The last several weeks have seen a reversal, or at least a fizzle, in the stock market’s upward trend. This indicates that, unfortunately, the Dow has become more likely to retest its March lows. Technically, such a retest would be a signal of support for the start of a major turn in the market.
This technical assessment is in direct contrast to the case that can be made for hard assets, where the fundamentals remain strong. Despite the fundamentals, technical analysis of recent trading action points to a bleak outlook for just about every equity and commodity investment available.
This conflict is confused even further if the markets are examined through the eyes of a contrarian. The old saying goes that markets continually try to get as many people on the wrong side of a trade as possible. This means that the market will often fake out investors before changing direction on a massive scale.
The basic message here is “buyers beware.” Furthermore, don’t expect this kind of volatility to be a short-term fad. The kind of market action that we’ve seen lately is likely to last for the next several years. To prepare, you need to find a system that you can handle.
If you manage your own money, it is imperative to your personal health (financial and otherwise) that you find investments with a level of volatility you can live with. If, on the other hand, you prefer the “out of sight, out of mind” approach, find a money manager with a system that works for you.
Most importantly: whichever method you choose, stick with it. Do not simply quit saving or stop investing. We have stated this time and time again, so you can consider yourself warned: We still believe that the inflation that is coming will severely hurt investors who are not prepared, especially those who abandon the markets entirely.
Quite frankly, we’re somewhat surprised that the beginning of this inflation hasn’t yet been recognized. This is because bank lending has not seen the resurgence that we expect. While it hasn’t yet, we have no doubt bank lending will pick up and the inflation that follows will rip through global economy.
It seems increasingly likely that bank lending will increase as a result of all the foreign investment that has occurred in the United States. For example, consider the purchase of Hummer by the Chinese. Once the Chinese decide to expand operations here, they will be taking advantage of still-cheap bank credit in order to do so. This example can be repeated several dozen times over, as numerous U.S. companies have lately been taken over by foreign investors.
The last topic of significance for this week is the newly proposed rule by the Commodity Futures Trading Commission (CFTC) to limit position concentrations in commodities. This means that, finally, the agency in charge of regulating trading in commodities will be monitoring the positions held by market participants and attempting to limit market speculation that can drive the prices of commodities to unreasonable levels, high and low.
Hopefully this new level of oversight by the CFTC will be echoed in other agencies that regulate securities markets, ensuring that they continue to operate fairly and without undue influence from any major players. In free markets it is of utmost importance that everyone plays with the same deck.