Rangebound (again)

It seems that the equity markets are probably rangebound again as everyone awaits a bit more clarity on the economic picture. Data over the past few weeks has generally been better than expected, showing that expectations had been set pretty low. But now people are starting to talk as if there is no recession at all, or it will be very mild. The data do not support this conclusion, either. Employment (including initial claims), consumer confidence, housing starts and the ISM manufacturing index are all signalling a weak economy, one that is probably mildly contracting.

Looking forward, there are few good reasons for optimism. The consumer is suffering from the powerful one-two combination of falling house prices and very high gas prices. The financial crisis, which may or may not be over (I am somewhat ambivalent here), has had a severe impact on consumer and business confidence. Interest rates have been lowered significantly but the full impact has not been passed through to the end-users due to the problems in the financial sector (mortage rates remain above 5%) and loan officers are reporting a tightening of lending standards.

What is obvious is that there has been a major shift in investor perceptions since the March lows, and most are now much more bullish and trading the recovery. This is good from a contrarian perspective. I assume that the recent peak around 1420 on SPX will hold and we will ultimately see the index around 1150 (though I dislike hard predictions like that). Any strong gains above 1420 would be a serious concern and force me to re-evaluate my positioning.

HXD continues to be a major loser in the portfolio and is a strong argument for the introduction of a stop-loss rule (which I abandoned soon after trading). However, I am becoming much more bearish on commodities after recent spikes and therefore am more comfortable with the HXD position. In some ways, this is shaping up to be a classic cycle where the Cdn market lags the US into a bear market by about 6-12 months due to the tendancy of commodity prices to increase sharply towards the end of the business cycle. I remain a long-term commodity bull but think that we have seen most of the gains this cycle as prices have moved too far too fast and the fundamentals cannot catch up. I was an oil bull at $90 but at $125 the effects on consumption will be gradual but strong. I will probably sell gold into any near-term strength.

MARKET POSITION: SHORT EQUITIES (10 units); LONG GOLD VS. SHORT REAL ESTATE (2 units)