(Short) Bear Market Rally

According to Richard Russell of the Dow Theory Letters, last week's price action confirmed the existence of a bear market in US equities. While I think it is too early to say for certain that we are in a bear market (bear markets, like recessions, can only be identified after the fact), it does appear that way. The market has gradually ground lower, without panicking, some days down more, some less. Importantly, despite a lot of negative data (housing, consumer confidence, financial sector) there is still a lot of optimism around. That is a necessary ingredient in a bear market. Once that is all gone, it is time to start looking for a bottom.

So the markets did fall over the past week as I expected, but the sharp drop that I was anticipating did not occur. That is both good and bad. Bad because I am impatient (though I am trying to work on that) and I want at least a 20% decline NOW, but good because it means that the market has yet to capitulate, and the bear is still alive and well.

Yesterday and today suggest that we may be experience a short bear market rally. This is totally normal after 3 weeks of almost continuous declines. I would not be surprised to see the markets rally 3-6% over the next 1-2 weeks. Not enough to trim positions (my ideal holding period is longer than that) but I may add to the short position if the rally is large enough. The key will probably be the data coming out of the US over the next few days. If it is OK, then the rally should hold. If it is terrible, the markets will probably return to the downside. I do not forecast monthly variables, instead trying to look for trends, so I am not too concerned about one month's data point. For now the economic trend is slowing, the data looks bad, and I expect that to continue for some time.

Gold has turned lower again, and I am starting to get the feeling that it could be some time before we see it over $800 again. I remain a long-term gold bull, but as long as the credit situation is detetiorating and the other asset markets falling hard, it will be difficult for gold to rally. The turning point should come once the Fed reduces rates much further and pumps a lot more liquidity into the system, and the US dollar really starts to take it on the chin. So I will continue to hold the 1 unit for now.

MARKET POSITION: EQUITIES - SHORT (7 units); GOLD - LONG (1 unit)