More cautious on bonds!

Therefore, with presently so much bearish consensus about the economy, as a contrarian, I think that the upside for long term bonds is now extremely limited. But if the economy is weakening why should bonds not rally further?

Several reasons: It is far from certain that the US economy will slow down right away. Consumers, whose sentiment has recently weakened considerably, could still continue to live above their means for a while by selling equities or simply borrowing even more, because lending standards are still extremely loose - this certainly among the sub-prime lender desperados.

Moreover, wage growth and capital spending has recently seen some upside acceleration, which could - at least partially - offset a slump in housing. Finally, as energy prices have begun to decline and as interest rates have recently come off, US shoppers may once again be revitalized.

Then, there is also a technical reason for my renewed caution about holding longer dated Treasury securities. At the end of August, Large Speculators held record net long positions of Ten-year Treasury Future Contracts - indicating too much bullishness among these market participants.

Forward strategy

I would look at selling some stock sectors, which appear to be weakening including retailers, sub-prime lenders, brokers, and cyclical stocks including resource stocks (even oil) rather than to buy aggressively the stock market in expectations of interest rate cuts, in the near future. I concede that despite poor fundamentals, the high tech and telecom sector looks technically strong, offering possibly a short term trading opportunity.

My friends at Credit Suisse who run the bank's market technical department provided a figure showing that the high tech and telecom heavily weighted NASDAQ 100 Index had for the first time since 2003 the potential to reverse its downtrend relative to the oil service sector.

Still, my concern for the entire market is that when the Fed announces its first interest rate cut, the stock and bond market and the dollar will tank - unless they did so already in anticipation of such an inflationary monetary policy move.

Crash possible

Lastly, with so much complacency around and with such a high propensity to speculate in just about everything among all classes of investors, a nice crash should not entirely be ruled out.

Finally, with respect to commodities, I feel we are still in the midst of a correction period. I like gold and silver for the longer term, but further near term weakness should not be ruled out. I suppose that when the Fed will cut interest rates, precious metals will resume their bull market and surprise investors by their up-side potential while industrial commodities are likely to under-perform.