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Frankly, I am utterly confused by this market - first time in a long time I can say that. With all the behind the scenes socialism and hedge fund liquidation, not much of the action makes sense to me the past two weeks - technicals are not working correctly - when indexes break down, they hold up - when the dollar increases 1%, commodities drop 20%. No sense. What stunk 3 days ago is now worshiped; and vice versa. If there is a 5% rally from here I have no idea which group the hedge funds will flock to - will it be commodities? tech? financials? retail? or something else? Or does it matter, because they will rotate from one to another within the span of 48 hours.

Today of course, as predictable as it is, when last week's junk is this week's treasure the "commodities are back" trade has arrived. This is simply not an environment I thrive in as no trend lasts for more than a few days/or hours. So I am cutting back and raising more cash until I can see any sort of trend. I still have no change in my long term belief in commodities, especially agriculture, but until some pattern emerges that lasts more than the blink of an eye, I am going to simply reduce exposure to everything.

I try to invest on fundamentals and use technicals for timing entries/exits to some degree. Right now fundamentals mean nothing, and only quick in and out trading works for any sector. This is not an environment for me to thrive, so I am going to ratchet back for the time being. I feel like a person in a cave without a flashlight right now, so the best thing to do is to raise cash and reduce exposure everywhere - even in positions I favor the most on fundamentals.

Today I took off some:

  1. Kinross Gold (NYSE:KGC)
  2. Silver Wheaton (NYSE:SLW)
  3. Mosaic (NYSE:MOS)
  4. Potash (NYSE:POT)
  5. Powershares DB Agriculture Fund (NYSEARCA:DBA)
  6. Foster Wheeler (NASDAQ:FWLT)
  7. Mechel (NYSE:MTL)
  8. Arch Coal (NYSE:ACI)
  9. Peabody Energy (NYSE:BTU)

At this point, with (in my opinion) no rhyme or reason, I'd rather miss part of a move up and have more safety. This is the strangest market I've ever encountered and the level of strangeness since the Invisible Hand went from invisible to visible has increased by a degree of 10. Until fundamentals are rewarded once again, I'm going to pull back on risk to some degree - and try to remain hedged. Right now it "feels" like hedge fund liquidations make more difference in a stock price than any sort of fundamentals.

I don't believe in a "2nd half recovery" (although I am open to a double dip recession based on rebate checks) so it is hard for me to buy financials or retailers up 30% from their bottom last week, and the stocks I do believe in are sold off every time the dollar drop 0.0004%. So I don't have an easy path right now on the long side. If I see some better technical action in the stocks I like the best I will reapply some exposure...

Maybe my mood will change and some great awakening will awash over me (or my Magic 8 Ball will show me the way) in a few hours/days but for now I am simply perplexed and that's not a way you want to invest. Just being honest; I don't have the answers all the time - only 99.7% of the time. We are now in the other 0.3% of the time.

I've moved cash up to 21.5% at this point.

Disclosure: Long all names mentioned in fund; long Mosaic, Foster Wheeler, Mechel in personal account

Source: Why I Am Cutting Back on Commodities