Stock markets – what to do now

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Risk aversion has re-entered the investment equation with risky assets such as equities and commodities bearing the brunt of the selling orders, while gold bullion, government bonds, the US dollar and the yen are attracting safe-haven money.

The global stock market pullback seems to be gathering momentum with three markets on my radar screen now trading below their 50-day moving averages, indicating a reversal of the secondary trend. These markets are China, Hong Kong and Chile, with most others uncomfortably close to this intermediate support level (see table below). I am of the opinion that more markets will fall below the 50-day lines and that we will at least see some degree of reversion to the key 200-day moving averages (often used to distinguish between primary bull and bear markets). The table provides the key levels, as well as the declines since the recent highs.

Click here or on the table below for a larger image.

tabel030909s

For some ideas regarding the short-term direction of the Nasdaq Composite Index, Adam Hewison’s short technical analysis (INO.com) provides valuable insight. Click here to access the presentation.

It was interesting to catch up on the views of Albert Edwards, global strategist of Société Générale, in yesterday’s Financial Times. Donning his familiar bearish colors, he said: “Once again, equity participants are missing the big picture. For despite clear signs from the business surveys of some sort of second half recovery, firm evidence is emerging that the global economy is sliding towards a full-blown deflationary episode once this recovery falters.

“We heartily concur with GMO’s Jeremy Grantham who remarked recently that after 20 years of more or less permanent overvaluation of US equities, we saw just five months of under-pricing through the March trough. Do bursting global equity valuation bubbles really end like this? Of course they don’t.”

Doug Kass of Seabreeze Partners and a columnist at TheStreet.com, who accurately called the March bottom, is also now outright bearish, as discussed here with CNBC’s Larry Kudlow.

Source: CNBC, September 1, 2009.

According to Kass (via TheStreet.com), one should now do the following seven things:

1. Build up cash reserves by reducing exposure to equities and credit.

2. Upgrade one’s portfolio to quality. Eliminate secondary and tertiary stocks that have benefited the most from the second derivative and statistical economic recovery.

3. Longs: Concentrate on market-share-gaining multinationals that are self-financing, that do not rely on the kindness of strangers to fund growth and that will benefit from a lower US dollar.

4. Shorts: Consider shorting stocks that are levered to the capital markets and the consumer – for instance, brokers, asset managers and retail-related stocks.

5. Err on the side of conservatism over the balance of the year, and recognize that, at times, it’s more important to place a priority on limiting the potential loss on capital above the possibility of sacrificing lost investment/trading opportunities.

6. Reread the books written by the old masters of trading, investing and even poker in order to gain a greater investment perspective. One should always try to learn more, and one can from George Soros, Jim Cramer, Barton Biggs, Jim Grant, Charles Mackay, Rich Bernstein, Doyle Brunson and others who have written of their experiences.

7. Gain or regain a better balance in one’s life. Whether it’s gardening, exercising, vacationing, going to sporting events or reading, it’s important to clear one’s head, step back a bit and gain a better perspective — it’s healthy food for the body and mind.

Kass concludes: “I believe that, similar to back in March 2009, we may now be at a fulcrum point in the US stock market. It is, again, time for a variant market view. My advice is to reduce your risk profile by raising cash, upgrading the quality of your trading/investing portfolio, chill out a bit, read some books and words of advice from the best there is/was and, generally, to err on the side of conservatism in the months ahead.”

Be cautious out there!

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