Today’s Market Action: Deflation is Back!

Today’s Market Action: Deflation is Back!

You can run, you can rally on low volume, but ultimately you can’t hide from deflation!

Today the Deflation Bird digested and ultimately pooped on the lame FOMC statement issued yesterday.  It will take more than that, says our feathered friend, to stave off the ravages of deflation.

It was one of those now “all to common” breathtaking days on Wall Street where everything gets slammed, except for the US Dollar and Treasuries.  So to everyone who’s looking for a place to invest during these waves of deflation, repeat after me: CASH!

There were 5 stocks down today for everyone 1 up on the NYSE.  Most portfolios not lined with SDS and UUP likely ended up in the red today.  And if this is indeed the kickoff of the next nasty decline we’ve been waiting for, then we should expect more days like this in our future.

Also, fittingly, the S&P 500 correlation index has risen to record levels.  From Marketwatch:

The CBOE S&P 500 Implied Correlation Index based on options expiring in January 2011 rose to a record high of 79.84 at one point Wednesday, according to the Chicago Board Options Exchange. The index rises when S&P 500(SPX 1,089, -31.59, -2.82%) stocks move more in tandem, or have a higher correlation. In July, The Wall Street Journal reported stocks were trading in lock-step more than at any time since the crash in 1987, showing the recent tendency of investors to move in a herd and raising red flags with analysts.

This fits perfectly with the All The Same Markets theory of Robert Prechter’s that we’ve been following so closely.  With all of the markets moving in tandem, diversification is pointless.  If we’re in for an instant replay of 2008, then we’d better get into cash (US dollars), and short-term treasuries, and buckle up!

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