Simon Baker of Baker Avenue Asset Management is neither perma-bear nor bull; he's a perma-realist trying to make and keep money for his clients. So far Baker has been doing a good job for Breakout viewers. Simon came on in May and told people he was getting out of Chinese markets; the (FXI) ETF of Chinese stocks is down 27% since then. On August 15th Simon incurred the wrath of the long-side faithful by declaring "Buy and Hold" dead. The S&P500 closed at 1,204 that day and moved between 1,200 and the low 1,100's six times since.
With stocks stabilizing today after a crazy week I asked Simon to share what his latest indicators are telling us today. As usual his take is pragmatic, if a little dark. "People keep talking about whether we're going into a recession...the reality is we're here," he says.
To support his case, Baker notes the performance of copper, or "Dr. Copper" as it's called by market pros for the base metal's ability to predict economic action. Typically when copper is moving higher, or at least stable over $4, the economy is in at least okay shape. Copper is down over 17% in September, currently sitting somewhere in the mid-$3.00's.
Another portent of ill are the Dow Transports (^DJT), as evidenced by the FedEx' (FDX) horrific quarter and warning this week. "If people aren't shipping then people aren't buying," notes Baker. For Dow Transport traditionalists, weak transports mean a weak economy, which means bad things for stocks.
However Baker isn't tied to these traditional metrics. He puts them together in a proprietary index he calls the "BAMSI" --Baker Ave Market Sentiment Indicator. The BAMSI is a basket of over 4,000 stocks, measuring momentum and market sentiment. The indicator remains negative.
Frightening as it sounds, it's not a cry to run screaming into cash. Baker is simply suggesting investors review their goals and decide whether the risk is worth the reward. The situation in the economy, Europe, and the technicals are reminiscent of this time in 2008, but the analogy is almost too obvious to be a trade. It's time for smart market participants to ask themselves "do they want to participate or not participate?" This may not be a buying opportunity but the sell-off is a chance to evaluate your emotional state in regards to stocks. This volatility isn't for everyone; if the swings are making you crazy Simon Baker suggests investing discretion is the better part of valor.

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