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December 28, 2008

Year-End Clearance

I can't say I'm really too thrilled at the way Christmas week turned out for equities. A week ago I noted that "a market poised for a rally should have little trouble moving higher on a holiday week," yet the S&P 500 lost 1.7%... a paltry sum by recent standards, but still a loss. The good news is that SPX 850 held and that this week's drop... naturally... came on declining volume.

index chart

One aspect of market action I find particularly curious is the fact that Treasury yields continue to be floored at historic lows. This behavior tells us one of two things: either there is more tragic news directly in front of us or money managers are falling over each other to get Treasuries on their balance sheets before year-end... the balance sheets that will be published in their annual reports. If the latter, then our mid-term rally should arrive with explosive force on January 2nd as Treasuries are dumped in favor of stocks.

Before publishing this post, I scoured around news sites and blogs for a clue to the question above, but found nothing with which to build an informed opinion. Instead, let's mull through our regular list of indicators and see if we can lean our opinion one way or the other.

indicator chart

indicator chart

indicator chart

indicator chart

stock chart

Humph. Not much to lean on here. It seems more likely the whole world is about to fall over. Let's move on to commodities.

oil chart

commodity chart

gold chart

platinum chart

As you can see, the world is full of contradictory signals (moreso than usual), and I have followed my playbook for such situations by drastically reducing positions. There will be plenty of opportunity in 2009, and I see no reason to force myself to frolick in murky waters. I'm a trader, not a gambler, and if you don't know the difference, you need to stop playing the game.

My trading portfolio currently contains some oil-related shares as well as EWT and TBT. The thinking goes along the lines that if the mid-term rally succeeds in extending itself, both oil and Asia will outperform, and bonds will have to back off. I also added a short in AZO simply because the chart looks juicy for a plunge. This short conveniently provides a minor hedge to the other positions.

So, what if the greater mid-term rally doesn't materialize? Apart from the doom and gloom implications, I have to wonder if the idea of such a rally was misplaced, perhaps the corresponding assumptions should be thrown out, as well. Maybe we get a hyperinflationary depression, after all. The dollar has collapsed over the last three weeks without spurring an equity rally. Will the buck continue to swoon while the market tanks again? If so, we should be loading up on gold and shorting everything else. Just something to keep in mind. The signals should become considerably clearer after New Year.


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