Thursday, October 2, 2008

The Gloom Descends

Markets in New York stumbled again and lost 4% today on growing recession fears as a bad employment report nullified any possible bounce from the successful Senate vote on the bailout plan. The Dow closed at 10,482 and the S&P finished at 1114. It is becoming increasingly clear that the bailout plan will not be enough to right the sinking ship. Although it is possible there might be a small bounce if the House of Representatives passes it Friday, this likely won't amount to much. It's possible that Monday and Tuesday of next week may be positive but our orientation should be short here as risk increases as time goes on. I'm expecting a decisive move below 10,000 on the Dow next week. 9000 is a worst case scenario for October.

Perhaps more important is the flight to the US dollar that is crushing all comers including the Euro, crude and gold. As predicted, the Euro is in free fall here and ended the day barely hanging onto support levels at 1.3809. And as fears of a major slowdown grow, crude oil fell back $5 to $93. Gold was hammered and lost 4% today and closed at $840. Gold is quickly losing its safe haven status now, and the US dollar has reaped the rewards of the current crisis. I believe this trend is likely to continue for the next few months. It seems that my forecast for $1000 gold will not be realized. We might see $900 at the end of next week, but rallies should be treated as exit points and opportunities for going short. This also holds for crude and the Euro.

By the end of the year, we may see gold at $650, the Euro at 1.20 and crude at $70. This is still in keeping with my previous medium range forecast. The only significant revision is that the short term upside potential has largely already been realized.