The Next Correction Will Be a Doozy

01/26/2010 12:00 pm EST

Focus: MARKETS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says there are plenty of warning signs about stocks, but he doesn’t think bonds will be the safest haven, either.

At some point, the stock market will wake up to reality.

The warnings are there—big time insider selling, weakening consumer economics, mounting public debt, a fragile bond market, negative technical divergences, and a long-extended rally based on media spin and little else. With the technicals and fundamentals this bad, one should be looking for a correction, even in a bull market…which this definitely is not.

The next correction promises to be a doozy. I think it will be more than a correction, unless you are willing to accept a drop to new lows a “correction.” If your portfolio isn’t properly aligned, it will be a disaster.

Bearish omens abound for paper assets, not the least of which is the yield on ten-year Treasuries. I earlier reported that I expected the Federal Reserve to intervene and try to bring the yields back down, as they have in the past.

It is instructive that although the ten-year yield is rolling over somewhat, having moved down from over 3.8% a few weeks, it is not breaking sharply lower as it has after past peaks. Consider also that the ten-year yield is up from 2.2% over the last 12 months. There is an emerging trend here.

The bet is that we will see yields on the ten-year and the shorter maturities much higher by year’s end. The way to play this is to do what may seem like pure folly—sit tight in short-term paper. Don’t go overboard trying to maximize yield. I would stick to as short a term as possible—no more than one year—so that you will have the flexibility to move into T-bills once short-term rates begin to run.

It is best to stay safe. I prefer bank CDs, keeping in mind your FDIC insurance coverage. I am a little nervous about money market funds. A little money in money market funds may be unavoidable, but be careful. Bide your time. You will be glad you did.

The best capital gain bet this year will be in gold. Silver is also a possibility; but again, you should keep the bulk of your precious metal money in gold. While the Street was overly enthusiastic about gold last December, we took some money off the table, anticipating a temporary upside correction in the US dollar and some consequential selling in gold and the mining shares.

Gold has support at $1,050-$1,000 basis April. If it overshoots to $950, I recommend buying bullion gold coins. The gold/XAU ratio has been moving up a little lately, and it currently stands at 6.5. I continue to look for it to move to the 7 to 7.25 level during this correction. That will indicate that the mining stocks are a better value compared to gold than they are presently. The best bet is to wait for it.

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