U.S. Stock Market - Leave The Dance With The One That Brought You

The more familiar saying is probably "Dance with the one that brought you", but the title of this column as written seems appropriate, especially given the subject matter here.

As a trader, investor, or adviser, if you followed the tried and true formula of "Don't fight the Fed", then you made a lot of money over the last five years in the financial markets. The Fed's quantitative easing programs have been hugely successful at inflating asset prices, especially in the stock market since March 2009. 

However, the "dance is over". The Federal Reserve has turned out the lights and left the party! Remarkably, no one seems to have noticed as yet, but this will soon change! And the consequences for equity markets won't be pretty!!

The Fed's monthly bond purchases have been "tapered" steadily over the last 5 months, and rhetoric from most Fed governors and from Chair Yellen herself is that monthly bond purchases will end completely before year end 2014. And Philadelphia Fed President Charles Plosser said last Tuesday that a strengthening U.S. economy may force the Central Bank to actually hike rates "sooner rather than later" to stay ahead of inflation. Affirming his hawkish stance, Plosser said that the Fed is at risk of falling "behind the curve" in its control of potential inflation if policy remains at its current loose level while the economy continues to grow and the labor market continues to improve. It's not hard to imagine a scenario where other Federal Reserve hawks like Plosser will soon be given the platform to express similar views.

Bottom Line: The U.S. Federal Reserve is quietly engineering a "normalized" monetary policy where bond purchases will soon end and short-term interest rates will then be allowed to rise from their current level near zero percent. I firmly believe that Wall Street has underestimated the Fed's resolve in its pursuit of this goal. In the interest of full disclosure, I am aggressively short the S&P 500 Index while also hedged with long positions in several precious metals mining stocks (AG, EXK, GG, & GDXJ) in my managed accounts. I think it could be argued that the U.S. Equity Market is the single "most loved" asset class on Earth right now, while Gold/Silver (and related investments) is the single "most hated" asset class.

The latest monthly Margin Debt data from the New York Stock Exchange is interesting and revealing. Margin debt fell for the 2nd straight month in April, another sign that U.S. stock prices could be vulnerable here to a major correction.

Russell 2000 Index Daily Chart with 50-day Moving Average Line and 3 Std. Dev. Bollinger Bands

DJIA ETF (DIA) Weekly Chart with Computer-generated Buy & Sell Signals

SPDR Utilities ETF (symbol XLU) Monthly Chart with Computer-generated Buy & Sell Signals

S&P 500 Index Monthly Chart with 50-Month MA & 3 Std. Dev. Bollinger Bands

U.S. Stock Market & Precious Metals - Ahead Of the Long Weekend

While I have never viewed myself as a "perma-bear" on the U.S. stock market, my negative stance on U.S. equity prices is well documented in this column over the last year. And I have been mostly bullish or neutral on Gold/Silver and related precious metal mining shares. On the surface, my market views in both these asset classes over the last year could easily have been recipes for disaster in my managed accounts. Fortunately, this was not the case. My largest managed account is currently up 32% year-to-date, and up 64% over the last 12 months. How is that possible?

The answer is pretty simple, but not easily duplicated. I accumulated large positions in precious metals mining shares last June and then again last December. And when these shares rallied sharply from panic lows during those two months, I liquidated 100% of these positions with gains of 50% or more on each stock. While I lost a significant percentage on a core "short" S&P 500 position over the last year, my trading positions in this same asset class were almost always positive. In other words, I've been flexible and even a little lucky!

On Wall Street and LaSalle Street, it is often said that "you are only as good as your last trade!" Fair or not, every trader, investor, and adviser faces this reality almost every day. My managed accounts are doing well this year so far, thankfully, and over the last 12 months my performance results have been exceptional, especially given my less than optimal market views all along the way.

However, I know from personal experience that success in the financial markets can be fleeting. Maybe I've been lucky. Maybe I won't be so flexible on the next major investment position that moves against me. And with more than 35 years of experience now, I know for sure there WILL be a next time when I commit to a major investment that moves against me. 

While I normally write this weekly column on the weekend, I made the decision to write this particular column tonight (Thursday night), ahead of the long Memorial Day Weekend because I think two major separate markets are now at key turning points. No one will be surprised to hear that I think that the U.S. stock market will soon turn down with conviction. Some of you may be surprised to hear that I have now accumulated a sizable position in precious metals mining shares (EXK, GG, GDXJ). If you've been around as long as I have, you already know that there are at least a dozen reasons to be bullish or bearish on any given market at any time. Great researchers (and especially chart technicians) can easily make a solid case for either view, depending upon their inclination at the time (or to support those companies or individuals that pay their salaries). It's sad, but true!

I wish I could tell you that my current market views are NOT biased by my positions, but you all know better! Hopefully, my positions reflect solid research and strong quantitative methodology. I have a couple of charts for you that may better illustrate my thinking right now.

For the U.S. Stock Market, here is the latest Weekly chart of the Dow Jones Industrial Average ETF (better know as "The Diamonds" symbol DIA). Please note the official sell signal from my computer trading system from last week!

Dow Jones Industrial Average ETF Weekly Chart (symbol DIA) with Computer-generated Buy & Sell Signals

And here are the latest monthly charts for the Gold and Silver ETF's (GLD & SLV). The way I have drawn the key trend lines, Gold has already broken out to the upside, while Silver is poised for a major upside breakout very soon!

Gold ETF Monthly Chart (symbol GLD) with Downtrend Line

Silver ETF Monthly Chart (symbol SLV) with Downtrend Line