NOTE:  This Trading alert was originally emailed to subscribers at Ritholtz Research & Analytics on Wed 9/6/2006 1:11 PM EDT; s alerting them shortly there after.

This is posted here not as investing advice, but
rather as an example of a trading call for potential subscribers. We
expect to post future advisories in a similar manner — after the call,
but in the correct chronological location on the blog.

Over the past few weeks, I’ve gotten numerous questions from subscribers. (I may eventually set up a Q&A forum so people can submit questions). But lately, these three questions have come up — ALOT –  and I wanted to address them.

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Q: Are you still cautious for the second half of the year? Can we really see a major correction?

A:  Yes, I am.

The Summer rally we mentioned on August 9th has come – and in all likelihood – gone. As we noted then “I expect to see stocks drop appreciably in value — a 15 to 30% correction is very possible. Indeed, any Summer rally sets up that correction possibility.”   

By now, you should be positioning yourself for that correction. I can’t tell you when the precise top will appear – but I wouldn’t be surprised if it happens over the next 2 weeks.

Investors (not traders) who want to maintain their long bias, should be rotating into defensive sectors such as Utilities, Health Care, and Consumer Staples.  I also think you should be raising cash on rallies, and tightening stop losses. But I know some people prefer to be fully invested.

If and when we do get that major sell off, my plan is to wait as long as I can, and then flip bullish. In the past, the general initial reaction has been: “He is insane.” I expect  that when it happens, you will have similar feelings.

Over the years, I have put together an excellent series of bottom calls. I’m not sure exactly why, but my methodology makes it much easier for me to spot bottoms than tops;  Eventually, I will issue a "BUY "EM HERE" call. When you see the reasoning that will accompany that, you may intellectually agree with the logic, but you may also be unprepared emotionally to make the purchase. (Just remember this conversation when the time comes).

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Q. I recall you were Bullish on Gold in 2004 – but it’s had a great run that seems to have ended. What are your current views on Gold? Are there any Gold stocks you like in particular?

A. This is was a surprisingly popular question. 

It’s clear that Gold has been in a secular bull market since 2002. I do not believe the recent softness has meant the run in Gold was over. Indeed, after a few months of consolidation, Gold stocks are now breaking out again. Today’s productivity decline and labor cost rise suggests that perhaps inflation is understated (a theme I have hit upon over the years). Inflation sensitive (Gold, not financials) stocks are becoming attractive. This market has shown little in the way of leadership; The strength in the gold stocks are a possible source of both leadership and long side gains.

We have attached our technical review of the Amex Gold Index and four stocks:  KGC, GOLD, GFI, and CDE; I particularly like the charts of KGC and GOLD.

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Q. You mentioned Microcaps recently — Why?  Some time ago you showed a chart that revealed the market shifting to big caps from small caps – why even look at smaller capitalization stocks? 

A. I look at Microcaps for a few reasons: 1) They are not well covered by Wall Street, and therefore opportunity exists; 2) They offer large potential upside; 3) I have had some pretty good luck with them over the past 10 years.

If subscribers insist, I will send out more details about the pros and cons of these speculative issues.

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For now, your defensive rotation should be well under way.

There are several other reports due out this week — sorry to bombard you, but we are both anticipating market action, and responding to data as it is released . .  .

-Barry Ritholtz
September 6, 2006

Category: RR&A

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

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