"Think how stupid the average person is, and realize that half of them are stupider than that."
- George Carlin
This week we are slipping towards our seventh straight weekly decline in the S&P 500, and finally my indicators have had enough. Today we went from 2.5% in cash equivalents to 18.5%. This was accomplished by selling both US and International equities.
Here is where we currently stand:
Where We Stand Today:
US Equities -- Neutral,
stocks are in a rather controlled sell-off.
Int'l Equities --
Neutral, clearly in a down-trend.
US REITs --
Bullish, but showing some signs of tiredness.
Int'l REITs --
Bullish, but nearing neutral.
Gold -- Bullish, but moving towards neutral with recent sell-off. Gold miners are neutral, but heading towards bearish.
Commodities -- Neutral, but heading towards bearish
.
US Fixed Income -- Bullish, flight to safety (risk-off) has caused 10 year Treasuries to fall below 3%.
Int'l Fixed Income -- Bullish, but risk has increased with the European bank problems.
Cash Equivalents & Currencies -- Currently 18.5%, divided between US, China, Australia, and Brazil.
Seven Down Weeks:
"Some people see the glass half full. Others see it half empty. I see a glass that's twice as big as it needs to be."
- George Carlin
Here is a good table from the guys at "The Chart Store" that shows what the market has done after 7 consecutive down weeks. First this is very rare, it's only happened five times since 1928. In most cases the market was higher 26 or 52 weeks later, but not in all cases. While this data is interesting, it really isn't that useful in predicting the future. The number of instances is too few to be statistically relevant, and sometimes history doesn't repeat. It's just a pretty table.
A High-Stakes Game Of Chicken:
There are basically three high-stakes games of chicken being played out.
1st: Will Europe come to the rescue of Greece?
Yes, eventually. But how will this be structured? Will the bondholders (namely French and German banks) have to take a haircut? Will the rating agencies treat this "haircut" as a default? If it is a default what will happen to the US money-market funds that own European bank commercial paper?
2nd: Will Congress raise the debt ceiling?
Yes, probably in the eleventh hour. But with what strings attached? How much and how soon will deficit reduction be implemented? Will it be enough to encourage long-term investment in the US? Will the cuts be too drastic too soon, and lead to a double dip recession?
3rd: Will the Fed implement QE3?
Probably not. Unless something goes wrong with game 1 or 2. Former Fed Chairman Alan Greenspan put it like this, "Greece is almost certain to default." He then went on to say that he sees little chance of a US double dip recession...unless Greece defaults. Huh? Greenspan is notorious for his double-speak, but if he's certain Greece will default, than the odds of a US double dip would seem pretty high, which increases the odds of some further QE3. Still with me?
Is it any wonder that the markets have been struggling of late? Of course there could be some very positive surprises, and corporate America is actually doing very nicely, but I know I feel a lot better with my cash reserves building.
"People who see life as anything more than pure entertainment are missing the point."
- George Carlin
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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