Short Side Lining Up Nicely

The TSX appears to have spent the past four days forming a top to its pullback and the short side is now lining up nicely. Last week I mentioned that my level of uncertainty seemed greater than usual but I can safely say that I no longer feel that way. I would cite the following five factors:

1) Economy: last Friday's NFP report confirms what I have been saying for a while -- the economy is weak. The US housing market is very slowly falling off the edge of a cliff, and this will have major implications for households and the financial sector. The odds of a recession are now high -- certainly above 50%. Hell, there may be a recession underway already. A cut in the Fed Funds is now gauranteed, but as I said last week, it will be too late.
2) Market Sentiment: has shifted from overconfidence to hope. Everyone is now hoping that the Fed will save the market and the economy. That is the classic sign of the early stages of a bear market. Nevertheless, the bears remain wary. They are scared that the Fed will cut and the market will rally strongly. My investigations (admittedly anecdotal) are that there are not a lot of net shorts out there. That is a good sign from a contrarian perspective.
3) Financial Flows: The first week back after the summer was not good from a financial flow perspective. It seems that few deals were done. Everyone is edgy, and investors are not committing new money. The M&A market is quiet. Banks are stuck with lots of PE loans that they cannot unload and will have to carry on their balance sheets. LIBOR is ticking up as the financial system is icing over, despite all the money injected by central banks
4) Treasuries: Treasuries are rallying strongly. I was worried last week that the longer end of the curve was not coming down. Since then, the US 10 year yield has fallen by 15 bps. Impressive.
5) Gold: Over the past 8 months or so, gold has been stuck in a band between about $640 and $700. In general, it fell when risky assets fell, as investors treated it like other risky assets. But over the past couple of weeks, gold has increased sharply, and it breached $700 last Friday. And this despite the fact that the economy appears weak and commodities are not very strong, so inflation should not be a big concern. This may indicate that investors are becoming worried about the US financial system, and believe that the Fed is going to have to create LOTS of money to bail it out, putting more downward pressure on the USD.

If the market continues to fall I may add to my short position in the near future, keeping in mind rule #2. I will also considering taking a long position in gold, using the Horizons Betapro Gold Bull fund (HGU).

MARKET POSTIION: SHORT (4 units)