Market Update - Caution Required

May 19, 2009 · Posted in Uncategorized

Markets rallied globally yesterday and continued rallying overnight. The original impetus was the Indian election which saw the Congress party returned to power with a large mandate. The Indian market rallied 17% in one day on the result. In the US earnings results from Lowes provided enough of an excuse for stocks and commodities to take -off skyward. That said, volume on all of the US indexes was very low and certainly not high enough to correspond to a solid 2-3% rally indicating this little correction is over.

We remain cautious and remain of the view that investors should be raising cash by selling stocks that are either down or not performing as well as others. We would not initiate any new positions this week unless they are viewed as a short term trade. The feel of this rally was similar to the rallies we saw in late ‘07 and throughout ‘08. The market had declined and then we rally strongly for no real, sustainable reason. Further, oil rising to nearly $60 a barrel represents a break on growth. We also must ask why oil is continuing to go up when we have record supply stockpiles in this country? It is a trading rally.

We added some small shorts late last week and will likely reduce those further on any weakness. We are over 60% in cash and will stay that way for the time being.

As for overseas markets, Brazil rose 5% yesterday taking out all of the correction that market had achieved. That puts Brazil back up at the high they made a week ago. Shanghai is bobbling around the RSI 70 level which is where they almost always correct from.

In news this morning we hear that Libor is contracting significantly which means that liquidity is flowing strongly between the banks. This is good for the economy and lending but may mean that the wall of money from TARP is getting set to hity the real economy which will be inflationary. The flip side is that home starts unexpectedly came in at a record low.

There are many cross currents today. Futures are down as we write this but not by much. This is a dicey time. We reiterate, do not stay heavily exposed to this market. Cash is good until a true consolidation is achieved. Given the holiday weekend this may market may well trade very differently next week than it does this week.

We recommend reading the post “The Most Important Question Facing Investors” which can be viewed HERE.

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The following additional posts are highly relevant:

How the US Dollar Will Lose Reserve Status

Chinese Gold British Debt

Brazil

China Part 4 - Playing the Dragon

China Part 3 Global Hard Assets

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends

As of 05/15/2009 we are holding:

Short through QID, FAZ, TZA