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Stock Market Investing: Expect Trends to Remain Intact, Investment Strategy: The Fed Meeting Holds the Key,Trader Dan & The Continuous Commodity Index


Trader Dan Comments On This Week’s Action In The Continuous Commodity Index: Courtesy of Jim Sinclaire

...This chart...is significant in telling us the direction that gold prices will take moving forward. For the deflationists to be proven correct, this chart will need to break down technically which would require both a move below the 400 level and a downturn in the rising moving average in which price moves below that average as it trends lower. AS you can clearly see, the moving average is trending higher and prices are above it. This signifies that the inflationists have the upper hand and their assessment is currently the correct one.

Until this chart reverses its positive technicals, those calling for a major top in gold are simply mistaken in their assessment and are attempting to impose their view on the markets rather than reading what the market itself is currently saying. That’s the problem with analysts and even traders who cannot let the market speak to them and get stuck in a losing trade because they refuse to acknowledge that they might be incorrect. In effect, they end up fighting the trend or the tape as we used to say. Continuing Education...

 
Stock Market Investing: The equity markets have consolidated over the last few weeks in a tight trading range. Meanwhile, the US$ has caught a bid sending Oil and Gold lower. Once again the financial media would like you to believe a major crossroads has been reached. We at RCM would beg to differ. Perhaps a review of reality would help:

 
1) Over the last several months, the US$ experienced strength during the week or so before the Fed meeting. Said strength rapidly dissolves as Fed comments from the meeting reiterate the need and desire for easy credit. If the US$ strengthens after this week's meeting then perhaps a "crossroads" has been reached. Until then, recent US$ strength appears nothing more than the financial equivalent of a hiccup.

 
2) Please review the chart and comments above from Trader Dan. Clearly, the commodity markets as a whole have not responded to the "US$ strength" of the last two weeks. One would need to see the up trend in commodity prices challenged before a "crossroads" could be reached.

 
3) During previous US$ rallies in '09 the equity markets have suffered. Often a sell off of 5 - 10% would occur in the equity markets if the US$ rallied 2 - 3%. This time however, equities have used the US$ rally to consolidate gains in a tight sideways movement. Equity players may be signaling disbelief of US$ strength, the exact opposite of a "crossroad".

 
Investment Strategy: The Fed meeting this week will be key. Should the Fed choose to change language and appear inclined to reduce liquidity then a crossroads of some kind will in fact be reached. However, until the Fed stance changes expect year long trends to remain intact.

 
As I have explained above, commodity and equity markets are not foreshadowing a change in Fed stance.

 
On the other hand, the last two weeks have been replete with Government statistics suggesting economic "strength". The retail sales data "surprised" on the upside and University of Michigan Consumer Sentiment Index rose more than expected. Both announcements led to spirited US$ rallies.

 
What will the Fed decide? We won't know until the stories hit the wire.

However, we do know rates need to remain low for this country to handle an enormous Federal debt burden. We know the economy, whether recovered or not, is precariously perched and needs liquidity. We know consumer confidence does not equate to consumer spending; income is required for consumption. And we know income will continue to be constrained as debt defaults continue to mount...

The Coming Wave Of Debt Defaults -Sam Rovit and David Sweig - Forbes

The worst is not yet past. Be prepared.

The trouble in the commercial real estate markets is getting ugly, as the precarious situation of Dubai World has made all too clear.
Expect many more unpleasant situations like that one. Speculative-grade debt issuers are bracing for the default rate to hit 12% to 14% by the end of 2009, according to our projections at Bain & Company. The last time the U.S. economy experienced default rates of that magnitude was 28 years ago.
Continuing Education...

My parting question: Knowing all that we know, should this week's Fed comments really be a mystery? What possible good could result from the Fed changing its stance at year end? A stance change now would simply not be logical and perhaps that is where the risk lies. Logic and government are often at odds.


Disclosure: no positions