This August Rally Is Living On Borrowed Time

by: Bret Jensen

It has been one heck of a three day rally. However as we get close to new highs for the year, I think it is time to take some money off the table and even put on some new shorts on for more aggressive investors. This rally feels like a "melt up" on low volume that lacks a solid foundation. For my own account, I took my 30% plus one day gain on Fossil (FOSL) and instituted a new short on LinkenIn (LNKD) yesterday as the stock was not participating in Tuesday's rally and already had a major move off recent earnings. I think the next leg here in equities is down and want additional cash to "buy the dips" in this trader's market.

10 things I don't like about the market here.

  1. The Germans and Italians are in full name calling mode. As outlined in the Telegraph Tuesday morning tempers are flaring, hardly a good sign for the partnership Europe needs to pull through this crisis.
  2. The Germans have good reason to be testy. June Factory Output fell twice as much as anticipated as it clear signal their economy is slowing down.
  3. Speaking of Italy, the recession there is worsening. The country just reported its economy contracted by .7%, worse than expected.
  4. Bill Gross of Pimco came out saying Europe should be avoided by investors for the foreseeable future.
  5. Doug Kass who I also respect is reducing his longs and has his lowest long exposure of the year.
  6. Investor appetite for risk is growing suggests BlackRock data showing July flows into ETPs (Exchange Traded Products) were driven by moves into equity funds. Of $22.6B in net inflows, $21 billion went into stock ETPs. Being a contrarian, I find this disconcerting.
  7. Although overlooked by most of the media, gas prices are continuing to rise. This should have a negative impact on consumer spending.
  8. A large portion of the 163,000 new non-farm jobs reported last week are temporary and likely to vanish soon.
  9. In addition, CEO confidence in the economy continues to decline. Hardly the sign of robust hiring in the near future.
  10. Although companies are reporting okay earnings, only about 40% of S&P are hitting their consensus revenue estimates. This reflects the slowing of the worldwide economy which I believe will continue in the third quarter.

Be careful out there. Raising some cash is a prudent move here. There will be better entry points in the near future. Happy Hunting.

Disclosure: I am short LNKD.