Out of Sync

by JDH on March 20, 2010

I have been out of sync this week. Last Saturday my family and I drove to Buffalo, and then flew to Las Vegas, returning yesterday. Las Vegas is in the same time zone as Los Angeles, which is three hours behind Ontario. We arrived on Saturday, and that night, in addition to the three hour time difference, we also had to “spring forward”. No wonder I felt out of sync. At 4:00 in the afternoon my body felt that I was already an hour late for dinner, but dinner was still an hour away. Of course getting up in the morning was easy on the way out, not so easy on the way back.

I have decided to spare you the complete details of my trip. However, for those who are interested, I have posted my thoughts as separate blog entries, which you can read here:

My personal favorite is the Southwest Airlines Sucks story. I had never flown Southwest before, so I didn’t realize that you can’t actually buy a seat on their flying bus, and of course they don’t fully explain that in advance. Instead, you have to rush to get a seat. Needless to say, even though I now understand their system, I will never fly Southwest again. And of course airport security is equally stupid, but again, I won’t bore you with my comments here.

I will, however, give you my thoughts on Las Vegas, and what it tells me about the economy in general.

According to the Las Vegas Review-Journal, McCarran Airport’s passenger volume dropped 8.2% last year. That’s still over 40 million passengers, so the airport is still the 17th busiest in the world, and seventh in the U.S., but obviously the recession is taking it’s toll.

The streets in Vegas were crowded with people, and the two shows I went to were full, but the casinos were certainly not full. There were more empty tables and slots than full ones. Does that mean anything? Perhaps not, but clearly the boom is over, or at least on hold at the moment.

I’m not a gambler (well, not at casinos; my stock picks are another matter). In fact, I didn’t gamble at all this week. We spent our time going to shows and site seeing. I like Vegas. The city is clean, and the buildings are awesome.

My overall impression is that the world, like me this week, is somewhat out of sync.

There are headlines that make it appear that we are recovering:

But there are others that suggest the opposite:

So which is it?

We have massive government debt, very high unemployment, record high consumer debt, and yet the general stock market looks great (click on any chart to see an enlarged view):

The S&P 500 is in an obvious year long uptrend, it’s broken through to new highs, and it’s trading well above it’s 50 and 200 day moving averages. If you follow the theory to “buy high, sell higher”, than now would be a time to buy, as the market is making new highs. The only warning sign (other than the weak state of the general economy), is the high RSI level, which generally, at levels around 70, is predictive of a correction. Of course a three year chart doesn’t look as good, but again, up is up.

So here’s where we are out of sync: is the market up because it’s predicting better times ahead, because the recession is over and the recovery has begun? Or is the market up because the government has spent trillions in stimulus dollars to artificially prop it up? That’s not an easy question to answer.

Here’s the same chart again, but instead of using dollars as the measuring stick, I’ve replaced it with the price of gold:

Using this view it’s obvious that the market is going up, but not nearly as much as is indicated when using dollars as the unit of measure. There are still some obvious resistance levels we still have yet to reach before a new high for the last twelve months is reached. In fact, if you look at the same chart on over a three year time frame, we are still in a down trend:

The horizontal purple lines show that the market has been in a trading range for the last year, in stark contrast to the big uptrend presented in the first chart. It’s quite obvious from this chart that we are approaching a decision point: either the long term red down trend line will continue, or the blue uptrend line that started a year ago will take over. We are clearly out of sync at the moment.

What’s my guess?

Well, I’ve been completely wrong for the last year. I did not anticipate the current strength in the market. In fact, I predicted that the Dow would be at 9,000 by the end of March, so unless we have a crash in the next two weeks, I will be wrong again. (DavidSLane’s prediction is looking pretty good though. He should be writing this blog instead of me, although he too, like me, appears to have been overly optimistic on the price of gold).

Having said that, I refuse to admit that I have been wrong. I prefer instead to say that I underestimated the willingness of the government to spend like drunken sailors, and it is that spending alone that accounts for the market’s strength. At some point reality will strike. Perhaps tomorrow, perhaps six months from now, but at some point fundamentals must become paramount again. So I will stay the course.

I will remain with lots of cash (I have about 50% cash now). I will hold selected precious metals and oil stocks, like:

I will also do covered writes after periods of strength. If the stocks are up strongly two or three days in a row, I will lock in my profits by selling calls, no longer than one month old, out of the money. It didn’t work during the strength in February, but it worked wonderfully this month, I was able to pocket some cash in advance of the weakness late this past week.

We can’t be out of sync forever. At some point reality will strike, and I’ll be well positioned to take advantage of bargains.

That’s my report for this week; now I have to go try to adjust my internal clock. See you next week.

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