RCM Editorial: Fed Action Leads to Market Reversals: The Cat May Have 9 Lives

A quick update to the post on Friday the 13th:

I wrote last Friday that this week's action would hold some of the keys to unlock the true direction of the markets going forward. Dead cat bounce or a real change in direction? That is the question that needs answering.

Allow me to begin by writing that real changes don't happen in a week and time is needed to prove out any new trend. This is why we at Rosenthal Capital Management have a discipline of leaning in the direction we believe the markets are taking as opposed to plunging. Then we watch closely for signposts along our path that validate our thinking and act accordingly. If we don't receive the correct feedback we reassess and live to fight another day. Make no mistake, it is this discipline, among others, that allowed us to not only survive the bear market mauling of 2008 but even prosper.

Today, we are officially leaning towards a more bullish stance. Last week I mentioned the G20 meeting and options expiration as reasons for volatility this week. Both have had their impact, but perhaps the biggest game changer was revealed by the Fed. The announcement by Helicopter Ben and the Fed to buy US debt had the effect of pushing the US equity indices (DOW, S&P500, NASD Comp.) above key areas of resistance. These markets have now broken downtrends on volume and notice must be taken. Furthermore, the group with the highest ranking out of 197 William O'Neil groups exploded higher. If the markets are going to trend higher leadership must develop and this is a good first step. Shame on you if you need to inquire as to what group I am referring. I invite all avid readers of this blog, owners of any of the Fortune's Favor Family of Funds and all others working with Rosenthal Capital Management to join me and say, THE NUMBER ONE GROUP IS PRECIOUS METALS.

On the 13th I wrote: "a solid long position in gold...a short of the US$ and US Treasury Bonds..."

Due to the events of this week we bore witness to a dramatic move higher in gold prices and a serious plunge down in the value of the greenback. However, when the Fed announced its intent to "buy $300 billion of long-term US treasuries" the knee-jerk reaction was to put a serious bid in Treasury prices. I want to be very clear: this does not change our opinion on the direction Treasuries will inevitably take. We believe that this move up in price/down in yield, for US debt will give way when the realization that a devaluing of the US$ makes this debt less attractive. Higher yields must be demanded when the underlying currency is losing value. Furthermore, I'd like to call to your attention once again to the issues China has been raising about US debt obligations. We would not be surprised at all to see stories written in the coming months that the Fed has been the bidder on US debt the Chinese have been selling.

I will end by writing that if a bottom of sorts has been reached there is no need to be the first to take the plunge. Be careful, market bottoms take time to develop and often require retests of lows, which can be painful. Continue to focus on leadership and accumulate opportunistically.