We mentioned last week that despite the government’s best efforts to shore up investors confidence, prevent a run on money market funds and attack the root of the difficulties in the credit market, their actions not only brought to light just how dire the situation had become, but would also carry some consequences. One immediate result was an absolute drubbing for the U.S. dollar as worries grew over how the government would pay for all of the proposed bailouts, and that, in turn, triggered huge price surges in oil, gold and other commodities. If that sort of action persists, then we will be facing the same sort inflationary pressures that caused so much consternation earlier this year.
Meanwhile, equities suffered from heavy selling, with the major indices giving back the lion’s share of Friday’s advances. The simple fact is that you don’t manipulate one area of the market (i.e. short selling) without affecting other areas, and that means investors won’t be interested in providing support when there is no help from short sellers who cover their positions for a profit.
As we’ve been saying for quite some time now, the charts are tremendously messy right now, and the fact that the action is being driven by politics has made navigating this market extremely difficult. The flight to weak-dollar plays has given short-term traders something to latch on to, but the thing we need to keep in mind as individual investors is that there are no hard and fast rules stating that we need to be participating right now. In fact, probably the best thing to do right now is stand aside while this market sorts itself out. Unfortunately, with the government sticking their noses into the operation of the free market, we might have to wait a while before it does.