No Place to Hide
Dow Jones Industrial Average 10,445
Value Line Arithmetic Index 1,816
30-Year Treasury Index 4.77%
Gold 1/10 Ounce $45.83
The Big Picture for Stocks
The 4-year cycle is negative into 2006.
Technical Trendicator (1-4 month trend):
Stock Prices Down
Bond Prices Down
Gold Price Down
The US Dollar index looks toppy once again - see chart below. The latest Consensus survey shows 73% bullish on the dollar which is an overbought condition from a sentiment standpoint as well. According to Sentimentrader.com, large commercial traders (aka the smart money) have their largest net short position in history, while the trend-following speculators have their largest net long position ever.
Gold would normally be expected to rise while the dollar drops. However, that may or may not be the situation right now. While I am generally bullish on gold, the technical position of gold is a bit iffy at the moment. What would almost certainly send gold soaring higher is the Fed's reversal of its higher interest rate policy. But that appears unlikely just yet. Our assumption is that the Fed wants to continue to raise rates to induce a recession, hoping that a mild one now is better than a deeper one later (which could be a major problem given the precariously high debt load in the economy). A mild recession next year would potentially put the economy back on recovery by the next election in 2008.
One of our Special Situations holdings is the Prudent Global Income Fund (PSAFX, 11.47). They invest in short term debt instruments in foreign currencies. While they also invest in gold (a possible negative right now), the fund is down some with the recent rise in the dollar and this weakness could be an opportunity to add modestly to the position.
Stocks also are suspect in this rising interest rate environment. Perhaps the biggest technical negative is the low mutual fund cash position. Note this link: http://www.cross-currents.net/outlook.htm.
While we could paint a fairly optimistic short term picture for stocks, the negative longer term picture suggests more risk than I am willing to accept to own equities. There is really no good place to hide - except foreign currencies and a few unique opportunities on our Special Situations list (average rate of return on all closed positions is over 100% per annum). Cash looks like the best risk/reward play for awhile.
Note: We are long PSAFX in accounts we manage.