Toro's Running of the Bulls Market Blog

Aaannnddd I'm Back Out Again.

Making my broker happy, I blew out of my gold position Friday.  Had I not sold my position on Friday, November 27, I still would have sold it anyways. 

Gold was down 5.7% intra-day. One difference Friday compared to the Friday over Thanksgiving was that volume was huge. This is worrisome. Another big difference is that there was no intra-day reversal as there was over the Thanksgiving holiday.

So I blew out my position. We bounced a little at the close, but we ended the session near the day’s lows, which is usually a sign of more selling to come.

I don’t think this is the end of the gold bull market. I think that we are going to get to $1500-$2000 eventually. But I might be dead wrong. This may be the top in gold. Large declines on huge volume after a parabolic run is not a good sign.

If you study past parabolic moves, there is often a correction and a period of consolidation. This may be such a period. If gold behaves in a similar manner, I expect a period of backing and filling for 2 to 6 weeks and then another move higher. However, when you trade, you have to be intellectually flexible. If we run immediately back up on light volume, then begin to roll over, that might signal the top and a shorting opportunity.

Back In

After selling my gold position two days ago, I have re-established my position.  I may be doing this totally wrong, but following Friday's sell-off, it appears gold wants to go higher.

We are in a melt-up in gold, and I believe one must be quick on the trigger if you want to play it here, because when it does sell off, you are not going to want to hang around.  It will be ugly.

I have not re-established my long position in stocks, though I may do so if we break to the upside.

Of course, I could change my mind tomorrow and sell gold again, making my broker happy.

Out of Stocks, Gold

I liquidated my gold position on Friday.  A large down day after strong upside momentum like the sell-off Friday is usually met with either consolidation or selling.  I will be watching gold closely and hope to re-establish my position in the not-too-distant future.

This bull leg in the gold market is acting remarkably similar to the upswing in 2007 and 2008.  We had a similar sharp pull-back in November 2007, followed by a consolidating bullish wedge formation, which broke out a few months later and moved to $1032 in March 2008.  I will watching closely to see if a similar pattern develops over the next few weeks.

I have been selling down positions in the stock market this month and hedged out my remaining positions on Friday.  I am now actually slightly net short, primarily because I apparently can no longer do math.  Having said that, I am happy to be net short, and will be looking to get even more short in the near-term.

As long-time readers of this blog know, I could change my mind tomorrow and completely reverse my positions once again.  Thus, it is best not to trade and invest solely on what I write.  (Oh, they know that. - ed.)

Net Flat

I hedged out all my longs by putting on new shorts today.  I do not like the action of the market.  However, I am not looking for a tremendous break on the downside.

Now that I have gone net flat, it probably means stocks are going higher.

What Worries Me

I would very much like to extend my appreciation to all the kind words yesterday.  One of the reasons why I started this blog was to provide unbiased (though, in retrospect, not always correct) observations about what is happening in the market.  If I have helped you understand things a little clearer, then I have accomplished one of the missions of this blog.

I have not gone away, at least not yet.  However, circumstances are changing such that it may no longer make sense for me to actively blog as I have done so in the past.  That decision remains to be taken, and I will continue to post, but only occasionally until decisions have been made.  Then, we will see.

I do owe at least one post as Isam reminded me in the comments yesterday. And that is what really worries me.

The economy and the markets have gone through a traumatic shock unlike anything we have seen in seven decades.  You know the story by now - housing bubble collapse, Lehman bankruptcy, subprime mess, credit market implosion, deleveraging, etc. 

I believe the market had priced all of this in, and more, given the record spreads in credit and dirt cheap valuations in equity.  If we are to break to new lows, then another convulsive shock must occur to the economy.  There must be something as big or bigger than what has already been experienced to send the market into a free-fall once again.

Bears argue that the shock is going to be commercial real estate and/or credit cards.  I disagree.  I believe the market has already priced in the decline for both.  The REIT ETF, ticker IYR, fell 77% from the highs, while credit card giant American Express fell over 80%.  Those are depression-like returns.  These are well known and have already occurred.  I also believe that both are no where near as threatening as what has already happened in the housing and mortgage markets.

But there is one thing that I believe is not well known, and it does worry me. 

And that is the potential collapse of Eastern Europe.

The collapse of the economies of Eastern Europe is an event that could rival or even surpass the collapse of the housing market, and I do not think American investors fully realize the ramifications of such a collapse. 

The region is not particularly important in terms of global output.  However, it is the exposure of European banks to the former eastern-bloc countries that could cause a chain reaction which could bring down the European banking system, causing the economy to plunge further and markets to collapse once again.  Given the hodge-podge of European financial regulation and a patchwork political system, the European authorities are less able to respond to such a crisis than the United States.

By some accounts, the eastern European countries are in worse shape than the Asian countries were at the start of the Asian Contagion in 1997, with sky-high indebtedness and large current account deficits.  Western European banks financed the borrowing in eastern Europe, and large defaults could bankrupt the European financial industry.

I do not know if the ultimate denouement is the implosion of the European banking system triggered by a collapse of the highly-indebted countries in Eastern Europe, but it worries me.

Dialing Down

I am decreasing the amount of posting, at least for the time being. 

Since I began this blog, I have made an effort to post on finance and markets at least once a day Monday through Thursday, and on economics on the weekend.  For a variety of reasons, I am no longer going to maintain this schedule over the immediate future.  Instead, I will post periodically when an issue of particular interest arises.

T.

Pulling Back

I continue to hedge down my positions and am now primarily in cash, with some long exposure remaining.  Over the next few days, if the market plays out the way I think it will, I will get net flat or perhaps even short.  If I am wrong, then I will reverse my positions and become more aggressive.  I have not sold any of my stocks bar one, and expect to add to positions on a downdraft. 

This is just a trade, and I might change my mind tomorrow.  I do not believe this is the beginning of a new leg down to lower lows.  To hit lower lows, another cataclysmic event must occur, probably even bigger than what has already happened, an event I believe is unlikely.  (There is one thing that worries me immensely, which I will address over the next few days.)  I think the economy is repairing itself, and economic growth will surprise to the upside in the not too distant future.

But we have come far, fast, and the risk that the market takes a breather and retraces some of the gains is high, in my opinion.

Paring Back

I sold out all my leveraged ETFs today.  This rally has come quite far, and though I think there is more upside to come, I think the probability of a pullback is high. 

I was very long, and I am still long but I now have a pile of cash I intend to put to work if the market goes down.  If we really begin to roll over, I'll get flat or perhaps net short.  But if the market appears to be going higher, I'll buy back in.

For now, as a trade, I am cautious.

Traveling

I will be traveling for the next week.  I will have access to a computer, so I may post while I am away, but I am going to try like heck not to.

T.

WARNING! - Phones May be Tapped!

I found out today that my phone may be tapped.  I can call out but am having difficulty with incoming calls.  If I can answer a phone call within a second or two of the phone ringing, I am able to connect with the person on the other line.  However, after a few seconds, if I do not answer the phone, the line clicks dead and is followed by white noise.  I called the phone company and they think the line has been tapped.

This afternoon, we noticed that calls were coming in and the caller would seem to hang up after a few seconds.  If this happened once or twice, this would not raise suspicion. However, when it happens 10-12 times in short succession, something is going on.

I had a friend over tonight who is an IT professional. He said a friend of his in Atlanta had the same thing happen to him on Friday.  It also happened at his work.  He believes that it may be the work of hackers trying to tap his computer.

I do not know what is happening exactly, and am having a repairman come out to check everything on Sunday or Monday, but I wanted to give everyone a head's up and be aware of what is going on.