Last week, we were mildly oversold and ready for the markets to temporarily rally. They did rally for about 5 minutes. The downtrend is continuing and it just illustrates how weak the market really is. The brief rally we had for a few days had the same characteristics that the rally had in March and April. A rally based on sellers pausing, low volume, and weak demand.
I believe one of the reasons we’re seeing this type of action with no real rally beginning is for two main reasons. The first is the devastation in Iowa. Crops could be down 50% this year vs. last because of the rains. That’s causing commodity prices to continue up. It doesn’t matter what the dollar does in this environment, more demand and less supply means higher prices. That’s tough for an economy that was trying to recover. We also have several places around the world either raising interest rates to control inflation in their own country or threatening to. One way to get commodity prices to come down is to have everyone simultaneously raising interest rates and kill the global economy. That’s not the way we want prices to come down. But, I believe that’s what equity investors are fearing.
So, don’t take off your short positions yet. Continue to trade and look for strength. I’m still seeing strength in gold. Gold is outperforming as I stated it would a few days ago. In addition, oil which opened the day down is actually up now and has had a big reversal. Interestingly enough, the oil & gas stocks are actually down still. So, I’m still holding DUG and slightly down on it. If the equity markets really fall apart, I think DUG will start moving up fast.
The best thing that can happen to the equity markets right now is for a fear based sell off like we had in January and again in March. If that happens and fear spikes, we’ll get a great place to cover shorts, get long and at least enjoy a 1-2 month trade.
