The Good, The Bad, The Ugly

Didn't spend much time watching the markets today, settling instead for an informal lunch, matchmaking a friend from overseas with my father... but that is hardly why you read this site, so here is today's news.
It has been another bad day for the longs, with some extra face stomping, as the SPY gently broke through last weeks support. China (FXI, GXC), which I hoped to be making a bullish pennant, broke to a new low in its 4 month consolidation range, increasing the likelihood of some more selling pressure, though I wouldn't say the bullish case is over quite yet. GXC/FXI are an excellent example of why it is safer to wait for a pattern to confirm itself, before jumping in early with the expectation of some extra points.
Inverse Real Estate, Financials, Consumer Discretionary and Small Cap Value (SRS, SKF, SCC, SJH) had a great day, and surprisingly, agricultural commodities held up rather well (DBA). The Yen and Swiss Franc show excellent strength, and the Yen actually broke its 1 year high (FXY). Disappointingly, GLD was down a hefty 1.7%, but considering its remarkably fast run in the last two weeks, I would say some consolidation is to be expected. GDX took a market under performing hit, with at +3% loss that outta shake out some of the weak hands, as this too has had a rather dramatic rise over the last 3 weeks. Newmont Mining (NEM), though down on the day, was quite strong, as was Humana (HUM), both of which I expect to outperform in the coming months. I'm sad to see I was stopped out of BPT... I hope to reenter the position on strength, though the short term technical picture isn't all that great.
The horrific numbers from Citigroup come as no surprise, but the negative retail numbers are certainly worrisome for those expecting to find value in the retail sector. Thus I remain short consumer discretionary, financial and real estate sectors, with an expectation for precious metals and defensive stocks in general to outperform.
Fundamentally: The markets are beginning to see information indicating a spillover of economic malaise into otherwise untouchable sectors (the American consumer), and this will continue to weigh stocks down until lower interest rates buoy the economy. This will only increase the value of commodities, especially as Asian consumption rises.
Technically: The market seems far from oversold, and thus any trades to the long side seem extra risky... That said, be prepared for anything as the overall volatility continues to rise (as seen on the VIX) and the shorts get ahead of themselves, leading to the inevitable dead cat bounce squeeze.
Sentimentally: Investors should be starting to panic and traders will be able to take advantage of their misery.
Recommendations: Keep the portfolio market neutral, shorting under performance and buying out performance in the aforementioned sectors, always with a nice tight trailing stop to avoid any nasty surprises.

Mid-Day Musing

Surprise surprise, precious metals and related miners are up, retail, financials and real estate are down, and both the Swiss Franc and Yen continue to show strength, even though the market is posting a moderate move to the upside. A tip of the hat to Mike Shedlock, who has a great post over at MGETA related to my rant about AXP. We share the same view of the credit card debt industry, and he has some very nice charts confirming my thesis of the next wave of financial disaster.
There has been some great performance by GDX and SRS this morning, but the real winner is HGU.TO which returns 200% of the S&P/TSX Gold Miners Index. HGU.TO has been on a stellar run in the past couple of weeks, up 40% since mid December. Anyone following GLD's bullish pennant could have guessed HGU.TO was due for an enormous move, especially after its break past 28. It is still making all time record highs, and continuing upwards at an incredible pace. A pairs trade long HGU.TO and long SRS (200% inverse of Dow Jones Real Estate Index) could prove quite valuable, providing some relative market neutrality.
As always, 7% trailing stops are a wonderful way to avoid major mistakes; leveraged ETF's tend to be incredibly volatile and costly when they are entered during consolidation periods.
Keep an eye on BPT, an oil trust supposedly yielding 11% with a great looking chart, and a recent breakout above 80.
Other movers include SSG with a much needed 5% pullback, probably due to renewed strength in Intel (dead cat bounce?). Semiconductors have been leading this market down, and I see no reason (yet) that this trend should end. With Intel's numbers coming out soon, perhaps it is best to wait on the sidelines and short any strength that may come from earnings week.

Post Porno Precious Metals

After a solid jerk to the moans of Ms. Haze, I'm inclined to write a piece on an asset I'm bullish on, lest my dear reader assume I'm a total curmudgeon and hater. A slowing economy is often followed by falling interest rates, which in turn weakens the currency of that economy, thereby increasing the nominal value of assets denominated in said money. Gold reflects this reality, and has done so for the last 6 years.
Since the first rate cuts of the millennium in September 2001, gold has tripled, leading many to believe that the easy money has been made in the shiny yellow metal. Yet, as William O'Neil so concisely points out, "What seems too high and risky to most investors is likely to continue rising. And what seems low and cheap usually goes down."
Gold will appreciate for fundamental, technical and sentimental reasons in the coming months. The best ways to play this trend include ETF's like GLD, GDX, DBP, HGU.TO, and the options tied to these underlying securities. There will also be stellar performance by the likes of Newmont Mining (NEM) and Barrick Gold (ABX), but to offset individual company risk, sectors funds like GDX may be a better bet.
Fundamentally: Gold is called a hedge against inflation, and it has done pretty well in this category, rising with the price of energy and agriculture since the commodities boom began in the late 90's. It is also a safe haven during times of perceived global instability, so as long as there are planes plastering the Pentagon, bombers in Bali, boys blowing up Bhutto and Negros 'nihilating Nigeria, gold will continue to shine. Finally, unlike the fiat currencies of every industrial nation, the value of gold cannot be easily debased (unless you believe there is a conspiracy to add base lead to the bars held by the Central Banks and sold to retail investors).
Technically: Precious metals have enjoyed a solid run over the past few days, months and years, generally moving upwards at a 45 degree angle across the charts. Currently GLD sits ~5-10% above the most recent consolidation levels (starting points are dependent upon subjective analysis), and is making new highs after breaking out of the bullish pennant formed over the past few months.
Sentimentally: Fear has gripped the Street as a fog of uncertainty clouds the quality of assets currently on/off the balance sheets of many financial institutions. This has led Central Banks to do what they do best, cut interest rates to encourage borrowing, further exacerbating the situation by allowing speculators to acquire money on the cheap and invest it in hard assets (i.e. gold and wheat). So long as these quasi-government institutions kowtow to the passions of commercial banks and other lenders, precious metals will move higher.
Recommendation: Buy precious metals on dips, on breakouts, in consolidations wherever, whenever you get a paycheck.