This post was published on Friday on ZYX Buy Change Alert.
First and foremost, it is an important reminder that no one in the world, including us, knows with 100% certainty as to what is going to happen next. In our 30+ years in the markets, the only way we have found to consistently make money is to think in terms of probabilities.
For those not well versed in probabilities, here are a few simple examples.
- 100% probability means the event will definitely happen.
- 0% probability means the event will definitely not happen.
- 20% probability means there is one in five chance of the event happening.
- 70% probability means there are seven in 10 chances of the event happening.
The probability is 70% that the U. S. stock market will be higher by about 25% in a year.
The probability is about 70% that emerging markets that are not commodity producers but commodity consumers excluding China will be 25 to 35% higher in a year.
The probability of a 2008 type event where the stocks were cut in half is about 5%.
Also keep in mind that selling causes two problems. First you have to sell the right position at the right time. Second you have to get back into the right position at the right time. It is often difficult to make all these decisions correctly. For this reason, investors should be reluctant to panic and sell everything.
Market’s Reaction To The Employment Data
The market’s reaction to the employment data is bearish. The employment data shows that the economy is strong. The negative knee jerk reaction is because the market does not like a strong economy. They would rather have a weak economy and the Fed launch another QE.
In our analysis, the market is like a spoiled kid throwing a tantrum. The reality is that the U. S. economy does not need more QE and can withstand another 0.25% rate increase. Some of the emerging economies such as India are in good shape. China is likely to be able to impose capital controls and contain the situation of fund flows out of China. Europe and Japan can muddle along.
Teddy Roosevelt Moment
There is a lot of negativity being brought into the markets today from last night’s Democratic debate between Sanders and Clinton. Sanders wants to break up big banks. Clinton wants to go to the left of Sanders.
This is just like proclamations made by Teddy Roosevelt in early 1900’s. Roosevelt’s proclamations hurt the U. S. stock market and the economy.
One needs to keep in mind that even if Sanders or Clinton win, they are not likely to get through Congress any legislation to break up the banks.
Suspending Buy Zones
All buy zones are temporarily being suspended. Short zones remain in force.
We are increasing the cash levels to 30% to 46%.
Hedges are being increased to 37%.
Guard Against Monday
Following a pattern like we have seen this week, there is about 15 to 20% probability of a serious decline on Monday.
We will be protecting 75% of the portfolio for the very, very short-term going into Monday morning. If there is no decline Monday morning, this protection will be taken off.
Aggressive Shorting Is Not Recommended
Aggressive short selling is not recommended because conditions are ripe for a vicious short squeeze. It is worth a reminder that all big sustained rallies start with a short squeeze.
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