Get Ready for More Downside

Buy on dips or to cut loss? There are several issues facing stocks / commodities now. The ECB meeting on 24 June may not have an outcome. If they cannot decide on the bailout of Greece, it could be catastrophic for the world. European banks will suffer a markdown of their balance sheets. The Euro will tank. Even a delay in the decision will trigger a default that could be bigger than Lehman's bankruptcy. This is truly an event that could rock the world. Greece will not be able to borrow from debt capital markets anymore.

I suspect in the nick of time, ECB / IMF / Germany / France will decide to bail Greece out, even though the Meditteranean country cannot push through an acceptable measure.

Then there's the end of QE2 at the end of June. The Bernanke put will end. Frankly, I believe the markets have factored this in already. That's why it started to correct in May. In any case, the money from QE has not flowed into the economy as they are mostly kept with the US banks to repair their balance sheet. Some of the money did flow into the stock markets and they could be from hedge funds and fund managers who managed to dump USTs into the Fed.

The US debt ceiling of US$14 trillion will be hit in July. I believe this will be resolved between the two parties otherwise it will trigger a US default. US can't even withstand a downgrade of their credit because it will lose its status as a reserve currency and the USD will plummet. The world will look for another reserve currency and US interest rates will skyrocket, forcing the FED to come up with another QE to bail themselves out.

So what's left to spook the markets? There's plenty more. The US economic growth is weak. China's PMI is heading south and their inflation still stubbornly high.

I don't see a double dip in the US. We are in the final half of the bull rally. July may surprise everybody and the 2nd half of 2011 may be a delight.

Meanwhile, we should all survive June. We should buy Amundi Volatility World to hedge our bets. The other hedge is Schroder Gold & Precious Metals. Gold is uncorrelated to stocks. If the ECB outcome is negative, investors will flock to gold. Vix will shoot up. Templeton Global Total Return may be able to withstand this sell down.

Hang on very tight. I think 10 - 20% downside is possible.