(snip)In March, with inflation fears in a frenzy, we argued that the only way to "inflation proof" your investment portfolio was to take the hype as a warning for a sell-off.
"Whenever you find yourself on the side of the majority, it is time to stop and reflect." ~ Mark Twain
Commodities broke hard last week. According to Reuters: "Never before had crude oil plummeted so deeply during the course of a day...The rare moves of $10 a barrel usually are set off by dramatic events -- the outbreak of the first Gulf War in 1991, or the collapse in 2008 of Lehman Bros bank, which both led to recessions."
In March, we reminded investors that the oil rise "helped break the financial system in 2008. We look for it to happen again in 2011." Our conclusion was to "urge investors to use this time to reduce risk, get liquid and secure your investment portfolio" (if they haven't already done so).
Interestingly enough, as the chart below shows, there is more leverage in the stock market now than before the collapse of Lehman Brothers.
During the recent oil sell-off, which encompassed all markets to some degree, "''Funds were likely to take profits before June when the direct (Fed) bond purchases stop. All were eyeballing each other to see who would take profits first,' said a London-based oil trader."
When valuations are high, this game of chicken ends up convincing investors to stay past the peak. The smartest investors sell when regular investors are piling in and the mania is at fever pitch. While George Soros was selling according to the WSJ, "day traders were going crazy." If a trend ever gets to this level of excitement, cross it off your list if you are a buyer or sell if you already own, i.e. do what Soros does.(snip)