Sitting Tight

That's right, I have decided to sit tight. The market continues to move higher against me. It is now clearly through my pre-planned stops. Proper risk management states that I should sell down my position. Am I a deer in the headlights? I sure hope not.

The fundamentals continue to suggest the market is past its peak. The housing market keeps getting worse. This has got to start affecting consumer spending at some point soon. Initial unemployment claims so far show the job market is fine, but that cannot carry on forever once spending starts to slow. The credit markets are making good progress at returning to normality, but overall interest rates have not yet returned to where they were a few months ago, even after the Fed easing. The volume of CP outstanding is still shrinking, and apparently some banks are still shut out of the interbank market. Banks have started to unload some of the leveraged loans but the process is only starting and apparently the amount on their books from the big spending spree earlier this year ($300+ billion) is almost as much as the total amount of leveraged loans held by asset managers, etc. It is going to be difficult for all this to be absorbed, and until then, the banks are not going to want to fund new LBOs, hence no more takeover premiums on stocks (despite all the hype about Bear and Sallie Mae today).

Of course this is only speculation but I wonder about the effect of quarter-end tomorrow. Are lots of investors clamouring to get back into the market before they close their books? What other effects might be at work here? Next Monday also marks the start of October, a traditionally difficult month for stocks.

On gold, my entry was clearly timed poorly (I seem to have a knack for poorly timed entries) but I knew this might be the case -- this is why I only started with one unit. Gold continues to hold up well. It has received a lot of media attention recently and everyone seems to like gold, so that is not good from a contrarian standpoint. But I think being a contrarian is more important towards the end of cycles / trends when the consensus has been right for a long time and it cannot get beyond this -- like the case in equities currently. So I am staying long and looking for an opportunity to increase my position on further strength.

I am slightly concerned about the possible tracking error between the TSX and S&P500 indices. I think the present economic environment is more similar to the 1970s then the 1980s or 1990s (the comparisons people are always making). In the late 1970s the TSX performed very well due to the concentration of natural resource stocks, while the S&P went nowhere. If something similar happens again I could end up being right (in that the S&P500 performs poorly) but I lose money. Not the desired objective. I need to keep a close eye on this, and maybe consider diversifying into other short ETFs (e.g. SDS) even if it means taking on some currency risk.

One last point: I took a look at the start of the bear market in 2000 again to see how it played out and if I could relearn anything. One thing that struck me: even though the market peak was reached in March, it was not until late September / October that the S&P decisively moved lower -- 6 months later! In contrast, it has only been 6 weeks since the recent market peak in July. So I am going to wait at least until next week to see how things play out.

MARKET POSITION: EQUITIES - SHORT (4 units); GOLD - LONG (1 unit)