall? I don’t know, but I read about 20%. It has already fallen about 10% and a 30% pullback would be a healthy correction. Note that the market could take wild swings, so if you can’t handle the risk, it might be best to stay on the sidelines and jump in when the tide turns.
With the downgrade of the country’s debt from AAA to AA+ by credit rating agency S&P, the market is almost guaranteed to fall. And other credit rating agencies Moody’s and Fitch say they are studying to see if they should also downgrade the country’s debt. The only good news, the Treasury says S&P made a $2 trillion error.
So the market may or may not fall. The bulls' case is shown by the green line on the graph of the S&P 500 shown below. The bears' case is shown by the red lines, as mentioned in Simon Maierhofer’s article.
The technicals for the S&P 500 also give both bearish and bullish signals. Technically, we are at oversold levels. But there is also what appears to be a bearish cross in the moving averages.
This leads me to safe haven number one: the VOLATILITY S&P 500 (^VIX). Whether or not the market does fall, volatility will very much likely increase. At a current price of $32, the first stop would be in the $40s reached in 2010. Second stop would be in the $80s reached during the credit crisis.
GLD has been on a tear and surprisingly was almost linear since 2005, just like the price of gold since 2005. Volume has remained strong. And if the dollar falls due to the downgrade, gold and GLD should rise. Further, there is still speculation that the Fed will have to initiate QE3, which will strength gold more.
SLV took a hit in the credit crisis and thus, is more risky than investing in GLD.
One could also buy gold or silver stocks, but if the market falls, most stocks will fall with it, just like what happened in 2008 credit crash. The best gold stock I can think of is Randgold Resources (GOLD). It has outperformed peers IAMGOLD (IAG), Goldcorp (GG), Barrick Gold (ABX). In the silver stocks, I recommend First Majestic Silver (AG) and Silver Wheaton (SLW).
(Click to enlarge)
Note that all these stocks have fallen during the credit crisis.
There is always the Bear ETFs, such as Direxion Daily Financial Bear 3X Shares (FAZ), Direxion Daily Small Cap Bear 3X Shares (TZA) and FactorShares 2X: Gold Bull/S&P500 Bear (FSG). These are bets that stocks will fall. So if you are wrong, then you could lose your shirt.
Other riskier investments would be the Japanese Yen, the Canadian Dollar, the Australian Dollar and the Chinese Yuan. However, note that the Yuan will not fluctuate much against the Dollar, but will slowly rise against it. One could buy these funds, CurrencyShares Japanese Yen Trust (FXY), CurrencyShares Canadian Dollar Trust (FXC), CurrencyShares Australian Dollar Trust (FXA) and WisdomTree Dreyfus Chinese Yuan (CYB), but I recommend just buying the currency directly.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.