Market Capitulation - Cash is King

Over the next two or three months the most viable market position to have is to hold cash or very liquid assets because I think that the market CAPITULATION is around the corner. explain?

When the market capitulation is all over; those who wanted or had something to sell would have sold then, only buyers remain. Buyers with cash or liquid positions would be kings.

Why do I think the market will capitulate?

• The financials markets are still in the gutter.
• The housing market is still straining and now the commercial real estate is showing signs of fatigue.
• The Nasdaq is trending downward.
• The Dow and S&P are in bear market territory.
• The US dollar is in the ditch and sinking. This should help manufacturing but factory utilization is down.
• The North American Consumer is tired and weary. The $600 Bush stimulus will end up being swallowed by the walloping price of gasoline.
• Inflation is rising (real cost of living is rising when we add energy and food back in)
• Economies are shrinking and unemployment is rising. Early second quarter results are pointing to a bad quarter. This quarter was expected to be the best of all quarters in 2008.
• The disconnect in the oil and gas market behaviour. In June while the price of oil and gas trended upwards, the price of oil and gas stocks in general headed south or at best stayed flat particularly the natural gas plays. for examples (CL-Nymex) (NG-Nymex) (Suncor) (Exxon)(Encana)

Putting all this together brings about a bad case of investor fatigue, anxiety and desperation caused by an emotional roller coaster ride.

Adding a global catalyst of some sort, the market traders, the small and large investors will throw in the towels and head for the exit door, all at once. Many of my readers may not have known or remember Black Monday in 1987. I do not claim that the conditions today are the same, Its the psychology that I am refrencing here.... (more on black Monday).

I also believe that the Canadian stampede will be more pronounced as evident by the disconnect between the price of oil and the price of oil and gas equities. If we remove the oil and gas component, Research in Motion and the ags from the equation will end up with a Canadian market that is a nervous wreck. We've already witnessed a mini-stampede out of metals and ags on July 2nd.

When everything is said and done still wait for the dead cat to bounce and only then move into the market and shop around for the gems.

Be careful out there!

Suckers Rally

In my posting of may 1st I said that the S&P at 1400 had no place to go but down. I also urged my readers to "be careful out there and protect themselves against the down side".SP index at 1400

Generally Canadians are nice and polite, so I did not dub the market's upward movement "a suckers rally". If you shared my opinion and protected yourself against a slide in the market then, I hear your laughter. If you didn't well, you got suckered.

Following the market decline in March many of the analysts called the end of troubles. Investors became euphoric and went on a buying binge driving the S&P upward by 11.8% in just two months.

Today the S&P touched an intraday low of 1252. This not only wipes all those gains but is 5 point below the intraday low of March 17th. Some people would say this is a double bottom and that the market should move aggressively upwards from here. I believe, this is BS. Nothing in the US economy would for a moment suggest or faintly support this theory. Furthermore, since Oct 11, 07 the S&P has channelled downward with lower highs and lower lows. The S&P reached a high of 1440 on May 19 and never looked back again. ( OK I was out by 40 points).

I predict that the S&P will continue its downward movement and find real support at the 1050 to 1100 level with a lot of volatility in between now and when we reach those levels.

Again if your investments are still in the black then, protect yourself from downward pressures. How? Buy puts. Place sell on stop orders. If you are the sentimental type and you really love and would like to keep your stocks then, sell calls. Selling calls will give you some cash-in while waiting for the market to turn around.

Be careful out there !