Don’t buy the dips. Sell the rallies.

It’s not uncommon for bull market opportunities to be exploited by buying dips in prices.  This is not one of them.

The bull market in equities is at least on pause, but in all likelihood over.  The latest series of down days is further confirmation of a lack of conviction.

There simply aren’t buyers.

Prices will go down farther if buyers don’t step up and buy dips.  This has already been evidenced on a day-to-day basis.  Whether it happens in the weekly charts remains to be seen — but price action seems to be confirming that as of late.

Commodity contagion

Weakness in the prices of energy, metals and other products continues to be a persistent theme.  And equities have finally noticed.

Stocks used to shrug off the losses in commodities as some sort of disinflationary tailwind.  No longer is that the case.  Now investors in stocks have become jittery on days when commodities are plunging.

The next leg down

Ultimately, the equity market is at much greater risk of a price decline than a rally.  The run up over the last 6 and a half years has been overextended.  Price to earning ratios, when share buybacks are discounted, are at higher than normal levels.

Corporations have amassed enormous amounts of debt and traders are speculating with more margin than in 2007 (the last stock market peak).  China has seen its managed economy unravel, while Japan’s attempt to start managing its economy is falling apart.

The Euro zone is in serious trouble.  There’s no amount of new debt that can cure the budget problems within many of its countries.

And the United States, which is starting to feel the pain of the rest of the world, is preparing for its own economic slowdown.  The Fed, panicked with uncertainty as its credibility fades away, decided once again to abstain from raising interest rates.

What does it all mean?

We’re closing in on the peak of this business cycle, if it isn’t already behind us.  This means that opportunities will be few and far between to find equities that are worth buying at these values.  Cheaper prices are quite likely in the future.

If I were still long a traditional portfolio of US equities I would take every rally as an opportunity to reduce exposure and raise cash.