Last week the Japanese earthquake darkened the skies with an unexpected flock of black swans. On top of an act of nature, we have the persisting presence of eurozone debt fears, currency wars, the Middle East unrest, and the near bankruptcy of many states in America. The Wisconsin problem goes far beyond one local state; there are 46 Wisconsins that have accumulated billions of dollars of deficits. States have more than trillions of dollars in pension obligations which they will be unable to pay. Unions are unwilling to budge and have taken to the streets in protest. Sheer survival mandates humongous cuts in spending. This places US states between a rock and a hard place as they will have to incur serious job cuts with an already high unemployment rate. This is combined with geopolitical issues in the Middle East, where Israel is mourning a family of five, including a four-month old baby, all of whom were murdered in their sleep on the Jewish Sabbath by Palestinian Terrorists over the weekend. I expect the situation to intensify as the region grows increasingly anti-Western.
This litany of woes have been compounded by the news out of Japan. Municipal bonds -- once considered to be a sacrosanct safe haven -- have been abandoned by the largest fixed-income fund, which sold out its holdings. The manager said he didn’t want to stick around as he felt prices would decline. Astute investors are not seeking Treasuries and the dollar as a safe haven asset.
We are witnessing a crisis of accumulated crises. I have recommended precious metals, uranium, and rare earths that can serve as safe havens in these gathering storms as both a hedge against a deteriorating dollar and leverage for an increased demand for clean energy commodities.
The US equity market is at a critical juncture after reaching overbought territory not seen since before the credit crisis. However, we are at an extremely critical juncture on the S&P 500, where we can be on the verge of an equity correction. If one needs to minimize risk, now is an important juncture to monitor as we may be seeing some of the same forces that caused our summer correction to resurface.
It is crucial to monitor this market and minimize risk as the S&P has reached my measured move after the end of August 2010 reversal. One can predict a move or where the next critical juncture will occur by using this technique, and I often use it to force myself to take profits as it reaches a target. I wrote several weeks ago when equities were reaching record overbought territory to be cautious and not to be blinded by market euphoria.
In July of 2009, the S&P bounced through the 50-day moving average moving from approximately 85-120. That is a 35-point move. Then the summer of 2010 we saw a correction down to point C at 100. The measured move is calculated simply.
A to B = 35 so C to D = 35
The measured move is another valuable tool to predict critical areas. It works in up and down markets. The measured move does well in timing potential profits and it is quite amazing to see such a simple symmetrical phenomenon occur so often in a chaotic market.
A note on the media-induced sell-off in uranium: I have highlighted that we are in the beginning of a nuclear renaissance throughout the globe. Nuclear stocks have been in an uptrend as emerging markets expand their nuclear capabilities. Many fear this is the end of nuclear energy as the media escalates these disasters. In reality, The Japanese have been proud of their nuclear accomplishments over the past 50 years supplying cheap and clean nuclear energy to approximately one out of three Japanese homes. In a catastrophe of epic proportions with a record-setting 9.0 earthquake and subsequent tsunamis, only two plants suffered significant damage, but have not released toxic levels of radiation to the public. One accident will not stop a developing industry that many countries rely on. Will nuclear engineers study and try to perfect reactor design? Yes. Will nuclear energy be abandoned by countries who have growing energy and carbon reducing needs? Absolutely not. Nuclear stocks are in an uptrend and what counts is not the news released but the reaction and resilience. Stay tuned.
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