Weekly Update from Puru

After the big rally since March, global stock markets are correcting their gains. This pull-back was expected given the fact that we are now approaching the one-year anniversary of last year's autumn crash. Psychologically, investors are becoming nervous and we are certain that many market participants are now expecting a repeat of last year's horror show. Well, anything is possible in the investment business, but in our view, another crash is not on the cards for the following reasons:

Remember, last year's crash was brought about by the sudden collapse of Lehman Brothers and the subsequent global margin call. When Lehman failed, all banks panicked and they pulled back their credit lines. This total freeze in credit forced the leveraged market participants to sell all 'risky' assets at any price. Today, the banking system is in a much better shape (thanks to the government guarantees and bail-outs), confidence has been restored and banks are lending again. Therefore, we do not see any imminent credit-related catalyst which may trigger a near-term market crash.

Furthermore, another reason why we are not fearful is due to the very fact that so many investors today are expecting another crash! To our knowledge, market crashes usually happen when not many are expecting them and it is unlikely that we will get a massive panic when so many are already nervous.

It is our contention that after a wobbly October, the markets will gather their poise and a powerful year-end rally may occur. So, our suggestion is that you hold on to your long-term investment positions and add more capital towards the end of this month. We continue to favour the emerging nations of Asia and recommend exposure to China, India and Vietnam. Out of our preferred markets, India and Vietnam have broken out to new recovery highs, whereas China's stock market is still caught in a medium-term correction. Based on sentiment and technical data, we have no reason to doubt our view that stocks are a few months into a cyclical bull-market which will continue until central banks start raising interest-rates. If our assessment is correct, this bull-market could go on for 2-3 years.

Over in the forex market, it is worth noting that the US Dollar is holding steady and it looks as though it may be on the verge of a rally. Yesterday, the US Dollar Index closed just below its multi-month downtrend line and if it manages to close above 78, we could see a sharp reversal in the currency markets. If that happens, the American currency will rally and all other types of paper money will decline in value. Should the US Dollar Index close above the 78 level, you may want to convert all your cash reserves to the American currency. Longer-term, we expect the US Dollar to decline against our preferred currencies (Australian Dollar, Canadian Dollar and Chinese Yuan) but nothing goes up or down in a straight line and the American currency may be about to rally over the following weeks.

Moreover, if the US Dollar strengthens, gold and silver will come under pressure. For now, we are holding on to our positions in gold and silver mining companies, but if the price of gold falls below US$925 per ounce, it will be a bad omen and we liquidate our positions. As long as gold stays above US$925 per ounce, a strong multi-month advance is possible and we will stay with our holdings but if the market becomes bearish, we will not hesitate to sell.

Elsewhere in the commodities markets, the price of crude oil is range-bound and some weakness can be expected over the following weeks. Longer-term, we expect the price of oil to sky-rocket and we are holding on to our investments in this sector. Nonetheless, we suggest that you wait for a pull-back before adding more capital to upstream energy companies and oil services businesses. Finally, it is noteworthy that the price of natural gas has zoomed in the past few weeks and it looks as though an important low is now behind us. We suggest that you hold on to your positions in this sector.

My Comments: This seems in line for now. The Demand Indicator has signaled me short/defensive as of 9/28 which seems to be good timing so far.