Let’s put the wraps on another wild week in the markets. Just a few weeks ago we were commenting on how eerily quiet things had become. Now they have livened up a bit. The week’s headlines were dominated by sovereign credit risk and US charges against Goldman, with an environmental calamity thrown in for good measure. Markets had a rough go of it.
Stocks ended poorly, after Tuesday’s hard selloff, followed by two days of lighter volume recovery, ended with a another strong down move Friday, as the SPX fell all day into the close. Breadth was weaker, with about 87% down volume on the NYSE and 80% on the NASDAQ. Of the S&P sectors, only the recently unloved utilities posted a gain, while all others fell 1-2% on the day. Small caps also seem to have stalled out at a resistance level and lost more than 3% on the week.
Clearly there is distribution in the US stock market, not a bullish sign. We have been looking for a significant correction since the inception of this blog nearly two months ago, and I’ve been wrong. I’m still overall bearish; next week will tell us whether this is it, or another buying opportunity (like January’s pullback). Foreign markets were for the most part also uninspired, and China continues to be among the weaker ones, outside the European crisis.
US Treasury Bonds and the Dollar continue to benefit from safe haven buying, and these positions have served very well as a hedge against the type of action we are seeing here. Many commentators insist that bonds are a death trap and the Dollar is toast in the long run, due to US fiscal profligacy. Maybe, but I’m not sold on that argument, and in the short run the US remains “the dog with the fewest fleas.” A lot of those who bet against the US in the markets have gotten carried off the field on a stretcher.
Commodities continue to present a mixed bag; gold is another beneficiary of the fear & loathing trade, and oil continues to hold up. It’s interesting to note here that natural gas has been stirring after being a wreck since the summer of 2008. This is an area worth looking at, but only for investors who can put the time and effort into really understanding how it trades. Natgas has been very good to me, but it’s dangerous, and holdings need to be monitored regularly.
A final note on asset allocation: commodities are an important part of a portfolio for many investors, as they are a good inflation hedge and have low correlations to other asset classes. Some investors may think of energy stocks as a suitable proxy for commodities. This week proved again that these shares, especially the large energy blue chips, follow the stock market more than the commodity markets – which is to say, they are too correlated to provide adequate diversification. That doesn’t mean they are a bad investment. I like energy stocks quite a bit, and have had success with them. It’s just to say that they are stocks first, while also being leveraged commodity plays to a lesser degree.