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What To Do in a Bipolar Market?

Today's trading was the culmination of a stressful week and the flight to safety trade has reminded us all of 2008 all over again. 

Asset class comments:

US Dollar: Has been in a tight trading range for a while, it is not rallying as much as it did during the 2008 bear market.  Watching this closely to determine whether to throw more weight behind international versus domestic bonds.

Bonds: The bond market seems to have rendered it's verdict on the S&P rating with a giant raspberry.  It seems that investors consider Treasuries to be a safe investment.  I think the recent runup in Treasury prices is a bit overdone, and I may establish collars on my bond ETF positions.  If they get called away, I would be nearly all cash, which is not a bad position right now. 

Equities: I am having a very hard time connecting the dots on why the downgrade will affect corporate earnings.  The macro story is not signalling a healthy recovery, but then again, it still seems to be holding its own on the employment front.

While my initial analysis indicates that equities are being unfairly punished, I never argue with the price action. All classes of equity ETFs are in my AVOID status at present.  Today did not seem like a bottom by any stretch of the imagination, although I expect some kind of bounce rally shortly.

Commodities: It was with some relief that I saw the CRB index breaking down, it served to confirm my concentration on fixed income ETFs.  Avoid hard assets for now.

Long Term: When the $VIX trade starts to sputter, be sure to watch the XIV ETF.  This moves quickly and may be the rebound investment of choice to repair portfolio damage.  But this is not the best entry point.  Stay tuned - there are some excellent opportunities emerging for your cash on the sidelines.