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Last Thursday, October 20th, all was right inthe world. We had rallied past every key technical indicator; Europehad announced that they had come to an agreement to save the default of Greeceand Spain,andItaly and Portugal. Peace and prosperity would once aging reign in the landof Leonardo da Vinci,and the home of the greatest art ever created. The food is not too bad either.
Last Friday I think everyone took the day off as there wassuch relief from the news out of Europe that no one wanted to jinks it byshowing up. Anyway it was Friday, Europe would be saved and we had a one monthclosing higher in the markets than we had in 40 years. We deserved a rest and Fridaywas the day.
Well what a difference a day makes. Last week's passage of the Eurozone financial rescue plan impactedthe markets as traders continue to evaluate its worth. The markets are also whisperingand watching the Fed for any news about a QE3 initiative but the Feds steadfastlydeny any such plan.
Initialrelief over Europe's latest attempt to end its debt crisis faded fast yesterday(Monday) as investors fretted about the plan'slack of detail and grew more skeptical about Italy's turnaround effort.
Oneday after European leaders announced a series of measures aimed in part atenticing investors back to the region's debt markets, bond buyers demandedhigher yields on Italianand Spanish debt. An auction of new Italian bonds was met with weak demand,forcing the nation to pay higher interest rates than in previous sales.
Theresponse from bond markets underscores how challenging it will be for Europeanleaders to convince financial markets that last Thursday's broad agreement issweeping enough to enable troubled countries such as Italy and Spain to worktheir way out from mountains of debt. The plan calls for beefing up theregion's bailout fund, recapitalizing banks and reducing Greece's debt burden.
Atthis point, it's pretty obvious that this recoveryis fake.
Since2009, this recovery has been manufactured, bought and paid for by governmentsfrom here to U.K.
Lastweek, the latest EU bailout plan was just another example of a governmentthrowing money at their problems - and really putting off the real issues untilnext month or next year.
Today,I want to show you two questions you need to answer so you can navigate these perilouseconomic waters this year.
Ask yourself; isthe EconomyGrowing or Shrinking?
Asa trader, I'm always watching to see if an economy is expanding or contracting?What is the trend of the market? Are the people in this country confident andassured or are they afraid that today may be their last day at work?
Todetermine this, I found this chart of the U.S.GDP.
A Government-Spending Induced Expansion HasCome!
TheGDP figures show how the U.S. economy is faring. A negative number shows thatthere is an economic contraction. A positive number shows economic expansion.
Rightnow, we're showing a positive number. But there's just one problem with that.It's not consumers who are promoting this growth - it's the government. Thepoliticians are stepping in to keep the economy afloat.
Inother words, it's not a healthy expansion. So I don't expect it to last long.
Thegood news: even if these numbers show a false start to the economy, they stillgive me some insight on what traders are seeing. Long-term, I'm still cautious.I know the enormous sums of money that the government spent to get theseeconomic results. They can't keep that up forever.
Sooneror later, the economy will fall onto the backs of the consumer once again (aswe saw in early August). When this happens, we'll likely go back into aneconomic contraction.
Thistells me that I can be bullishin the financial markets for short spurts here and there. But long-term, italso tells me to be cautious and to make sure I trade accordingly.
Toprepare for this in my trading, I can always cut down my lot sizes for eachtrade. That will decrease my risk just in case the markets turn on me.
Also,if my trades are comfortably above their breakeven point, I'll quickly move mystop-losses so I can assure myself of some gains just as soon as I feasiblycan.
Finally, Should I Be On Offense or Defense?
Thenext thing to keep in mind is whether you should be trading offensively ordefensively. Offensive plays involve buying the high-yielding equities and defensiveplays are the “safe haven” currencies like the gold and silver that tend torally when stocks fall. As of last week, the world markets seem to think thisEU bailout plan is enough to force a market rally for a while. Therefore, themood of the market can be favorable for taking a bit of risk during thesetimes.
However,I would be cautious. Right now, we have economies drunk on tons of printedmoney. In my opinion, there's no way this EU plan will hold up in thelong-term. For now, it just looks like the EU is kicking the can down the roadonce again and saving their problems for another time. The problem is thatevery time we kick the can down the road it gets bigger and it's beginning tohurt my foot.
Oncethe markets wise up to this fact, we'll see the hangover from all this. Stockswill fall - and that's when you'll want to bring out your defensive team. Yourdefensive team will include a basket of both physical and paper gold and silverETFs.
Thetrick is knowing which ETFs to buy. I own a basket of safe gold and silver ETFs.I own SPDR Gold Trust ETF (GLD), Sprott Physical Gold Trust (PHYS), iSharesGold Trust ETF (IAU) and I bounce in and out of ProShares Ultra Gold ETF (UGL).I also own iShares Silver Trust ETF (SLV), Sprott Physical Silver Trust (PSLV),Silver Wheaton (SLW) and I bounce in and out of ProShares Ultra Silver ETF (AGQ).
Inconclusion if the market rallies gold and silver will move up modestly but ifthe markets will sell off (which is just a matter of time) gold and silver willbe our safe ports in the storm. And if the FOMC whispersQE3 gold and silver will go parabolic. So while the market stages its rally Iexpect gold and silver to sell off and I will be a buyer on any pullbacks.
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