Last week should not be taken lightly.  A 5% sell off on US equities is not a trivial affair.  If we can take off up to another 10% in the next two weeks, I will be relieved and strangely bullish.  On the other hand, if we take out the highs, I will very quickly be on guard for significant crash symptoms ahead.

What do I expect this week ahead?  I expect over the course of this week and possibly part of next week to put in some short term bottoms on equities and a number of other commodities.  But, more important than expectations are what you are prepared to handle.

Keep in mind 2 of the 4 indications of a very large market top being put in have occurred.  The first being we have extreme correlation.  Not only do we have more markets intensely correlated than is systemically healthy; but, many of them are starting to get to extreme levels.  It’s pretty much the world against the dollar and bonds.  If the dollar and bonds go down, stocks, grains, oil, metals, other currencies, other commodities, go up and vice versa.  The second key ingredient to a major market top is extreme volatility.  We are seeing VIX over 30, 5% weeks, breaking of major support and resistance in a wide range of markets.  You should be on alert!

If you followed my commentary last week, I wrote:

Favorite set-ups on the horizon: Very interested in an opportunity to short metals on the immediate horizon.

Silver opened the week at 1771 and closed down at 1630, falling 8% for the week.  So, if you didn’t catch my post on Wednesday before the GDP announcement to take profit, you got another break on Friday.  Of course, if you have more contracts out there, leave some for the longer run.  I read about Joe Ross calling Gold at 400.  Why not leave a little on for the bigger play.

Meanwhile what other opportunities lie ahead for this week?

I’m starting my week looking at possible short in Cotton, Oil, and Sugar below current prices.  Only below current prices.  I’d love to be long bonds.  But, I just don’t have the appetite for that much exposure at the start of the week.  So, as much as I may believe in the trade, I’ll hold off on that one.

General outlook:

We are officially on red alert.  Be prepared to sustain this pace right up until Thanksgiving and beyond.  It is very unclear as to exactly how the story will unfold in the immediate future.  But, this is a great time to pay attention.  With both Fed announcement and Jobs reports, this is likely to be a high impact week.  Be safe.  Be conservative.  And above and beyond all, be prepared.

If time allows, I’ll come back with an unofficial transcript.  But, for the meantime, here are a few comments that stuck with me.

• There is a real social calling here.  Leaders and individuals alike need to rally to find our way out of this situation.  If we fail, this will be one of the greatest failures of known human history.  
• Areas of the United States that were in a recession while things were good are going to be in really bad shape as things get harder over the next few years.  There are many United State’s citizens that will not be in a position to afford basic care over the next few years.  We as people must be prepared to help provide financial relief.
• We are way behind on jobs.  Presently, we are an estimated 9 million jobs short.
• State governments have been a significant part of the bailout and will continue to be so.  If the federal government does not help them, they will in turn tax the people and business and will have a negative feedback loop, estimated at .5% of GDP.
• The biggest portion of the bailout that remains unspent is the infrastructure and jobs portion, which was slated for 2010.  Expect government to be spending significant money on improvements with the intention to provide a place for some of the 9 million.
• An estimated 30% or 60% (I apologize; I can’t recall) of US citizens today are afraid of significant salary reduction in the near future.  (By significant we are talking in a range of $7 – $12k.)
• Keep in mind that as united as the states may be the impact of recession is NOT evenly spread.  African American’s make up significantly more of the unemployed.  The young as a whole are having the hardest time finding work.  Woman are doing better than men.  Etc.  (Warning: social unrest ahead.)