PATIENCE GRASSHOPPER

The above chart is Cardinal Health, it means nothing. I just chose this chart at random, it looks just like any other stock or commodity chart right now, VERTICAL. I know this is very exciting and tempting to chase this stuff. I urge caution to people in doing this. I have to admit yesterday after reading of QE 3 and 4 already in the plans, and seeing the across  the board moonshot this stuff is artificially creating, I came up with the following conclusion.

I HAVE NEVER BEEN MORE WORRIED IN MY ENTIRE LIFE THAN I AM RIGHT NOW

What is the Fed looking at that makes them take such dramatic action, I thought there was a recovery underway? For them to embark on a program to artificially force inflation in the hopes that will in turn get the economy going again is ludicrous.. If you look at commodity prices with Cotton for example, you see the price just skyrocketing. How many of you are prepared to pay 20% more for a pair of jeans? In the end I think this is going to create a monster devaluation wave that will be devastating. 

It is my opinion now that what the doomsayers have been saying for a long time is going to be correct in general. Here is what I think they have wrong. As the dollar continues to decline, it is putting other countries in a spot where they are going to have to try and devalue their currencies so their trade positions do not get too far out of whack. We might be embarking on a world wide contest of currency devaluation. When this does happen the US Dollar will skyrocket unless for some reason our country has become very weak militarily. When that happens all hard assets will plummet.

Our model for our economy has become based on consumers spending more than they can afford, going into debt that they cannot possibly handle, to aritificially move prices higher across the board. This business model obviously makes no sense at all. I have no idea the time frame upon which a scenario above will play out. It will not start tomorrow. For the immediate future as traders, we need to max out what we can with these extraordinary price moves. Here is the challenge as evidenced by the chart above. Most if not all markets are significantly extended price wise, many in historic fashion. The following weekly chart of Silver is typical of how many of these markets look here.

I have marked off the areas on the chart where the valuation versus Gold was at an extreme. Of the 3 prior level similar to where we are now, 2 produced nasty declines, with the third also happening but about a 5 week lag. We are actually more overvalued now than all of those. This just tells us fundamentally what anyone can clearly see on a chart. We have a blow off happening here sponsored by the PPT. I have no idea if a major top or just a retracement is going to happen. Here is what I do know from experience. If you chase these markets in phases like this you will get burned. The stops are massive, and you just have to set the greed aside and realize this is dangerous ground we are in right here. I would have loved to have been long Gold and Silver yesterday, but the Silver stop was over $5000 per contract, just an insane level of risk. It would have worked out, but had it not the loss when added across multiple contracts, is just beyond what I am willing to risk on an individual trade.

Here is another chart which shows the valuation of the Stock Market vs the US Dollar Index. A couple of things stand out to me.

First of all notice how well this valuation model worked for so long picking highs and lows in the stock market. Every time we got undervalued vs the dollar we got a rally, and every time we got overvalued vs the dollar we got a decline. Once 2010 started, the great engineering feat of the PPT began. It is obvious how overvalued we have been for the whole year against the US dollar yet the rally goes on. This to me is just more conclusive evidence of the market manipulation that has occurred. It has rendered so many traditional tools like this basically worthless. However, this is also why I am urging extreme caution. Since this whole thing is engineered not by natural forces, but artificial market moves by the FED, the minute they run out of money or slow down, this whole thing will collapse. It also could be reversed by other countries devaluing their currencies.

I do not believe we are at this point since they have just now initiated another round of QE. However the farther they push this, the bigger the air pocket is going to be. It is my contention that the next move down whenever it does take place will dwarf the last one. This type of thing can only end one way as we have seen. The biggest problem I see with this which makes it different from a couple of years ago, is that they have inflated virtually every market, there is nowhere to go for safety when this breaks. I told my best friend the other day who is a general manager of an NBA team, and completely divorced from the financial markets, the following when he asked me how to diversify. I told him there was no such thing anymore, everything is the same trade. You will have the same exposure whether you are in a US equity fund or an emerging market fund. Everything rises and falls together. This should tell anyone who doesn't even know anything that something is amiss.

What to do now? It is my suggestion to continue to play the long side, but wait for some type of pullbacks for entries. If you go back in time and look at huge price spikes like this you see a lot more tops than you do continuations. Do not pattern your trading approach to what is happening here, only about 13% of total market action is like this. This is time to be patient and manage your risk correctly. This is not a time to swing for the fences. If you are a long time investor life is good and should continue to be for awhile. Asset prices are going to rise except real estate, and that might even tick up slightly. However, develop an exit strategy on your long positions and stick with it. Whenever this moves down it could so so on virtually no notice at all.

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