Downside Potential In Stocks And The Euro (GDX, SH, UUP, TLT, SDS)

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September 23, 2011 9:49am NYSE:GDX NYSE:SDS

Chris Ciovacco: Global leaders continue to make statements, vows, and promises, but they have done next to nothing in terms of concrete actions.  According to Bloomberg:

Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a statement late yesterday in Washington. Many urged Europe to implement a July promise to expand the powers of a rescue fund, Japanese Finance Minister Jun Azumi said.

Silver futures are down over 8% this morning – gold is down less, at less than 2%.  This is a deflationary and ominous sign for stocks.  As we mentioned on September 11, the gold:silver ratio has moved in a similar manner to what transpired in August 2008. After the gold:silver signal in 2008, all asset prices, including precious metals, performed poorly relative to shorting the market.

For those who believe everything will be fine once the next bundle of cash is shipped to Greece, Bloomberg highlights the short-term nature of the next “fix”:

Even if Greece receives its next aid payment, due next month, default beckons in December when 5.23 billion euros of bonds mature, said Harvinder Sian, senior interest rate strategist at Royal Bank of Scotland Group Plc.

On September 22, we listed twenty-two reasons why the S&P 500 may be headed below 1,050.  While the headline was interesting, we are not big fans of price targets.  We prefer to use technical analysis as a way to monitor the markets, rather than forecast.   However, it can be helpful to know where markets may find support from potential buyers.  Areas of support may offer an opportunity to “cover” a short position or reduce exposure to defensive assets.  The video below explores downside potential in the stock market and euro.

We sold our relatively small position in gold mining stocks (NYSE:GDX) yesterday.  We added to our deflation-friendly S&P 500 short (NYSE:SH) and our stake in the U.S. dollar (NYSE:UUP).  We made no changes to our Treasury position (NYSE:TLT).  We do not plan to hold any of these positions for the long-term.  SH was up 3.14% on Thursday – UUP was up 1.04% and TLT was up 3.76%.

Long-term downtrends and bear markets do not mean stocks go down every day – countertrend rallies will occur and they can be sharp.

Written By Chris Ciovacco From Ciovacco Capital Management, LLC

Chris Ciovacco began his investment career with Morgan Stanley in Atlanta in 1994. With a focus on global macro investing, Chris uses both fundamental and technical analysis to assist in managing risk while looking for growth opportunities around the globe in all asset classes. If you are looking for an independent money manager or financial advisor, Ciovacco Capital is worth a look. Chris graduated from Georgia Tech with Highest Honors earning a degree in Industrial and Systems Engineering in 1990. His experience in the professional ranks began in 1985 as he began working as a co-op for IBM in Atlanta.

Ciovacco Capital Management, LLC (CCM) is an independent money management firm serving clients nationwide. By utilizing extensive research, disciplined risk management techniques, and a globally diversified approach, CCM prudently manages investments for individuals and business owners. Our focus is on principal protection and purchasing power preservation in an ever-changing global investment climate.

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