North American markets readying for winter

Last week the increasing cloudiness in equity markets was on my mind. This week, the snowstorms began. There is a definite chill about.

As I see it, the U.S. equity and debt markets and currency are transitioning from secular bull to a bear phase. I surmise that debt-laden markets are on the tipping point should rates continue much north from here. With mild inflation at hand, the market bulls are telling you that there is no inflation. But what they really fear is not inflation, but rising interest rates.

And even a stronger economy is going to raise rates. So there will be a bear.

I cannot tell at this point whether that bear will be long-term (which is the meaning of secular) or intermediate or short term.

In other words, will the declining prices grind out over a two or three- year down cycle like 1973-74 or 2000-02, which were devastating secular bears, or the 1981-82, 1990, or 1998 bears that lasted a year or less, or the even shorter-lived bear of 1987, which was a two-month shocker?

My thinking is that the longer this bull runs, the more baggage it will carry on its back, and the faster and further it will tumble — like 1987. But I have been known to be wrong.

Recalling the 1987 experience is a sobering experience to a trader today who has become drunk with excesses of blind confidence. The sheer exhilaration of watching your pet stock jump 10 pct in a week or maybe two — like INTC did in weeks #47 and #48-05 — can turn around and smack you in the face, however.

I suspect traders are on the threshold of pain today, but I won't know whether the market is going to react like a knife is stuck in it, or it feels like a dull toothache.

In terms of my own portfolio — heavily long precious metals and short financials -this past week's performance recovered some wealth for me, as I expected, but I decided to hold off another week before making big changes.

I have 78-pct in cash or near-cash, with 12-pct in gold and silver stocks (a major over-weighting) plus a minor-over-weighting in energy. I am actually short Financials and under-weighted in Telecom Services. A 2-pct holding in gold and silver miner call options was closed last week and moved into the underlyings, which are not so leveraged. The other ten pct of allocated assets is spread across all other (non basic material) sectors except Financials, and Telecom Services, where I have none except shorts (XLF and IYF).

So what's happening to U.S. Equities? Last week, all four broad market indexes were down. The Dow 30, the S&P 500 and the Naz combined were down about —0.7 pct. Despite talk to the contrary, it was not a good week.

That was to be expected when the Weekly momentum indicator (STO) started off the week a perfect 99.9 for the Naz. A week ago, I said, "I can hear a bear growling".

As for Canada, the equity market was up + 1.4 pct W/W, largely on oil and metal markets doing well.

As you know I keep an eagle eye on ten U.S. sector ETF's, which tell me where the market is and may be headed. After four weeks running with nine ETF's up, and one down, followed by one where all ten were up, a week ago the picture changed. That week there were 5 up and 5 down. This week it was 7 down and 3 up.

The biggest gainer a week ago, Semiconductor Techs SMH (+3.9 pct), was by far the biggest loser this week (-2.5 pct). Financials (XLF) took another hit, down —0.7 pct. :-)

Energy (XLE): Over-weighted: winter storms; #2 performer this week Basic Materials (XLB): Over-weighted: all about metal; week's #3 performer Industrials (XLI): Market-weighted: weakness showing; down —0.7 pct W/W Cons. Discretionary (XLY): Market-weighted: consumers don't like shopping

Cons. Staples (XLP): Market-weighted: consumers don't like shopping Healthcare (IYZ): Market-weighted: flat on the week; Big Pharma troubles

Financial (XLF): Under-weighted: decline continues; XLF down —0.7 pct Technology (SMH chips): Market-weighted: worst performer by far W/W Telecom Services (IYZ): Under-weighted: 2nd worst performer (short) Utilities (XLU): Market-weighted: #1 performer on the week

YTD (after 49 weeks this year), I note that only 3 of 10 of these ETF's are up > +8 pct, and the Dow itself is actually down 5 points. That makes it awfully tough if you are stuck in the wrong sectors.

YTD, XLE has been the star performer, up +44.8 pct. XLU and SMH are next, up +18.5 pct and +16.5 pct, respectfully.

Across all assets, I am very over-weighted in Basic Materials (due to precious metals), modestly over-weighted in Energy, very much short Financials, and modestly short Telecom Services, within a portfolio that is grossly over-weighted in cash (78 pct).

Bonds last week were flat as everybody's attention is focused on the FOMC meeting and policy decision on Tuesday.

Commodities last week were up sharply again — until Friday, when oil and the metals sold off sharply due to a 4:30 pm Thursday report on U.S. M3 that went into 14-digit historical record levels.

Oil & Gas had a modest gain — mostly flat -- but Friday was down big as the M3 growth started up fears of Fed tightening

Gold was up +4.6 pct W/W, which was +$23 per troy oz. The new $526 level is solidly above psychological support at $500. But with Tuesday's FOMC rate hike, gold could pull back a bit.

Shares of North American gold and silver miners were flying last week, but late Friday there was trading that showed nervousness going into FOMC meeting.

Last week, the trade-weighted USD was down second week in a row, this time —0.7 pct. The Euro was up +1.0 pct W/W; after three legs down this year, the euro-bear might hibernate, and the Euro might turn bullish for 2006.

It was an interesting week, with a significant increase in my portfolio. For much of November, it was hard to stay in cash and hold a short in XLF, but I managed to get through it alive, and now feel pretty good. I am, however, looking forward to a holiday break.