George Maniere: Last Thursday, October 20th, all was right in the world. We had rallied past every key technical indicator; Europe had announced that they had come to an agreement to save the default of Greece and Spain, and Italy and Portugal. Peace and prosperity would once aging reign in the land of Leonardo da Vinci, and the home of the greatest art ever created. The food is not too bad either.
Last Friday I think everyone took the day off as there was such relief from the news out of Europe that no one wanted to jinks it by showing up. Anyway it was Friday, Europe would be saved and we had a one month closing higher in the markets than we had in 40 years. We deserved a rest and Friday was the day.
Well what a difference a day makes. Last week’s passage of the Eurozone financial rescue plan impacted the markets as traders continue to evaluate its worth. The markets are also whispering and watching the Fed for any news about a QE3 initiative but the Feds steadfastly deny any such plan.
Initial relief over Europe’s latest attempt to end its debt crisis faded fast yesterday (Monday) as investors fretted about the plan’s lack of detail and grew more skeptical about Italy’s turnaround effort.
One day after European leaders announced a series of measures aimed in part at enticing investors back to the region’s debt markets, bond buyers demanded higher yields on Italian and Spanish debt. An auction of new Italian bonds was met with weak demand, forcing the nation to pay higher interest rates than in previous sales.
The response from bond markets underscores how challenging it will be for European leaders to convince financial markets that last Thursday’s broad agreement is sweeping enough to enable troubled countries such as Italy and Spain to work their way out from mountains of debt. The plan calls for beefing up the region’s bailout fund, recapitalizing banks and reducing Greece’s debt burden.
At this point, it’s pretty obvious that this recovery is fake.
Since 2009, this recovery has been manufactured, bought and paid for by governments from here to U.K.
Last week, the latest EU bailout plan was just another example of a government throwing money at their problems – and really putting off the real issues until next month or next year.
Today, I want to show you two questions you need to answer so you can navigate these perilous economic waters this year.
Ask yourself; is the Economy Growing or Shrinking?
As a trader, I’m always watching to see if an economy is expanding or contracting? What is the trend of the market? Are the people in this country confident and assured or are they afraid that today may be their last day at work?
To determine this, I found this chart of the U.S. GDP.
A Government-Spending Induced Expansion Has Come!
The GDP figures show how the U.S. economy is faring. A negative number shows that there is an economic contraction. A positive number shows economic expansion.
Right now, we’re showing a positive number. But there’s just one problem with that. It’s not consumers who are promoting this growth – it’s the government. The politicians are stepping in to keep the economy afloat.
In other words, it’s not a healthy expansion. So I don’t expect it to last long.
The good news: even if these numbers show a false start to the economy, they still give me some insight on what traders are seeing. Long-term, I’m still cautious. I know the enormous sums of money that the government spent to get these economic results. They can’t keep that up forever.
Sooner or later, the economy will fall onto the backs of the consumer once again (as we saw in early August). When this happens, we’ll likely go back into an economic contraction.
This tells me that I can be bullish in the financial markets for short spurts here and there. But long-term, it also tells me to be cautious and to make sure I trade accordingly.
To prepare for this in my trading, I can always cut down my lot sizes for each trade. That will decrease my risk just in case the markets turn on me.
Also, if my trades are comfortably above their breakeven point, I’ll quickly move my stop-losses so I can assure myself of some gains just as soon as I feasibly can.
Finally, Should I Be On Offense or Defense?
The next thing to keep in mind is whether you should be trading offensively or defensively. Offensive plays involve buying the high-yielding equities and defensive plays are the “safe haven” currencies like the gold and silver that tend to rally when stocks fall. As of last week, the world markets seem to think this EU bailout plan is enough to force a market rally for a while.
Therefore, the mood of the market can be favorable for taking a bit of risk during these times.
However, I would be cautious. Right now, we have economies drunk on tons of printed money. In my opinion, there’s no way this EU plan will hold up in the long-term. For now, it just looks like the EU is kicking the can down the road once again and saving their problems for another time. The problem is that every time we kick the can down the road it gets bigger and it’s beginning to hurt my foot.
Once the markets wise up to this fact, we’ll see the hangover from all this. Stocks will fall – and that’s when you’ll want to bring out your defensive team. Your defensive team will include a basket of both physical and paper gold and silver ETFs.
The trick is knowing which ETFs to buy. I own a basket of safe gold and silver ETFs. I own SPDR Gold Trust ETF (NYSE:GLD), Sprott Physical Gold Trust (NYSE:PHYS), iShares Gold Trust ETF (NYSE:IAU) and I bounce in and out of ProShares Ultra Gold ETF (NYSE:UGL). I also own iShares Silver Trust ETF (NYSE:SLV), Sprott Physical Silver Trust (NYSE:PSLV), Silver Wheaton (NYSE:SLW) and I bounce in and out of ProShares Ultra Silver ETF (NYSE:AGQ).
In conclusion if the market rallies gold and silver will move up modestly but if the markets will sell off (which is just a matter of time) gold and silver will be our safe ports in the storm. And if the FOMC whispers QE3 gold and silver will go parabolic. So while the market stages its rally I expect gold and silver to sell off and I will be a buyer on any pullbacks.
I have an MBA in Finance and 38+ years of market experience. In 2009, I knew the market was seriously oversold and committed a serious amount of capital to the market. Needless to say things went quite nicely but I always remembered 2 important things. Hubris equals failure and the market can remain illogical longer than you can.