Graham Summers’ Weekly Market Forecast (Something’s Changed Edition)

Throughout
most of 2009-early 2011, any and all bad news regarding the US economy was
perceived as positive for stocks due to traders’ belief that a weak economy
would mean more money printing from the US Federal Reserve.

That
situation now appears to have changed. The last two months have seen big misses
on virtually every economic data point: the PMI, ISM, Housing, etc. However,
rather than rallying, stocks have dropped nearly 5%, taking out numerous lines
of support.

The
commodity complex was way ahead of stocks on this one (agricultural commodities
and copper topped out back in February), which was the first indication that
the “bad news = more money printing= higher stock prices” group-think was in
for a rude awakening.

However,
despite the fact the Fed is pulling back on its liquidity schemes (at least
temporarily), the US Dollar has continued to drop from February onwards.
Indeed, aside from a brief dead cat bounce that occurred in May, the greenback
has remained within the same downward channel that it’s obeyed since
establishing a top back in May 2010.

Thus we see
that not only is the Fed no longer promising additional juice in the near
future (sending stocks and commodities into corrective mode) but the US Dollar
is failing to strengthen indicating
that the “flight to quality trade” could potentially no longer be favoring
Dollars.

It is,
however, favoring Gold.

Gold took a
hit along with the commodity complex. However, it has since come back with a
vengeance and is now on the verge of challenging its all-time highs.

What this tells us is that Gold is no longer
trading as a commodity but as a stand-alone currency: a fact emphasized by Gold
no longer trading in inverse correlation to the US Dollar:

 

To conclude, Gold continues to impress me
with its strength. And while it might take a hit if we get another round of
full-scale deflation, the bull market in Gold continues to go strong. So I
would look to increase exposure to the sector on pullbacks.

However, given the scale of the correction
we’ve seen in commodities, as well as the horrendous economic data we’re
seeing, I would look to lighten exposure to stocks, particularly more
speculative positions, and getting defensive. This means focusing on high
quality companies with minimal debt and substantial cash, particularly
large-caps, while moving out of the small-cap space (the Russell 2000 right now
is downright ugly).

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Good
Investing!

Graham
Summers

Comments

[tony bonn]

qen is coming.....you can even hold your breath waiting for it....ben has no choice but to bloat that crap he bought which has no market.....the fed is insolvent now but once the chattering class begins to observe that pattycake cow shit he made is swarming with a herd of flies he will do qe until he blows up the irs market....