Slaying a Bull is a Long Process

Anyone who has ever witnessed a bull fight knows that slaying a bull is a long process. Especially a large and strong bull such as the one currently in existence in the global equity markets. Clearly I was too hasty to declare the start of a bear market in August. Instead of increasing my short position, I should have covered and gone long. I made the wrong move.

But I do not think now is the time to cover. Despite an extremely bullish sentiment, the market is exhibiting signs of getting tired. The rally is being driven by a small number of stocks. Other than the DJIA, other indices remain well below their June/July highs. The Nikkei is still down considerably. Gold is $100 higher, yet the US 10 year is 60 bps lower than its peak.

Similar news on the economic front. It is not as weak as I previously thought. Yet a serious slowdown is evident. Employment, manufacturing and spending are all well down. House prices continue to decline as inventories rise. As I keep saying, I can't imagine people are going to continue spending as they become concerned about keeping their house and their job. But most economic commentators think the economy will avoid a recession. From my perspective, this would be incredibly lucky indeed.

Of course, the economy has not entered a recession yet. Leading indicators such as the ISM and initial unemployment claims are still holding up OK. But once it becomes obvious the economy is in recession, it will be too late from a trading perspective. One must look out and anticipate what will happen. And it appears that the balance of risks is to the downside. The situation is clearly weaker than July, yet the equity markets are at about the same level. I would rather be short than long.

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