The ugliness at JP Morgan Chase continues to top headline news. Even though it’s a really bad situation there, it is just one bad apple in what has become a truly spoiled bunch. Banks are in terrible shape all over the world. Greece and Spain have experienced significant cash runs on their banking systems because, quite frankly, citizens are scared of a Euro collapse. In a monetary move to show their distrust for banks and governments alike, several hundred billion Euros have been withdrawn from banks only to be stuffed under mattresses. That’s a vote of no confidence. And that’s why gold turned-around this week. Stress on money and banking does that – which is why China is buying gold in droves. Make no mistake, China understands the currency game.
Year-to-date the Dow has given back all but a mere 1.2% of its early calendar gain. Gold, after this most recent turnabout, is only up 1.7% for the year. The 15-51 strength Indicator has once again outperformed, remaining up 19.8% to date. Here’s the picture.
After an unjustifiable robust start, stock prices began retreating in April. The reason they have kept moving downward is because they had no business trading up at the action zone high point. Remember, that’s where the Dow should trade during times of economic strength and expansion – and that’s not the market condition we’re in.
Based on current market conditions the Dow shouldn’t even be trading at the action zone midpoint, which can be considered “fair value” (see this blog for more information.) Here’s the same year-to-date data from the above chart but with the action zone midpoint shown.
The Dow should trade around the midpoint level during times of market stability and moderate economic growth. But again, that’s not the market we’re in. The Dow should continue to move lower.
Many world markets are in recession and poor fiscal condition, and as we know, the free-market has been in recession for several years here in America. Add to this persistently weak and sloppy monetary policy – which, let us not forget, fueled the subprime mortgage disaster in 2008. Those same mistakes are stoking a worldwide debt crisis that will make the 2008 crash look like child’s play.
Bad money policy, along with reckless government spending, irresponsible promises, and fake solutions, have been standard practice for way too long. That’s why gold has encountered a long term surge, and it’s also why average stock market returns as indicated by the DJIA have failed to outperform the market (GDP). See below.
Listen, when you’re in a momentary and fiscal crisis gold is must have asset class. Gold is up 150.4% since 2007 began. The 15-51 Indicator gained 117.6% while the Dow lost 2% and failed to keep pace with GDP.
This is the best argument for multiple asset class portfolios built with superior 15-51 construction and smart design. During uncertain times like these, now is the time to play defense. Allow me to introduce a portfolio I call, Keep It Simple Smarty. It is comprised like this:
| Keep It Simple Smarty Portfolio | |
| Asset Class: | % |
| Cash | 50.0% |
| Gold (gld) | 25.0% |
| Stocks (15-51) | 25.0% |
| Bonds | 0.0% |
| Total | 100.0% |
Here’s how that portfolio performed since 2007.
This KISS portfolio gained 52% during this five year time span (remember, the Dow lost 2%), experienced less volatility, and was well positioned to capitalize on any major market selloff. That’s what you want. Buying low is where the real money is made.
Again, the three critical triggers to a steep and broad scale stock market correction are:
• Realization of Recession in America
• Inflation that forces Interest Rates higher, and
• Collapse of the Euro
Until then, play defense and make money too.
Stay tuned…