November 18th, 2011
I wish I had better news to share with you but I just can’t find any. The market is down 3.0% so far this month and the meter turned Red again as the Index itself again dropped below the 100-dma. Although picking up some dividend stocks looks appealing, I lean instead in the direction of questioning whether purchasing the stocks I had bought over the past couple of weeks actually might have been a mistake that need to be reversed.
Extrapolating the market’s current track leads to the realization that without a sustained bounce back above the 200- and 300-dma’s, the moving averages will all be in a perfect bearish alignment before New Year. For those who don’t remember, a bearish alignment is when all the moving averges are in reverse order (300- above 200- above 100- above 50-dma) and the Index is below them all. The last time that happened was as the market was coming out of its long, step decline on March 20, 2009. Perhaps more importantly, the market last entered into this bearish alignment was June 10, 2008 just as the Financial Crisis Crash began in earnest. This isn’t a prediction, it’s just an indication of how precarious the conditions are and the amount of effort that is needed to rekindle a reversal in the direction of market momentum.
Some analysts and newsletters are reluctant to suggest an all cash position and therefore are compelled to make suggestions and hone in on stocks with high dividend yields. But had you bought these stocks at the end of August, you would have suffered severe capital erosion that, in two cases, offset any dividends you would have made in a year. One might argue that since these stocks had declined already, the income from dividends won’t be lost in more capital losses. In my view, unless you’re a very long term buyer, dividend yield should never be the sole reason for buying a stock.
If worse comes to worst, the EU continues to implode, the infection spreads to our banks and economy and Congress is unable to come to agreement on our own deficit problems. There is renewed talk concerning the ability of money market funds being able to “maintian the buck” and new pressure on those mutual funds to move out of extremely short-term debt instruments and into cash. Then where is the safe haven?
We look again at precious metals. In March 2011, I wrote a blog piece entitled “Gold and the S&P 500 Since 1971” in which I included the following chart (since updated through October 31):
That ratio may continue falling close to the historic low of 1980, which not coincidentally was the beginning of the last great bull market. For that to happen, either gold has to climb to around 6000 (from current 1700) as the the S&P holds 1250, the declines to under 500 as golds holds firm at current levels or …. and this is most likely ….. some combination of both. Bottom line, the safe haven might again be cash with some weighting in gold as a hedge against deterioration of the dollar while the market approaches the lower boundary of the reveresion to the mean boundary at 950.