Back to insanity?

Seems that the return to sanity was relatively brief. I did not expect the large fall last Friday to continue, but this week has been bizarre. People on both sides (short and long) are clearly nervous, given the large intraday swings in the equity markets. The bears are nervous that the Fed easing will allow the economy to hold up OK and therefore boost stock prices. The bulls are nervous that corporate profits and the economic data are both weak, and therefore the economic picture might not be as rosy as they imagine. The result is pure noise, very difficult if not impossible to read from a technical perspective.

In such a situation I think it is important to return to the fundamentals. Three factors are key here: 1) the housing market is imploding, and shows no sign of bottoming in the near future; 2) the credit crunch in August has made it more difficult for many households, corporations and investors to borrow; it has also shaken their confidence in the future and made them less inclined to spend and invest; 3) oil has been making historic highs - (even though gasoline is not making new highs, it is still very expensive byt historical standards, as are other oil derivatives). The data also seems to confirm the economy is slowing -- today we had durable goods orders weak and initial unemployment claims moving up (4 week moving average).

The risk is that rapid money growth props up the economy and financial markets for a little while longer. Such a scenario could lead to an upwards "pop" in equity prices that could severely damage my bottom line. I think what is more likely is that rapid money growth will flow into other assets such as gold, commodities, and maybe emerging markets. It is notable that gold is once again testing its highs at $770, despite everyone saying last week that gold was overbought and due for a correction. Could be short covering of course and the correction may still happen, but it is notable nonetheless.

In this situation it is best to wait and practice being patient. In time, the market will reveal its direction, and this will cause me to either add to or reduce my positions.

MARKET POSITION: EQUITIES - SHORT (6 units); GOLD - LONG (1 unit)