That’s a wrap and what a week it was. As September comes to a close next week it looks as if the bears will chalk up another win. This past week, and we will cover this more in this weekend’s newsletter, the market broke out of the upward trending channel that had been developing over the last month. Unfortunately, it was to the downside. Not only has the selling been brutal in the equity space – it has been equally disastrous in the precious metal arena with Gold and Silver taking hefty beatings this week as the dollar surged as investors around the world sought a safe haven.
We have repeatedly warned in our weekly missive that taking money out of the equity markets and moving into bonds and cash has proved to be salient advice. Of course, the question that we get most often now is “when do I put money back in?” The answer may sound a little trite but the only correct answer; “…when the market tells you to.”
Take a look at the chart. What we see here are very clear signals that the “bearish” trade is still very much alive. While analysts, and the media, try to call a bottom to every down tick; the reality is that until the market is trending positively there is no reason to keep investing capital. The more capital you destroy during negative market trends the less you have to work for you when the market turns.
The real question that should be asked is what the market will likely do in the months ahead. Here is our best guess:
1) The market will stabilize somewhere between 1100 and 1000 on the S&P 500 and will like finish the year somewhere between 1100 and 1200 on the S&P 500.
2) Next year will be the real onset of the second recession and the markets will experience a fairly substantial 30% decline from the end of year levels which would drive the index to between 770 and 840ish. It is possible that the market could retest the March 2009 lows depending on the overall depth of the recession.
Those are our best “guesses” at the moment based on the current data available. We will change that outlook, and our allocation model, accordingly as data develops. In the meantime, the investment rules have not changed and you should still be selling rallies as opposed to buying dips. Capital preservation, income and hedged investments are the investments of choice in this environment and highly cyclical investments should be liquidated. Focus on cash and fixed income.