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Crash Alert

As two months, September and October have a chequered history in terms of stock market performance. Will 2010 be any different, well we have 6 weeks or so to find out and the usual measures of stock market sentiment are reaching extremes (of complacency).

There has been some commentary in the press about Gold reaching new highs on ‘investor jitters’ but the charts tell a different story with extreme readings of bullish sentiment. The run up since March 2009 topped out some time ago and although there remains a possibility intervention will create another liquidity fuelled rally higher – this is not likely to be before late November, early December.

This means now is an ideal time to reduce exposure to stocks and shares at least until the potential for a sizeable seasonal sell off has passed.

Risk on – Risk off

The 2008 market meltdown and rebound from early 2009 to now has been difficult for many traditional fund managers as asset classes have been increasingly correlelated – meaning prices tend to move in the same direction together. In fact there is now more use by mainstream funds of hedge fund type strategies, sometimes called Long-Short or Global Macro than in the past. This is definitely a trend that is set to continue.

I have used a defensive strategy of taking less trades on average in 2010 than in 2009, but with many markets on the cusp of breaking out a more agressive approach is appropriate for the remaining part of 2010 – suitable as traders return on Tuesday after the long Labor Day weekend. Although 2010 has been challenging trading wise, the last 4 months of the year usually produce some very nice moves in markets – the recent rise in Gold to about level with historic highs indicates markets are generally at a significant point here and this increased interest will drive cashflows into the market that are currently sitting on the sidelines, so moving not just Gold but currencies too.

News to note since last posting this years:

Coffee (NY) – moving to new price level/value area over 170-180 from support at 130 – await sell off

Grains – moving higher on weather markets and Russian export controls – Buying

Stock indices – drifting higher/slightly toppy but only a year and a bit into cyclical bull market statistically

Metals – Gold moving/about to move to new highs; Silver just under $20, risk of sell off

US Crude oil – Trading sideways/ranging between high 60s and low 80s – no direction/trend

Euro – recovered from a deep sell off to 1.2000 tested above 1.3000 now risk of sell off on weekly chart basis

Aussie – Was toppy and now is testing those overhead resistance levels – to buy if breaksthrough 0.9400

Recent trade;

Gold Bugs Index near highs:

Soybean long trade

Retest of 1,000 round number level and top (descending) trendline

Euro break

Trading short the break in Euro yesterday.  Too volatile for trades to leave open overnight on Daily chart/H4 trades but ok intraday with 20pip stops.

A general comment on the USD – if the immediate situation with Greece is resolved over the bank holiday weekend expect the Euro to gain next week which could cap the upside in the USD which is acting as a safe haven, especially with recent weakness in equity markets.  However, with most commodities trending higher despite facing the headwind of recent USD strength this year – especially gold – expect a significant rally on the upside in commodities and all assets traded against the USD in the event that it sells off in the coming weeks.

I personally hope it all ends well with Greece, it is a fantastic country to visit and it may well be best for the nation – and all round –  if they leave the Euro without further ado – as this would help domestic matters immediately, but it would come hand in hand with a default on their Sovereign debt – a story I highlighted at the start of this year.

Trading conditions have been challenging this year so far – but market move in phases and should the US Dollar weaken, commodities will swiftly move higher – on the other hand – if as I suspect there may be an equity market sell off (this being a bear market rally in my opinion) then it could hinder progress on the upside.

Anyhow – Gold is moving up, long from 1,158 and currently nicely in profit – a close over $1,200 will signal more upside and this will mean an add on position – if the market trends upward and this is a new ‘upleg’ it could run north of $1,400 and $1,500 by year end – one not to miss out on.

A False Testimony?

I watched with interest this week to much of the questioning of the Goldman Sachs ‘GS’chief.  These all were looking to understand why this firm was packaging up and selling these securities in risky residential mortgages while at the same time betting against them – was that a proper thing to be doing was the point of most of the questions – well, I think its safe to say GS isn’t a ‘not for profit’ organisation but the interesting answer given by the chief was that if they had actually known how bad the collapse in the housing market was going to be – then they wouldn’t have been only short in a “small” way (they made $500m profit in 2008 on the short positions) – they would have been massively short.  I think this was a fair point, even though a lot of the chief’s statements were pretty suspect.

So we can’t know what’s round the corner in the market but we take a position on it nevertheless with a defined risk at the outset, that’s the nature of the job.  The big winner in all that of course was the hedge fund manager John Paulson who made $3.7bn on his short positions in sub-prime.

Want to know what he’s up to these-days?  Well he recently setup a fund to buy up gold mining stocks at a time when they are underperforming gold… really though this is a longer term play on the potential inflationary tsunami expected to hit anytime in the next few years, and a trade against the US Dollar wrapped up in one.

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A general comment on the USD – if the immediate situation with Greece is resolved over the bank holiday weekend expect the Euro to gain next week which could cap the upside in the USD which is acting as a safe haven, especially with recent weakness in equity markets.  However, with most commodities trending higher despite facing the headwind of recent USD strength this year – especially gold – expect a significant rally on the upside in commodities and all assets traded against the USD in the event that it sells off in the coming weeks.

Choppy markets

The US Dollar is in a confirmed uptrend – or nearing the end of a bear market rally however you want to look at it.  Gold has been treading water for a few months and is looking good from either a short sellers point of view or a longer term buy depending on your time frame.  A surprise continuation in the US Dollar – perhaps relative to Euro weakness could give some markets a shake out – but we are near the top of the rally area in the DX (US Dollar index) so it is a nice point to take a position either side of the market in the next few weeks.

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