Market Timing Brief™: ECRI Says Recession Ahead, Mild or Moderate?

Brief for 3-02-2012:

On Friday I started a position in the VXX which goes up if the market (SP500 Index) goes down based on the increase in the volatility (level of fear) when that occurs.  Why?  Because the SPX has hit the 2011 high and is coming down from there.  There is a sense that there are not enough buyers to carry us to new highs.  If I’m wrong, the risk is just a few percent (not zero), but if I’m right, the gain is likely at least 3 times as great and potentially more.  It all depends on the depth of the correction.  NOTE: See Twitter feed.  Currently short QQQ and out of VXX trade at profit.

We have not corrected perhaps in part due to the fact that so many are predicting a pullback.  But when that sentiment aligns with caution about the economy, selling may finally begin.  It may not be enough of a correction for long term buyers to be concerned about, but my plan is to vacate the market in steps (already 50% out of “normal” equity position) and re-enter as needed, higher or lower in steps.  What has me leaning toward a correction is the ECRI (Economic Cycle Research Institute) study I Tweeted on March 1st (see link to Twitter below and then read my latest list of Tweets; you don’t have to have an account to get to the link.)  The study by the ECRI, which has been very accurate about predicting recessions, shows that the rising employment we have seen is a lagging indicator in that GDP peaked in 2010 and has been FALLING.  Since the stock market discounts things ahead of time, and it’s behind on that already, it will soon start correcting to reflect lower SP500 earnings to come.

The ECRI says that the depth of the recession will be influenced by how high oil prices get.  A recession in the midst of high oil prices could give us in a much deeper recession.  Another negative is that housing stocks have reversed a breakout above the 2011 high. (HAVE SINCE FIRMED UP)  That may drag the banks lower as they are very connected at this time.

Small cap stocks have broken into a legitimate correction (SEE CURRENT REPORT – link above; bouncing now).  As they tend to be less liquid than their larger breathren, it could be “a sign” of the start of a general market correction.

All that said, the Bulls still have their arguments.  The biggest one is that the financial did not sell off much on Friday and the volume went down as that small pullback occurred.  Tech has yet to start correcting.  The NDX which is heavily Apple (20%), was down only 0.07% on Friday.   So as you can see, the call to sell this market is early in that the markets are not selling off briskly in unison yet.  My stops have brought my stock exposure down to 50% of my maximum exposure, which I was at very recently.  My exposure will plummet if we should start selling off.  I exited my silver position with a profit, but kept my gold trading positions.  Remember that I am not trading my long term position.

What I noted during the last major pullbacks in the stock market that I did not share “publicly” last week, and said I would here, is that gold and gold stocks can rally during the start of a significant pullback in the SP500 Index.  Then the metals and their stocks fall with the stock market.  So I am looking for a “terminal rally” for gold before it succumbs.  Gold holds up better than silver during these pullbacks, which is why I exited the silver position and kept the gold positions.  The trouble brewing for gold is the stronger dollar. The dollar could go into a significant rally from the bounce over the past few days unless the Fed pulls the plug on it again.  With the Fed and other foreign governments throwing their wrenches into the system periodically, making dollar predictions has become very difficult since 2008.

Set your mental stops on your profits (WRITE THEM DOWN and email them to yourself so you have a record) and …

Enjoy your week!  

Standard Disclaimer: Remember, it’s your money and your decision as to how to invest it.

This is the text from a previous free “Weekly Wall Street Sun and Storm Report™.  To see the full current issue and this week’s ratings of all 35 markets I follow and receive the newsletter every weekend for free when it is published, subscribe here:

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Standard Disclaimer: Remember, it’s your money and your decision as to how to invest it.

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