Bear Market Rallies and Tactical Asset Management

The stock market exploded nearly 1000 points in a single day, the largest percentage move since 1933. This rise has quickly taken the market back to significant levels of overhead resistance. We believe that the rally was initiated by the “Working Group on Financial Markets ‘ who were joined by value buyers who saw what they believed to be a great buying opportunity in this implosion to under 8000. Considerable fuel was added to the rally by substantial amounts of short covering. Finally, momentum traders jumped on board for a quick trade. None of this is reason to get very excited, nor to believe that the secular bear market is over. In short, we believe this move to be unsustainable.

What we see before us is a giant casino that is on fire.  The Fed Chairman and the Secretary of the Treasury are doing everything in their power to put it out by pouring unlimited water (in the form of US Dollars) on this blazing Wall Street inferno. Unfortunately, most of the gamblers are out of chips, and are unable to place any significant new bets to keep a rally going. The only way the fed can help these gamblers is to re-supply them with new chips by creating money out of thin air. This new money is the life blood of the speculators, or the Wall Street gamblers.

This newly-created money supply explosion by the Fed has the bulls excited at the prospect of a new and sustainable bull market. What they fail to understand is that the gamblers were severely wounded in this fire and are bleeding from several open arteries. The result is that as fast as the blood is being pumped into the patient’s veins, it is squirting out of the near terminal patients at a much faster rate. In other words, money is being lost much faster in stocks, commodities and real estate than it is being created by the Fed. That is called Deflation. If the Fed and the Treasury are able to successfully suture the gambler’s wounds, then and only then will we see the patients revived and the casino restored to its former glory.

What long term investors need to understand is that this explosion of money will eventually show up in rising inflation for what will be referred to as a new era of stagflation in the Global Economy. The question most advisors and investors are now asking themselves is where do the gamblers who control the majority of the remaining chips go next to invest, trade, and speculate? They went to dotcoms in 1999 then to real estate in 2004 and then to oil and commodities in 2007, but where does the money go in 2009?

Initially in a bear market, savvy investors reduce their long exposure on any significant rallies, as they did during the nearly 2000 point rally from the intraday lows to intra day highs we just witnessed. More aggressive investors should look to short these extreme rallies, and anticipate that they will see new lows or at the very least a test of recent lows.

Money will always go where it feels the safest in troubled times. Money will not go to stocks when world markets and everything that basically trades is melting down. There really is only one smart long term place to go and that’s to Gold and Gold stocks. Once Gold powerfully crosses 1000 we will have officially launched to the next big leg of the gold bull market that started in 2003. Technically gold is putting in a right shoulder of an inverse head and shoulders bottom and is setting up very well with the bullish fundamentals.

In summation, we believe we are in a new era of market volatility. We also believe that the time-tested philosophy of buy and hold is dead and gone. The lone exception is the one asset class that is still in a long term secular bull market and that is gold. Unfortunately for long only buy and hold investors, times have changed and a new strategy to deal with these changing times must be adopted. The new mantra is fast becoming “buy low, sell high and short high, buy low”. Advisors and managers will need to be more tactical in their approach and deploy strict risk disciplines to preserve gains and cut losses. They will need to finally realize where the next big opportunity to simultaneously preserve capital and achieve gains resides, that being in deploying tactical asset management in stocks, bonds, and commodities, while buying and holding physical Gold and Silver.  

(c) Coby-Lamson Capital Management

www.cobylamson.com