Since I cashed out of equities about two months ago I have waited and watched for this pullback. I don’t trust the market because it seems to have forgotten about economics as illustrated by the referenced article.

I understand the market ignoring the slide in factory orders as a blip, but the out-pacing of wages to productivity is a problem. That is called inflation, and it is bad inflation, namely core inflation. I have noticed this core inflation problem at the stores as they have been scrimping on the sales, even if it is ever so slightly. I do the shopping in the household and I notice that prices have been moving upwards, again ever so slightly. As long as we have a core inflation problem there will be no interest rate drop, that means housing will be hurt and that means problems with our economy.

When I hear analysts saying “oooh all is ok” I am wary. Here are some other things that make me wary of the market.

  • People are broke! People are trying to save money and trying to reduce debt resulting in a slow down of consumption (UPDATE: link talks about people trying to reduce debt). Just last week when I wanted to deposit a cheque I had my bank ask me if I knew the person who issued the cheque. I asked why they are asking me this question. The bank teller replied that in the past couple of months the number of cheques (coming from the US) that have bounced have sky-rocketed and as such have the costs. Thus they would prefer money transfers.
  • Bernake is too optimistic for me. With Greenspan saying one thing and Bernake saying another I get concerned. And what really disappointed me is that people are angry at Greenspan for saying what he did. As one commentator on CNBC said, had Greenspan said the economy is great and wonderful everybody would have complimented him. But because he was being pessimistic they jumped on him.
  • Too many people have too many vested interests. I keep hearing about people who saying this is a good market, etc, etc. It seems like they want to talk out of this pullback.
  • The down slide only broke the 125 day moving average and still stayed within the 125 day Bollinger Band. To have a meaningful pullback it has to significantly drop below the 125 day moving average and break the bottom of the Bollinger Band.

Assuming that you got out of the market, or you have monies to invest right now here is what I would do. For long term money I would not step back into the market. I would choose safety right now for long term. Safety to me means fixed income, or even bonds. BTW safety does not mean less value. Safety means knowing how to choose your bonds, and fixed income products. You can earn in excess of 10% with bonds, etc.

If you got caught then hold steady and wait. I personally don’t think you should play things one way or the other unless you are an experienced trader. Right now we are in a traders market and that means to make money you need to be a trader.

But let’s say that you are a long term investor, what do I see happening?

  • Good Case Scenario: The market does a bit of rebound, but then drops again, and then does a sideways push. I hate using historical patterns as they often wrong, but I could see a year like 2004. This means your investment growth will be zero, with some winners and some looser’s. It will be painful to see no investment growth, but at least there is no loosing either. Hence my reasoning for flight to safety with fixed income products.
  • Bad Case Scenario: The market does a major rebound and breaks the highs that were just hit. At that point, in my opinion, take your profits, smile, and run to safety because I fear there will be a very hard crash.

Last night I attended a webinar on “Advanced Hedging Strategies Using Options”, and the speaker made a real funny comment on selling options. For those that deal in options you often hear how options are an easy way to make nickels and dimes. The speaker said something along the lines of the following

Selling options is like picking up nickels and dimes from the street, yes its easy money. Though you are doing while in front of a moving steam roller. And we all know what happens if you make one wrong move and get caught by the steam roller, right?