Any offensive positions must now be switched to defensive. It is our view that the market has entered into the next transition phase and defense is back on the top of the list for any of you who have been holding ‘long positions’.

There are those in the media, analysts, and others who have been claiming that the lows reached back in March was "the bottom" and that it was ok to be buying on the dips for the "long haul" as the market was going to rally to new all time highs soon. That kind of bullish talk is what has fueled a good part of the market over the past two months, on low volume I might add, into a feeling of complacency. But, as you are all aware, Lisa and I never deviated one bit from our thesis of where this economy and the markets are going. We made our bear market claim in November last year, and warnings as far back as last July.

Over the past two months many investors and traders (not us) switched from playing defense to playing offense. While that is fine on the quick day trades, the longer term investors and/or traders need to make the switch back to defense. A couple weeks ago I wrote that the market had handed you a gift if you were a long term investor with long positions. And that gift was an opportunity to get out. That is what playing defense is all about. If you are sitting on gains, and the market is teetering on a long and extended bear path, then it is wise, smart, and prudent to take your gains off the table. There is no "what if it goes up another 5%", or "I might miss a big run"… You have to get that kind of investing methodology out of your head.

Defense is all about capital preservation, not speculating that you might miss out on the next "big rally". If someone hands you a $1,000 dollar bill on the street, and tells you that you could add another $500 to it by playing a game of chance with the stranger would you do it? Now, the rules are that you could simply say no to the challenge and walk away with the $1,000, or if you play the game with this stranger, and you lose, you lose the $1,000, the additional $500 that was up for grabs, and an additional $500 out of your own pocket. Now, what would you do?

Now make that $1,000 your own money, still want to play games with it and risk losing it?

The point I’m trying to make here, and why it is so many long term investors always lose out in the end, is that many investors and traders never learned when to say "I’m going to play defense", and instead leave their money exposed to the storm that may blow it all away, even when they had a weather forecast telling them a storm was on the way. So when I said the market handed you a gift a couple weeks ago, it was akin to the stranger in the street coming back and giving you part of your money back out of kindness. What would you do? Take the money or play the game with him again as the storm around you is brewing up again?

Mark Douglas, author of "Trading in the Zone", examines the psychology of this very topic and many others. In his book he writes extensively what it is (and why it is) that investors and traders fail to recognize risks and take appropriate action. Additionally, he helps you comprehend discipline and a plan for the "what if" that the markets presents to us. If you have not already read Marks’s book I strongly recommend it. If you read his book, and follow the teachings, then when someone hands you a $1,000 dollar bill you will grab it and run.

The market is at a point that could very well be the beginning of the next leg down. And it is also entirely possible that the next leg down will be longer and deeper than what we have already witnessed. This is not to say we will not have bounces along the way, but the future looks to be getting worse for the financial markets. Defense should always be your number one priority, but now, it is paramount.

The coach has called a time out, and you and your team must go over your defense plans in order to win the game. Have you blown the whistle yet? Have you developed your defense strategy? Or are you going to just "Hail  Mary" and hope?

The financial sector appears to be breaking down once again. Long term views of banks and other financial institutions remains poor for the long run.

 

 

 

 

 

 

 

(XLF - Financial Sector)

 

 

 

 

 

 

 

 

(Gold - GLD)

 

We are in the period of transition now. It is in these times that some wild up and down swings will be taking place more and more. The S&P 500 has shown us her hand, and her hand is 1440. That is where the line in the sand is now.