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Crash Brewing

True to form, following confirmation of a bearish head and shoulders pattern, the markets are in the process of dropping hard and fast after a slightly positive opening. Past market history suggests selling pressure will continue, and given the light volume in the markets, and extraordinary levels of investor anxiety regarding losses and deteriorating macroeconomic data, it seems likely that this leg lower may ultimately end in panic.

It is premature to do so, but investors who have already sold (such as the author) should consider their "re-entry" point. For example, assuming ten year average earnings of about 60 for the S&P 500, perhaps getting to a price level that sports a PE ratio of 10 or 11 might be a solid entry point? Alternatively, more technically minded traders may simply have to wait until the short term moving price averages vault above the long term moving price averages. That entails missing the bottom of the market, but preserves reasonable upside within the context of a longer-term upward trend. It also entails waiting for what could be months or even years prior to placing a trade.

It may be unwise, however, to short the equities markets. Valuation of equities is somewhat high, but still reasonable. Volatility is so severe, a short position could produce devasting losses within seconds. Moreover, investor gloom is high, suggesting a potential for a contrarian move higher when nobody expects.

Overall, I am maintaining a heavily overweighted cash position, low risk bonds, and nominal exposure to risky assets such as master limited partnerships, preferred shares, and junk bonds. Equities exposure remains below 5%, which to my mind represents the probality of the market shooting higher over the near term.