Tuesday Outlook: Commodities, Emerging Markets

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With so much money being thrown at the markets, and with conditions deeply oversold, it was just a question of time before we got a snapback rally of great proportion. This certainly qualified and the magnitude of it took most by surprise. Thankfully, whatever short positions we still had left were eliminated shortly after the open. We made money and now are flat.

What next? That’s the big question. Bear market rallies are usually the strongest and today would make a believer of any skeptic.

Government printing presses are running overtime and all this is very inflationary. But that’s always the choice politicians make and authorities succumb to every time. Ultimately gold and commodities should respond but that’s not the name of the game today. It shouldn’t surprise anyone if central banks were selling the precious metal to pay for all this fiat printing.

We still have plenty of problems and not much was changed today except psychology. But that’s always an important component of investing. We still have unsold homes, foreclosures, derivative unwinding, crummy earnings coming and so forth.

Volatility is not removed from markets yet and it’s as likely as not that the markets will retest their recent lows. That’s the way it generally plays out.

Some investors were encouraged to buy like famed but dotcom-failed trader Julian Robertson, who was delighted to announce that decision from the comfort of his digs in New Zealand. It wouldn’t surprise if he was selling his recent buys to you.

So, there will be plenty of table pounding and those calling today the sign of a bottom. Perhaps it is. But the way I see it, we’re just not as oversold as we were coming into today.

I’m content to lay in the weeds for a bit and enjoy the show before joining the crowd whether to reshort or go long.

Comments

[Bobby Baklava]

Mr. Fry your comments and charts are excellent. I completely agree with your cash position currently, as the VIX still stays above 50.

I would like to say a few comments about Gold, (GLD) and its strong downward swing on Friday. The G7 summit which was held over the weekend, (usually the weekend is a good time to do things when people aren't paying attention), had a large part in the sell-off and was a strong sign for the equity market rally globally today.

Gold hit a high ot 910 dollars an ounce the same week, and then plunged suddenly of Friday. The market predicts future events, but with a commodity like gold, global leaders dumped their position a day early to reallocate their assets in equities.

Now, some might contend that today's rally was caused by low volume and bond market holiday. However, how would that explain the explosive rally in asian and other global markets.

I am not predicting a bottom either but I am predicting an upward movement towards the top of a double bottom hill. If the libor rate comes down and Apple has some innovative new laptops to offer the market might take off. Obviously there are many other factors but I believe the sell off in gold was a early sign that global financial leaders knew of the results of th G7 summit ( such as the US annoucment of federally buying preferred shares of several large banks - financial socialism - aka. overreaction).

Expect a uptrend hitting resistance for the DIA at 11000, and then a reversal before we get out of this mess. I have NO idea what the time frame is.

[Blue collar guy]

All of which means that my guess is as good as his. The world's largest crystal ball couldn't come come up with a better than 50/50 GUESS as to what happens next.

[Winston Smith of Oceania]

Dave, awesome job and as always, great points! Is this time different? A quick look back in history finds two big sell off periods in October. The first in 1929, where there was a 2-day sell-off in the Dow for -23.62% beginning on October 25 and ending on the 28th. The following two days produced a rally of 18.88%. However, it didn’t last. From the low registered on October 28, the market slid another 13.64% by November 13, which wiped out the two-day knee jerk euphoria.

The second period is Black Monday 1987, where the S&P 500 was down 20.47%. The two days following added back 16.6%. Again, measured from the low registered on Black Monday, by December 4, the S&P 500 was down re-testing the Black Monday low. The rebound rally was erased leaving the return at -.41%.

[YR Dog]

Nothing like a whipsaw to make us all humble. I still have my ETF shorts and am thinking along the lines of Nationalize Everything above. There still is going to another nasty downdraft. I start to feel naked without the shorts.

Here is my dime store philosophy for the day:

The quick and dirty cure for the financial meltdown is for the world to basically declare itself bankrupt and all debt is written off at 9 am tomorrow morning and there is a new beginning.. 95% of the worlds population would love it, 5 % that controls all the money and power would hate it, as they would have to go to end of the line. It is a shame that the fraudsters are going to make the 95% go down with them, just so they can keep their position at the top of the pile.

[johnthebear]

David, I have noticed a disconnect between FXI and the double short FXP for the last few trading days.

FXI moved down today, but FXP barely moved. Any idea why this happened or how FXP climbed to 219 just before the close on October 9th while FXI moved to 24.31? I am heavily invested in FXP and it looks to me like the gap on FXI at 28.38 should fill soon. But, will FXP give the appropriate move up?

SRS and IYR are moving as expected with the 2:1 ratio.

Your thoughts would be greatly appreciated.

[jay1234]

It seems to me that we go thru' a bubble every 5-10 yrs and a massive downturn on a longer wave cycle. Why? Greed and incompetence. Instead of creating wealth and prosperity, some small minority always runs with the things in our world. We need to control those types - whether it is corporate, financial, religious, or other types of extremes. We have truly lived upto what Dale Carnegie said "the business of America is Business" and that has made us a country of marketeers and not achivevers. We leave the hard work and exploit the immigrants or weak countries worldwide - for our entreneurial pool, for labor, for goods, for oil....and leave a mess everywhere we go. This has been especially true after WWII and we have become obnoxious, manipulative, dogmatic. We are the main cause of global warming and financial mess and we dont still dont want to clean that up....in the name of free trade. Trade is free and the playing field is level when the true cost of the complete cycle is taken into account - eg there was a cost of pollution but we gave the industry a free reign esp, in air and water pollution as these costs were NOT PRICED or imposed on those responsibe, same with toxic assets, etc. We need to develop of thoughful introspection and almost zen like culture to evaluate things and regulate them properly before jumping all over the next bubble which will soon be forming - what is that going to be....alternate energy anybody? Without proper regulation we cannot creat a level playing field and we must regulate most the lobbies.