More Nails In The Coffin
The market continues to weaken and the only thing that is being raised are a series of red flags. It seems that many of the foreseen problems will be resolved with lower equity prices. In the last post I noted that the market had rallied 50% off the Jan low getting to about 1400. A quick selloff excited buyers who came out in force but that too faded. Friday brought a late rally that erased the day's decline as we headed into the 3 day weekend. On the strength of oversea's markets, today's action hammered more nails into the coffin as a 1.25% opening rally faded and, as we approach 3pm, is on the verge of going negative.
Why? Oil spiked 4.2% to $99.70 (almost a new high), gold spiked 2.6% to $930 (almost a new high), and US Treasury yields spiked 2.5% to 3.88% (from 3.50% 2 weeks ago). Are they dumping Treasuries because of potentially stronger economic growth or potentially higher inflation? If it was for growth reasons then US stocks should be holding their gains and/or adding to them, not fading. I'm leaning towards an inflationary (or stag-flationary) answer. And, I think there is some sort of de-coupling of global growth from the US economy. Despite what many believe, this can happen and if it does its another thing that bodes poorly for our economy.
Fortunately there are ways to work with this set of possibilities that could lead to enviable returns. Regarding inflation, gold is one answer and, in my opinion, owning shares of gold mining companies is the best alternative. I have specific ideas about stock selection in this area but gold shares are an important part of the mix. Regarding a slowdown, long positions have been pruned to maintain only positions that are working with reasonably tight stops. There are many excellent US companies/stocks but since 3 of 4 stocks follow the market I would lean towards less long exposure. In its place I recommend holding cash or adding short positions via ETFs. It is now possible to go long an ETF that gives the inverse return of a major US stock index. Adding some exposure to these will reduce risk from longs and possibly add to returns if the market heads lower. Finally, from a decoupling point of view, ADRs are one solution to owning foreign stocks without the typical hassles of currency exchange, illiquid markets, etc. They, too, have factored prominently in the new mix.
The best way to make outsized returns is by owning great stocks. Despite my bearish perspective I maintain a list of stocks to buy that look terrific. Once they get to certain levels and/or the market straightens out I will be happy to build positions in them. But until then there will be other areas of focus.
In the short run, a rally in the SPX above 1400 would concern me as well as a decline in gold under $900. Despite my negative view, I respect that the market could shoot like a cannon and for seemingly no reason. There are many huge pools of capital that are betting on a shallow downturn with no recession. They will fight the bear market with everything they got. That will lead to rallies that erase losses and rallies that appear to be strong, like this morning's. But, as long as we continue to see a series of declining peaks in the indices, a weak advance-decline line, weakness in the new high-low ratio and other market internal statistics, the market will grind lower. The fed's reliance on lower interest rates will not stoke demand if their target market is tapped out and has no more gas in the tank. That sounds like the US consumer and what the US stock investor is becoming.
Stay tuned. It will be interesting.
Why? Oil spiked 4.2% to $99.70 (almost a new high), gold spiked 2.6% to $930 (almost a new high), and US Treasury yields spiked 2.5% to 3.88% (from 3.50% 2 weeks ago). Are they dumping Treasuries because of potentially stronger economic growth or potentially higher inflation? If it was for growth reasons then US stocks should be holding their gains and/or adding to them, not fading. I'm leaning towards an inflationary (or stag-flationary) answer. And, I think there is some sort of de-coupling of global growth from the US economy. Despite what many believe, this can happen and if it does its another thing that bodes poorly for our economy.
Fortunately there are ways to work with this set of possibilities that could lead to enviable returns. Regarding inflation, gold is one answer and, in my opinion, owning shares of gold mining companies is the best alternative. I have specific ideas about stock selection in this area but gold shares are an important part of the mix. Regarding a slowdown, long positions have been pruned to maintain only positions that are working with reasonably tight stops. There are many excellent US companies/stocks but since 3 of 4 stocks follow the market I would lean towards less long exposure. In its place I recommend holding cash or adding short positions via ETFs. It is now possible to go long an ETF that gives the inverse return of a major US stock index. Adding some exposure to these will reduce risk from longs and possibly add to returns if the market heads lower. Finally, from a decoupling point of view, ADRs are one solution to owning foreign stocks without the typical hassles of currency exchange, illiquid markets, etc. They, too, have factored prominently in the new mix.
The best way to make outsized returns is by owning great stocks. Despite my bearish perspective I maintain a list of stocks to buy that look terrific. Once they get to certain levels and/or the market straightens out I will be happy to build positions in them. But until then there will be other areas of focus.
In the short run, a rally in the SPX above 1400 would concern me as well as a decline in gold under $900. Despite my negative view, I respect that the market could shoot like a cannon and for seemingly no reason. There are many huge pools of capital that are betting on a shallow downturn with no recession. They will fight the bear market with everything they got. That will lead to rallies that erase losses and rallies that appear to be strong, like this morning's. But, as long as we continue to see a series of declining peaks in the indices, a weak advance-decline line, weakness in the new high-low ratio and other market internal statistics, the market will grind lower. The fed's reliance on lower interest rates will not stoke demand if their target market is tapped out and has no more gas in the tank. That sounds like the US consumer and what the US stock investor is becoming.
Stay tuned. It will be interesting.
posted by David Geller at 2:53 PM
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