Home' Trinidad and Tobago Guardian : July 20th 2014 Contents JULY 20 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
STOCKS | SBG17
Some investors have been waiting for the rug
to be pulled from underneath this market, with
record high stock market levels and valuations
feeling "toppy." Yet, it hasn t happened. The
Dow Jones Industrial Average (DJI) hit another
all-time high this week and investors struggle
with a fine balancing act of eking out the last bit of gain from
this market, versus standing on the side lines and missing out
on more of a rally. It is hard to recognise a market that is at
its very peak.
Henry Blodget, co-founder and CEO of Business Insider,
has been warning of a market collapse all year and believes
that when it happens, it will happen in frenzied fashion. He
tells me, "If history is prologue... there s going to be a mad
rush for the exit."
When asked about the timing of this market plunge that
he has been predicting since the year began, he refrained from
providing a timetable in the interview saying, "Nobody knows
and we won t know until hindsight."
But knowing vaguely when it could happen is crucial for
knowing when to execute an exit strategy. Seeking signs,
investors are looking for exit signals from the Fed, the markets
and even industry insiders. Volatility (VIX) and trading activity
remain extremely low, another sign of a market nearing the
top, according to technicians. Yet the markets continue to hit
fresh all-time highs.
So how will a fall from the top look?
Blodget says the market exodus will happen in a flash. "I
think that the idea that there suddenly will be a light that
changes from green to red and everyone who wants to exit
can exit quietly and the market will quietly go down is crazy."
There are two factors Blodget is watching as signs of impend-
ing market turnaround. First, he is watching the Fed and any
change in direction. He believes that when the Fed begins to
tighten policy, it is usually a harbinger of a pullback. The Fed,
which is not moving rates just yet, has said it will begin to
pull in the reins on its bond buying activity in October. That
piece is set in motion, only to accelerate.
Blodget is also keeping watch on corporate profit margins;
which are at record levels. He says if we see any breakdown
in those margins to even "normal" levels, we could see a reason
for the market to turn.
Even with Blodget s prediction, he says it isn t necessarily
a call to action for investors. Whether you short, sell or buy
into a falling market depends on your goals. "It is different
for every investor. There s no uniform position...if you re
investing for retirement with a time horizon of 10-20 years,
there s no reason to do anything," he says.
And as history reminds us, even a frothy market can keep
giving for many months or years more. Blodget says, "We saw
in the late 1990s that this (bull market) condition can last for
years. The bulls will point out it has been more expensive than
this in the past."
Shibani Joshi for Yahoo Finance
Gold was down 2.0 per cent on Monday, but it has
just come off its highest levels in nearly four months
after worries over Europe s banking system subsided.
Gold settled at US$1,306.70 per ounce.
But, those hoping to use the current pullback as a
chance to jump into the yellow metal may want to
think again, according to Gina Sanchez, founder of
"Interest rates are going to go up," said Sanchez, a
CNBC contributor. "Even if they re not going to go up
by a lot, eventually they re going to go up and that s
bad for gold."
Seemingly dovish comments by Federal Reserve
Chair Janet Yellen as well as geopolitical tensions also
helped gold move up over the past several weeks. But,
Sanchez believes not enough attention is being paid
to the federal funds rate, which is currently targeted
between 0 and 0.25 per cent.
"The expectation, even from the Fed, even given
Janet Yellen s comments, is that by the end of 2015,
they re at least going to be up to 1.0 per cent; by the
end of 2016, up to 2.25 per cent," Sanchez said. "That
will be bad for gold and you re going to have to take
that into consideration."
On the other hand, Richard Ross, global technical
strategist at Auerbach Grayson, is a fan of gold.
"I published a report on Friday where I called gold
a trading buy," said Ross, a "Talking Numbers" con-
tributor. "So, if I liked it on Friday, I m probably going
to have to like it down 2 ½ per cent from Friday s
Ross acknowledges that the gold chart of the past
year may justify scepticism in some toward technical
in analysis. However, he sees one indicator as working
in the chart, at least in the short-term: the 150-day
moving average, currently around US$1,287 per ounce.
As long as gold trades above that level, it can be a buy,
according to Ross.
"It was a floor in the past, and it s been a floor
before," Ross said. "That s a level you want to keep a
close eye on for short-term traders."
Nevertheless, longer-term traders may have trouble
trading gold at the moment. "It s very difficult to have
high conviction when the chart moves sideways like
this," Ross said. "The best thing to do is look for charts
that are trending, and clearly, gold is not a trending
One example Ross gives is the bullish flag formation
that began in June. But, rather than heading higher,
gold broke lower. "That should have been a continuation
to the upside last week," said Ross. "We ve come in
on Monday and they ve pulled the football away like
in Peanuts and we re down 3.0 per cent. This is a tough
chart to trust (and) it s a tough chart to trade."
Yet Ross doesn t think traders should give up on
gold. "I d still be a trading buyer here," he added.
"Use that $1,287 down to $1,282 as a stop."
Two signs a market crash is coming
Why gold is so tough
to trade right now
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