Red-Hot Resources

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Tuesday, March 06, 2007

Is The Sell-Off Over?

Futures are strong this morning. India is leading the way higher. That may be significant because despite what we heard in the media, the Indian market actually started swooning BEFORE the Chinese stock market. Meanwhile, Australian stocks just had their biggest day in FOUR YEARS. The S&P/ASX 200 jumped 2.1%. So now we have to ask ourselves: Is the pullback over?

I’d say there is a good chance we could see more selling. And I’m not just being pissy because the TSX didn’t hit my 10%-to-12% decline target (it has pulled back by 5.2% so far, compared to a 4.6% decline for the Dow). Heck, I’m happy when the market finds a bottom.

But we know that one of the main drivers of the sell-off was an unwinding in the global carry trade, where investors borrow funds in yen and invest that in stocks, currencies and futures around the world. The US dollar/yen carry trade is estimated to be worth AT LEAST $1 trillion. Even if just a small piece of that is going to unwind, don’t you think we’d see more than a 4.6% correction in the Dow?

Maybe not. But I’m also looking at this chart of gold...

Gold still hasn’t come down to its major uptrend. The fact that it hasn’t broken below the major uptrend is bullish. But this also shows it has room to come down, and it might just do that.

Gold seems to be integrally involved in the carry trade. A lot of borrowed yen went into gold. If we see the carry trade unwind a bit more, gold might go back and test that uptrend. And that is where I would see a huge buying opportunity.

Where gold is now, I’m cautiously optimistic, but I’m in no great hurry to buy. It might go much higher from here … or it might go lower. We’re in one of those damned twilight zones where market direction is not clear.

Bottom line: I think more caution is warranted. If we see more confirmation that the sell-off is done, I’ll turn more bullish.


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