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Is This The Time To Buy Stocks?

11/22/11 02:22:16 PM
by Billy Williams

Europe's debt problems signal a retreat to the one universal safe haven of wealth and a clarion call to take the following action as well.

Security:   RGLD
Position:   Buy

While the debt crisis and a seemingly apparent lack of resolve on the part of European Union bureaucrats is a proverbial albatross around the necks of the Europeans, it is Europe itself that is the albatross around the neck of the US and, for that matter, the world. On both sides of the pond, the Atlantic powers play a game of chicken with each other for political advantage and lose sight of why they need to grab this problem by the throat and fix it.

Spain's bonds were sold hard on November 21, causing yields to spike higher in order to keep attracting investors to invest in their debt to offset the growing risk of default. Italy is teetering on the edge of calamity as Italian bond yields flirt with 6% + yields, while the tipping point for Italian insolvency lurks around the 6.50% mark. If Italy's bond yields stay at or above the 6.50% level, it will not only prove disastrous for Italians but could set off a literal domino effect across European banks and wash up on American shores as big national banks such as Bank of America and Chase sink under the weight of overexposure to European debt and credit-default swaps.

FIGURE 1: RGLD. Gold-related companies like Royal Gold are holding up well in a volatile market that teeters on the edge of disaster. Why? Gold remains the one universal safe haven of buying power and refuge from looming inflation.
Graphic provided by:
These are serious times.

Sadly, there doesn't seem to be any serious players to resolve it. But as history has shown us in the past, when things look their darkest, light will break in the form of a charismatic leader to rise above the fray and inspire thoughtful people to do the right thing and fix things.

In the meantime, as traders, we must hedge our risks and be proactive without giving into false hope until such a leader arrives.

That said, is it time to buy stocks?

Given the major indexes' price action, you would have to say no. The overall market is declining on light volume and if things get ugly and the news gets worse, the herds could begin a massive selloff. At the lowest point of the market when despair permeates the financial news, you would be smart to buy value while there is blood in the streets and create a list of stocks that reveal strength to lead the market higher.

One safe haven now seems to be gold (see Figure 1).

While all hard assets are declining along with equities, the fact remains it is the one universal asset that still emerges a safe haven for buying power in a sea of mediocre alternatives. Not only that, its relative strength holds up and you only have to take a glance at the stocks that deal directly or indirectly in gold for that to be apparent.

The markets are a dangerous place to put your money given the troubles among the industrialized countries, in the US and abroad, so play it safe by buying hard assets like gold and create a list of possible shorts to take advantage of short-term to intermediate-term bearish price action.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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