The reason for my decision to stay mostly out of the market since late July is that the market is currently in an unstable position, due to macro events dictating the markets over economic and company fundamentals. Equities of any sector, country, valuation, or economic quality are all moving the same way to due to panic related to global macroeconomic concerns. Issues such as the probable default of Greece, a European banking crisis, and the continual weakening of American economic data put investors in an extremely dangerous position. Macro events and politics hijacking the market has spiked up volatility to near 2008 levels, and has established a bearish trend for equities.
I expect this macro-driven bear market to continue until the end of October. Economic indicators such as the newest estimates in the US for the unemployment rate, jobless claims, inflation, and manufacturing outputs, GDP revisions for the second quarter, and consumer confidence will all be released in the next three weeks. International economies in Europe, Japan, Australia and Canada (which is on the verge of a housing bust of its own) will also release weak economic data that will drive down the markers. I expect that these number will also disappoint the market, causing a panic selling each time. Underperforming retail sales, which were released today, and Best Buy's weak earnings yesterday are foreshadows of the confirmation of a double-dip recession.
The Fed's meeting on September 21 is also critical to the market. Many traders are expecting a QE3 or other sort of monetary stimulus to save the day again, like last year. However, this time the threat of deflation is no longer present to justify quantitative easing, as the current inflation rate is already at 3.6% for the year, and oil is near $90 per barrel. All QE2 did was temporarily support the markets while causing inflation to rise and commodity prices to skyrocket. More easing will just put more pressure on food and energy prices and further stretch an already broke American consumer base. As a result, QE3 is unlikely to happen, but if it does, I will be buying aggressively buying agricultural commodities, industrial metals, and oil to join my current positions in gold platinum.
October is critical for the market ,as this is the point where the next Greek debt issue occurs, earnings releases for the first expected weak quarter of the economy, and the GDP numbers are released for the third quarter in the US. With 1-year Greek bond yields at 138% and the backlash of Germany towards a Greek bailout, the market has priced in a default of Greece, which I expect to happen as well. This event has been priced into the bond markets, but not entirely in the equities markets, which wait for confirmation of a event (like the expectation of S&P's downgrade in late July) to actually finish its reaction.
With Best Buy leading the way, this earnings season may be one of disappointment. This quarter's reports will be key to see which companies and sectors are the best shape to withstand another slowdown. I expect negative earnings surprises to generate significant sell-offs across the board. The release of the GDP growth rate for the third quarter on the 28th of October is the final break point of whether America slips back into recession, or if this so-called recovery is substantial.
Overall, due to all the economic uncertainty and critical macro events and releases compacted into the next six weeks, I remain cautious about re-entering the market to buy/short any equities, or non-precious-metals commodities. Once the dust settles by Halloween, investors will have a better base of economic data on which to make sound investing decisions. Until then I plan on largely sitting out of the market, and then capitalizing on what opportunities the current market tumult will create.
Disclosure: I am long GLD, PPLT.
Additional disclosure: I am short the SPY.