Risks To the System
Now that the bulls have enjoyed a record-breaking run in response to the funeral for the banking system having been called off on March 9th, even the most ardent bears will likely agree that risks ar on the rise. So, in looking ahead, we think it is important to identify the risks that the bulls could face this year.
We see three big risks for stocks in the near-term: (1) The unwinding of the dollar-carry trade, (2) a spike in interest rates, and/or (3) a geopolitical incident.
While our list of risks probably don’t need much explanation, the dollar-carry trade does remain a mystery to a great many investors. So, let’s take 30 seconds to review the concept briefly. The problem isn’t so much the trade itself but rather the popularity of the trade. The idea of shorting the dollar and buying “risk assets” such as stocks, commodities, and emerging markets has become one of the biggest trades in recent memory. Thus, should something happen to cause this trade to “unwind,” the dollar would be bought and the risk assets would be sold – both in very large quantities.
Looking at interest rates, slowly rising rates are probably already priced into the market to a certain degree. Nobody expects to see rates stay at generational lows unless the economy does not improve. However, a move above say the 4.25% level on the10-year would likely be damaging to the bull case.
The Roadmap to 2010
A review of both the historical cycles and the two markets that are most similar to what we’re seeing now (1974-76 and 2003-04) suggest that 2010 will be a mixed bag for stock investors. By looking at the traditional one-year cycles, the presidential cycles, and years that end in 00, it looks like things could be fairly bumpy throughout much of the year. But, when you compare the current cycle to what we saw in prior “mini bulls” that took place within the context of a secular bear, a better pattern emerges.
While all of this cycle stuff can be fun – especially when the market sticks to the historical script – it also is no way to manage money as this type of cycle analysis is merely computer-assisted guesswork. So, now that we’ve dispensed with our big, fat caveat, the good news is our roadmap for 2010 suggests that stocks will (1) be higher in the first 3-4 months of the year, (2) see a strong correction (which may or may not turn out to be a “mini bear” market) lasting about 4-5 months during the second and third quarter, and then (3) see a final rally into the end of the year.
So, what’s the best way to play the New Year? We’ll suggest that those who see the glass as half full stick with the bulls for a while but be ready to play defense when spring rolls around or whenever the risks become excessive.
The bottom line: We see a “buy-and-sell” type of market in 2010 with risks of a meaningful correction rising.
Wishing you green screens,
David D. Moenning
Founder TopStockPortfolios.com
Positions in Stocks Mentioned: None
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The opinions and forecasts expressed are those of David Moenning, founder of TopStockPortfolios.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.
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