Global Cooling?

We are in very dangerous waters today. The Nikkei dropped 450 pts, don’t think that can’t happen here – it is their 4th major correction of the year, leaving Japan flat to the year’s open and showing technical weakness. Other Asian markets down as well and Europe is weak, although coming back at the moment. US futures are up a bit but don’t confuse a pathetic bounce with a rally. The S&P looks awful, having broken right through its 50 dma support at 1,270 and now eyeing the 200 dma of 1,225. 1,250 is psychological support only. The Nasdaq has fallen below its 50 dma of 2,265 and has no reason not to test 2,150! The key indicator now, the only one we can hope for, is the NYSE which is still above its 50 dma of 7,900. If the S&P gives this up then it’s duck and cover time. We need to get into a defensive mode until things look better. Really, really conserve your cash and let’s not leave long positions overnight unless they are balanced by shorts as well – losing 10,800 on the Dow was a big deal and should not be taken lightly! Now that I’ve said that, there is a ray of hope: It is still possible that my initial thesis of global sector rotation is correct. That means that the previously hot Asian markets, which are up 40% and more last year, could be topping out as their economies enter a more normal growth phase. London gained 35% while the S&P slept since ’04 and Germany picked up 35% this year alone. We already know Asia has been killing us and the whole world made a double in oil, gold and other commodities this past year. If the world were your virtual portfolio and you were up 100% in commodities, 40% in Asia and 35% in Europe, would you perhaps want to take a little of the table to start the new year? Let’s put our global goggles on: Japan may begin raising rates – we know how that kills an economy. China can’t keep growing at 10% a year. Australia is basically a commodity play. Europe has done well but has a worrisome 8% unemployment rate and bird flu is a big concern in all of Europe and Asia. The Middle East’s economy lives and dies on oil and that may be ending. With all this going on the US markets have held up pretty well. From a global investor’s point of view, US stocks have gained 15% last year because the dollar has gone up 15% and US equities are measured in dollars. So the US has done well but not great and US corporations have done a great job selling their goods against that rising dollar. Housing is in a worldwide meltdown so it doesn’t phase a global investor and the US is actually looked at as one of the safest countries in the World as we have 2 entire oceans separating us from bird flu and terrorism. Betting against the US has been a bad idea for most people’s entire lives so we might have just enough goodwill left to attract a few Marks or Yen this year. Bottom line – My optimistic hat says that it is possible that investors are cashing out of what worked in ’05. If we don’t see a global rise in bond purchases or a resurgence of housing, then the money may have nowhere else to go but US Equities. On the other hand, if we don’t a bump soon, we may be caught up in a global correction that could bring us down 10-20%.