Yes, the economy’s been bad. But the markets have actually been pretty good. But it’s time to be prepared for a sell off in major markets, and consider it a buying opportunity in select products.

Investors who purchased stocks, gold or silver, and bonds anytime in 2009 were handsomely rewarded in 2010 if they held their positions. How long will these assets continue to perform well? How long can gold pump out double digit returns before suffering a bad year? How high can stocks climb when uncertainty seemingly surrounds the marketplace?

Since 2009 stocks, precious metals, and bonds have all had tremendous performance records. Most economists point to actions by the Federal Reserve as the primary reason because these interventions lowered interest rates to extremely low levels which caused investors to take more risk for better returns. High levels of liquidity paired with low interest rates moved nearly every asset class higher, with stocks and precious metals earning outstanding year over year returns.

Will stocks, bonds, and precious metals continue rallying? When looking at probabilities and statistics the odds are not favorable that all three asset classes will remain outstanding investments. In fact, it is arguably likely that at least one or more of the asset classes will face headwinds in 2011 and beyond.

S&P 500

The stock market is overbought currently on nearly every time frame. Some pundits are calling for another outstanding year while others believe a correction is likely to unfold. I for one am totally unsure about the future, but what I am cautious at this current time. I would not be afraid to take profits and adjust stops to protect my trading and investment capital at these levels. Risk seems excruciatingly high and when we look at a longer term chart of the S&P 500 it is rather easy to surmise that a pullback may take place.

Precious Metals
A nasty correction or pullback may be likely If yesterday’s price action yesterday is any indication of what is in store for gold and silver investors. I have been warning about the possibility of such an event and as usual have received countless emails and even some veiled threats. Gold may go up for years, but most assets do not trade straight up. Price ebbs and flows with the marketplace as buyers and sellers come together in the process of price discovery.

If this is the start of a correction in gold, a potentially outstanding purchasing opportunity is possible for patient traders and investors. While the gold bugs fill up my email inbox with hate mail, I wait patiently to enter at lower prices while they remain in denial. The daily charts of gold and silver futures below illustrate key support levels which would likely offer solid risk / reward entries.

Gold Futures Daily Chart

Silver Futures Daily Chart

Bonds

For most traders and investors that started their careers in the 1980?s, they have witnessed a bull market in bonds as yields went from double digits to the lowest interest rates in history over the past 20-30 years. New all-time records could be set in the future, but strong fundamental headwinds exist. Overexposure to bonds could prove dangerous and diversification regarding duration, currency exposure, and geography remains paramount.

I have no idea what is going to happen over the next 12 months in financial markets. What I do know is that equities, precious metals, and bonds have been providing outstanding returns for over a year. While I realize that there are fundamental and technical drivers impacting the price action, I would be remiss if I did not remind traders and investors that taking profits is never a bad strategy. While all three asset classes may power higher by the end of the year, at some point in 2011 it is possible that all three asset classes may potentially go through a pullback. By taking profits, traders allow themselves the opportunity to put fresh capital to work at potentially lower prices sometime in the future.

A patient trader who uses fresh capital to buy assets at lower prices compounds his/her returns while selling when prices are relatively high and buying when prices move lower. By no means am I saying to sell everything and move to cash, but when bullish sentiment is so pronounced and the price action looks extremely overbought, taking profits is something worth considering.

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