Despite a generally strong rally since the mid-month lows two weeks ago, stocks still look shaky as a host of technical indicators continue to deteriorate this fall.
The stock market is looking tired as the advance-decline line breaks down, many more stocks are hitting new lows and buying pressure has flagged. The markets’ breathe just looks tired and set to consolidate. Also, plunging Treasury bond yields is a bad sign for stocks as the ten-year hits the low end of its trading band this week. Bonds are screaming “recession” this fall, though I don’t think that’s going happen.
The main drag on this market remains housing and especially, financial services stocks. The above chart depicts an unfolding horror story for bank stocks in the United States; sub-prime and other mortgage-backed bottlenecks have also infected banks across Europe, Canada and to a lesser extent, Asia. The picture for bank stocks is grim (see chart below). This chart tells investors that we’re still looking for a bottom. Financial services stocks represent a hefty 20% of the S&P 500 Index.
Worse, I think, is the relentless rally in oil and gold since the Fed cut rates on September 18; oil prices have surged more than 25% and gold is up almost 20%. Big market moves like this for the most widely followed commodities eventually won’t be good news for bonds or stocks. At some point, assuming the rally in oil continues, the bulls will step aside and take profits.
In the next issue of The Sovereign Individual, I’ll address stock-market hedging strategies and the excellent trading services we have available to counter the markets’ decline, including currencies and put options. Also, I’ll show you how to easily and cost-effectively hedge against a bear market with foreign currencies, fixed-income, reverse-index funds and other strategies historically providing a negative correlation to equities.
The next great bear market won’t happen just yet. I’m still moderately bullish on global stocks over the next 12 months. On the bright side, foreign economies are much stronger than the United States, are growing bank credit at a faster clip and can probably absorb a soft U.S. recession, if it occurs. The Fed is also doing the right thing by cutting lending rates – not to save Wall Street but to rescue Main Street, bleeding a slow death in housing.
To be sure, volatility is now a prevalent theme since last summer and I urge investors to embrace market risk, otherwise your long-term returns will be dull. The key is to make sure you have a globally diversified portfolio across asset classes, minimize your trading costs and learn to properly hedge your investments.
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