The financial market finished the second quarter on an upbeat note. It surpassed all historical gain records for the US stock markets. In fact, the gains were even better for stocks of emerging markets, like China, India, Brazil (FXI, IFN, EWZ). Now that the last day of quarter window dressing is done with all the mutual fund managers, what should we do next?
Gold and silver have been on a slide downwards because of the temporary bounce back up in the US dollars the last few weeks. Many websites on precious metals believe we need to watch the $750/oz. level, the intermediate bottom and $1000 level, the upside break out. Knowing that gold is a manipulated items on the Federal Reserve and IMF agenda, its direction has to be view in the context of monetary policy parameters, like US dollars and T-bond. Unlike industrial commodities, fear and the desire of safety also increase the price of gold as a independent factor. See the right navigation bar for the gold dash board.
Industrial commodities and oil have risen more than stocks of many equity sectors since the end of 2008. The declining US dollars and inflation expectation (lesser hype on deflation now) were reportedly the driving factors in the media and expert opinions. There has been some correction the last four weeks as the US dollars continue its bounce temporarily. Longer term, expect US dollars to be decline and commodities to reach higher prices as the economies of the world improves, for real.
Emergent markets are in similar correction mode the since mid June. Opinion from MPtrade published at Safehaven, is one of a few that recommend caution for continued downward correction in the next few weeks.
July 2 US employment data was definitely bad because it surprised the market with a higher than expected monthly job loss, and hence broke the trend of slowing loss that has kept the major financial indexes up the last 3 months. Please be mindful of the fact that this is only one month disruption. There are other reports in the last few days that relates to the current view of the markets. Many fund manager and media sentiment are cautious and some defer their commitment of more money into the markets to the early earning reports due in the next few weeks. With occasional pre-announcement by companies that may surprise the market, it is wise to be defensive for the first part of July. Protect your gain and do small bets on commodities, and other defensive sectors, like consumer stables.
Last but definitely not least, there is change in the monthly equity indicator on our webpage’s right navigation bar – monthly stock trend . This is a brand new reversal signal since the last November 2007. The S&P 500 closed the month of June 35.9% above the March 9th low, but it remains 41.3% below the October 2007 high. However, one of our S&P 500 moving average signals, the 10-month simple moving average has indicated a move into equities. That was two days ago, and now S&P is back to negative since 1/1/2009. I think we should watch for a week and decide if we want to put considerable amount of cash into US equity. The case that suggests a continuation of the bull run last quater is the large amount of money parked in cash. The counter case is based on the doubts that the green shoots are really taking roots, and also if these current rise in valuation (general price level of stocks) is ahead of the reality, with bleak economic data around us. From reading different opinions, I found that there are enough positive and negative sentiments out there to make us, the independent common sense investor to be cautious, at least for a week. The first two trading days of July was not that positive from the technical point of view.
In general, we need to have balance judgment technical (reading charts) and fundamentals (real economics and business trend) in the context of the investor sentiment. Surprising, the media or slice of your friends at work or in the gym can give you a clue of the sentiment. Bull markets climb after the market has been in a long downward spell. Economic data are horrible and the people are sick at looking at their broker’s statement. Bear markets start when the world is rosy. The market has been in an extended clime, economic data are strong. And investors ignore typical bad news for many weeks.
Summary:
- Get ready to put some money into US equity (read the next paragraph before acting). Set tight stops to contain loss, in case the market turns south, despite the end of June monthly equity indicator based on SP500. Plan for possible whipsaw and false signal. Be also ready to turn bearish until the correction is complete. Avoid sectors that have gone too high too fast, including banking. Example of safer bets: tech sector is strong and have cash to fuel the growth without relying too much on bank credit availability. Consumer discretionary sector also tends to perform well when the economy really turns up. Overall assume that this is still a bear market rally that has some upside a little further, if it continues from here.
Whipsaw risk: The DJIA (DIA) has been making lower lows since mid June. If the market early next week is negative, we run the risk of reaching DJIA 7800 or 6000. Similarly with SP500 (SPY)With the 7800 more likely. Then there is a better risk reward to pick up some bounce as noted below.
- Watch for opportunity to add to your target position in the industrial commodities market based on the recommendation in our previous blog. Be more careful with gold and silver as they have more complicated drivers that include monetary policies and central banks’ agenda.
- Watch for opportunity to add to individual foreign company ADRs (like PBR, ITU, CHL, LFC) or country EFFs (like EWZ, FXI).
- Since this is a possible first excursion into stocks, subject to whipsaw out, consider keeping a reasonable amount in short term flexible savings or MM accounts. You can still get 2.0% APY with 3o month teaser of 2.6-3.0% from some FDIC banks.
I will post an alert if I see things changing significantly from this strategy. Meanwhile, I will continue to keep this website side biased on low-noise and actionable ideas.
GC-Editor.
