After last week’s events we were looking for heightened volatility this week, and boy have we gotten it. A 600+ point drop in the Dow Monday, and a 600+ point swing in the final hour and a quarter Tuesday. Here are some observations at this point:
The bounce we saw today did little more than relieve extreme oversold conditions. My trading plan is still in play and we should expect to see higher prices – perhaps not directly, but it’s still not time to sell (or sell short).
The bounce we saw today did little more than relieve extreme oversold conditions. The commentators who say back up the truck and buy all you can at these prices may turn out to be dispensing good advice…but I doubt it. This looks more like 2008 than 1987, but isn’t likely to be the same as either of them.
The VIX and VXN have backed off extreme levels, but remain sharply elevated.
So many of the dozens of charts I study looked so similar, which is typical of these market conditions. Domestic small company stocks, foreign equity ETFs, high yield bonds, they all moved together, just as they did three years ago.
Some of the most interesting action is in the gold miners. They were lagging the metal significantly, but lower energy prices coupled with high gold prices are panacea for this sector. Have a look at the AMEX gold bugs index (HUI) and the CBOE gold index (GOX). These stocks have avoided much of the carnage and could be poised to make a nice advance.
The Fed tried to move investors out of fixed income by sticking to low short term rates for the next two years. This is news to no one. If the market hasn’t accomplished that by driving yields down so far, the Fed isn’t likely to do it either, at least not in the near term. We should however be looking for any indication that they will take some action they aren’t already taking. Remember that the signal of QE2 a year ago set off a big rally in commodities and stocks.
The larger setting remains: we have a slowing domestic economy and a looming financial crisis in Europe. At some point the manic trading will exhaust itself and we will settle into markets that reflect the macro outlook. If you are a longer term investor, use this time on the sidelines to be thinking about what will work in that type of environment. More thoughts on that later.