Stock Market Warning, Sell or Hedge

By: Martin_D_Weiss

From its intraday high to this morning’s low, the Dow has lost over 430 points just in the last three trading days … breaking through critical support … raising the specter of AT LEAST a big correction, and … foreshadowing a possible return of the debt crisis this year.

Ergo, this is a flash update to help you start thinking about — and preparing for — a market turn in the making, which could be a MAJOR one.

I’ll have a lot more to say about the causes and consequences in my regular Monday morning edition. But here are the salient facts …

First, the obvious: We know full well that the U.S. economic recovery was hatched and nurtured by Washington’s unprecedented, virtually unthinkable, print-and-spend machine.

Second, the Democrats’ defeat in Massachusetts this week is already forcing the Obama administration to downshift or even reverse course. Regardless of political persuasion, no one, not even the president, disputes the fact that it’s going to be a heck of a lot harder to push his agenda.

Third, the public outcry against extraordinary deficits and debts is now reaching critical mass, encompassing not only those who supported last summer’s Tea Parties but also a wide range of Independents and Democrats.

For a stock market that was already overvalued and overdue for a correction, this is not exactly “encouraging.”

Just the perception of this political sea change — that Washington is going to be stingier with stimulus and more realistic about rescues — has been enough to knock the Dow for a loop.

To the degree that Washington actually DOES back off from fiscal stimulus, stocks are bound to sink a lot more.

The key missing piece before we can declare the big 2009 rally completely over? The Fed!

For better or for worse, no matter who controls Congress, no one seems to control the Fed.

And right now, Bernanke is pursuing a daredevil, Evel Knievel stunt unlike any in history: Zero interest rates.

What’s most ironic, though, is that

• while folks are viscerally upset with Geithner’s largesse to Wall Street …
• no one is audibly complaining about Bernanke’s multi-trillion-dollar charity to big banks in the form of ultra-cheap money and direct subsidies!

As long as he can steer clear of the public wrath and stay on his fast track to madness, he could conceivably pump up financial markets with more liquidity, generating another rally attempt in the near future. If so, I think it could be a great SELLING opportunity.

My recommendations are unchanged:

Caution! That means, at most, SMALL positions in the stock market, focusing on sectors and special situations that are most likely to buck the broad market trend. Plus, it means plenty of cash equivalents — DESPITE the miserably low yields.

Overloaded with stocks? Then cut back substantially.

Don’t want to sell? Then hedge with inverse ETFs.

Good luck and God bless!

Martin

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