Tuesday, May 3, 2011

Double Top?

Wanted to take a few minutes and share a chart with you.  As you all know I am not much of a T/A guy.  However, over the longer term,  I do watch them from time to time.
I often watch the Russell 2000 when I am looking for a trend change because it's usually the first sector that rolls over during bear markets. 

After taking a peak at the monthly of the Russell I couldn't help but take notice of an almost perfect double top:

My Take:

The Russell is much more sensitive than the rest of the market because it is comprised of smaller companies with matching smaller balance sheets.  Therefore, they are much more susceptible to a weakening economy versus a huge company like Apple that sits on tens of billion in cash.

As a result, when things start to head south as a result of things like $4 gas the market tends to sell these names first.  The fact that it couldn't hold the trendline after breaking through the 2007 highs is something to take note of.

The Bottom Line:

So are we due for a major correction?  Hard to tell.  The Fed seems obsessed with taking the market higher, and it has decided to destroy our currency in order to due so in the process. 

The reality here is no one wins this game if the dollar loses because stocks that are priced in dollars, and if the currency cracks it's not going to matter where the market is.

The market IMO seems to be struggling with the colossal battle between the powerful forces of debt deflation and deleveraging versus the equally powerful forces of inflation via currency debasing courtesy of the easy money Fed.

This battle has become a personal struggle for myself which is why I haven't had much to say recently.  Part of me believes that debt deflation is inevitable as the world realizes the trillions of digital dollars that people moronically borrowed over the past decade will never be paid back.

However, at the same time, you also have extremely powerful inflationary forces that are being created by the Fed as they continue money printing and keeping rates low at the same time the rest of the world takes rates higher.  India just raised rates by .50 basis points yesterday.

Who will win this battle?  Hard to say.  I am positioning myself for both.

What I can tell you is what I have done with my positions recently: 

I sold out of 50% of my silver at around $45.  Things got a little too bubbly for me here.  I will look for cheaper prices.

I shorted the Russell last week via TWM.  I also continue holding some small short positions in SDS and QID.  On the long side I bought the nuclear stock EXC when it got oversold following the Japanese nuclear disaster and I also added the titanium stock TIE.

I still hold the majority of my money in cash which at any moment could become worthless.  This is a scary proposition to me but the way I see it the dollar should rise before it tanks because I think Europe is going to go down before we do.

Greece will default by the end of the year.  The market has already priced it in.  The rippling effects of this in terms of the rest of the PIIGS are flat out frightening to me but there is nothing I can do to control it.

All I can do here is stick to the fundamentals and the most important one to remember is risk is relative!  As a result, I don't believe the dollar is toast just yet because the bond market continues to tell us that we are the best looking horse in the glue factory of bankrupt countries.

I write this post as a warning that something big could be coming.  Please play defense and be safe.