I Will Survive

Did you think I’d crumple?
Did you think I’d lay down and die?
Oh not I,
I will survive
— Diana Ross

The market has been surprisingly resilient in the past three weeks.  While the sentiment certainly was negative enough, and the market oversold enough to justify a big move higher, the fundamentals certainly leave much to be desired at this stage of the business cycle. 

Just in case you get too giddy at the positive stock action and forget about the pain the market has endured for the past three months, take a look at Whiskey & Gunpowder’s Survival Report.  It’s currently a free publication, although if the authors turn out to be remotely correct, I’m guessing they will soon be charging for it. 

From the title, you can tell that this isn’t gong to a bullish manifesto on the state of the markets.  And while the analysis is decidedly one sided, I think it’s first rate.  The authors take a similar approach to the markets that I do, combining fundamental and technical work to mold their outlook on the world. 

Here are their conclusions from their most recent letter…

The Big Picture

Since the lows in 2002 and 2003, the dominant theme has been rising prices: rising stock, housing and commodity prices. It now appears we are entering an environment of falling prices. Stocks are falling, and home prices in many areas are now falling. If the CRB breaks its trend this year and pulls oil down, it will be up to gold to prove itself before we enter long.

Final Thoughts

Now is not the time to attempt to catch falling knives. Nor is it the time to stubbornly hold onto equities and pray. The downside risks are tremendous. The upside potential is small. If you do not care to short equities, then hiding out in short- to midterm U.S. Treasuries or money markets is a very good idea.

Forget emerging markets, forget the loonie, forget the Australian dollar, forget anything and everything related to the bull market strategy of buying the dip. We may or may not have more individual plays from the long side (just as we are sitting in BUD right now), but remember, we hold such plays for balance only.

We also look forward to buying gold at some point in the future, but not until we see the right entry. One look at the volatility of those charts (as well as the technical formations) should be enough to tell you why we are on the sidelines or why we short those sectors even though we are long-term positive on them.

At this point, capital preservation is far more important than capital gain. Opportunity is easier to make up than losses. (And that last statement goes triple for bear markets). If you are unable or unwilling to short equities, then our advice (near term, at least) is to get on the sidelines and wait this out.

They are more negative than I am, but I am keeping all their points in the back of my head.  All their observations are valid and if you expect to survive in the market, you need to keep your guard up.