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Pastimes : The Philosophical Porch

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From: Rarebird	12/28/2005 9:21:29 AM
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Yellow Flag: The yield curve inverted for the first time in 5 years yesterday with the yield on the 2 year note rising ever so slightly above the 10 year bond. This is a signal of a possible recession coming within 6 months. I say possible because although the last 5 recessions in the USA have been preceded by an inverted yield curve, the existence of an inverted yield curve does not guarantee a recession. It can just represent the coming of a very nice slow down and profit recession. It's like a PSA test for prostate cancer. One of the major signals for prostate cancer is high PSA. But high PSA does not guarantee Prostate cancer. It could just represent an enlarged prostate. Nevertheless, this is a genuine yellow flag and should be taken seriously. Typically, a period of distribution results before the Bear comes. This distribution could even result in new marginal 52 week highs for the indices over the next 5 weeks. That is the ideal time to hedge your longs. There is no need to freak out and sell everything here. If you have good stocks or good funds, they will outperform the S@P 500 or Nasdaq 100. Just Hedge Your Longs. URPIX is an excellent vehicle. It is a Bear Fund whose daily investment results correspond to twice the inverse of the performance of the S&P 500 index. So, for example, if you have 1M invested in stocks, you should buy 500K of URPIX to hedge your longs. Capital preservation takes precedence when the market issues a yellow flag. I'm not expecting more than a 10%-20% correction here. And it may take place quite swiftly by the end of the first quarter, 2006, or by May 2006 at the latest. The Market is a discounting mechanism and waits for no one. Many will say that this holiday week is notorious for strong moves due to light volume. That may be true. But don't ignore the inverted yield curve signal. Make it one of your New Years resolutions to hedge your longs.

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