What does the Market Know, And When Did it Find It Out ?
In a market such as we are in now, a six year mania, followed by one month of panic, it is important to find some guide posts. These guide posts should help us to navigate these treacherous waters.
Our overall view of the economy and the market that we have stated way too many times is: that a normal recession was starting in 2001-2002 and the leaders of our country along with their advisors did not want to let it unfold, because to them retaining power in the 2004 election was more important than the countries health. So a four point economic plan was unfolded: 1) start a war (everyone knows that WW II got us out of the 1929 + depression); 2) borrow money from China and others to finance it; 3) through easy credit get consumers to buy houses, cars, and pickup trucks; and 4) give tax breaks to the rich so that they would have the leverage to really make the economy and markets run. And guess what, it worked for five years. Now the chickens have come home to roost.
As to the Guideposts, we have the benefit of being in an Presidential Election Cycle that provides information beyond the usual economic and market info. Back in March of this year Obama moved above 50 percent in the Intrade market, much to Hillary’s dismay and the Republicans. Since then the Intrade market indicator for Obama has moved around between 42 and 68 percent, and then on September 9th started moving up and around the first of October has started to make new highs above 68 percent. That tells us that that September 9th and September 29th are important dates for reading the country.
Now we look at the market, on September 9th the stock market broke down out of the S&P 1260 floor and closed at 1224. On September 29th the market really got the message and broke down to S&P 1106. This is a lengthy way of saying that 1260 and 1100 are important resistance price points that the market and investors are watching. This morning the S&P futures have rallied to the 1050 area. That is enough for us for now. We are cutting our positions in half, the Aggressive Portfolio is being cut from a leverage ratio of 1.30 to 0.65 and the Conservative Portfolio is being cut from 0.50 to 0.25 leverage. For comparisons sake mutual funds probably have on average a 0.95 leverage ratio, so even with our 1.30 leverage ratio we are not pushing the envelope too far, most futures traders use 8.00 plus leverage and we all know the banks have been using 30.00 leverage.
With our positions cut in half we will wait to see if the S&P 1260 area is tested. We remain short T-Bonds. Gold remains outside our interest at this point in the cycle.
8:16 AM CDT