Katrina looks like it may end up having far reaching consequences, writes Roger Nusbaum. I have begun to map out what action I will take in client accounts if the market breaches its 200 DMA and/or if the yield curve inverts.
I may be wrong but I don't think of the action today in the two year and the three year as being a true inversion. The problem created by an inverted yield curve is that lending becomes un profitable. Most banks are not looking to borrow for two years so they can lend for three. I do think there is more chance of an inversion now than there was a week ago, but it has not happened yet.
As a matter of philosophy I do not want to take defensive action against something that might happen. It usually takes months for an inverted curve to be felt in equities. I feel so sense of urgency on this topic. I mentioned the other day, long term money can handle down a little. The SPX is 20 or 25 points away from its 200 DMA. A drop from here down to there is only down a little. I am not worried about down a little.
The fact that there may be a touch of panic out there is probably a call to NOT get very defensive.
Another thing with all of this is that capital markets have had some sort of knee jerk reaction to Katrina and the waves (obscure music reference from my youth). Some of that reaction will be unwound as things get back to normal. I do not know how long that takes but its a good bet.
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