North American markets readying for winter
12/12/2005
Last week the increasing cloudiness in equity markets was on my mind. This
week, the snowstorms began. There is a definite chill about.
As I see it, the U.S. equity and debt markets and currency are
transitioning from secular bull to a bear phase. I surmise that debt-laden
markets are on the tipping point should rates continue much north from
here. With mild inflation at hand, the market bulls are telling you that
there is no inflation. But what they really fear is not inflation, but
rising interest rates.
And even a stronger economy is going to raise rates. So there will be a
bear.
I cannot tell at this point whether that bear will be long-term (which is
the meaning of secular) or intermediate or short term.
In other words, will the declining prices grind out over a two or three-
year down cycle like 1973-74 or 2000-02, which were devastating secular
bears, or the 1981-82, 1990, or 1998 bears that lasted a year or less, or
the even shorter-lived bear of 1987, which was a two-month shocker?
My thinking is that the longer this bull runs, the more baggage it will
carry on its back, and the faster and further it will tumble — like 1987.
But I have been known to be wrong.
Recalling the 1987 experience is a sobering experience to a trader today
who has become drunk with excesses of blind confidence. The sheer
exhilaration of watching your pet stock jump 10 pct in a week or maybe two
— like INTC did in weeks #47 and #48-05 — can turn around and smack you in
the face, however.
I suspect traders are on the threshold of pain today, but I won't know
whether the market is going to react like a knife is stuck in it, or it
feels like a dull toothache.
In terms of my own portfolio — heavily long precious metals and short
financials -this past week's performance recovered some wealth for me, as I
expected, but I decided to hold off another week before making big changes.
I have 78-pct in cash or near-cash, with 12-pct in gold and silver stocks
(a major over-weighting) plus a minor-over-weighting in energy. I am
actually short Financials and under-weighted in Telecom Services. A 2-pct
holding in gold and silver miner call options was closed last week and
moved into the underlyings, which are not so leveraged. The other ten pct
of allocated assets is spread across all other (non basic material) sectors
except Financials, and Telecom Services, where I have none except shorts
(XLF and IYF).
So what's happening to U.S. Equities? Last week, all four broad market
indexes were down. The Dow 30, the S&P 500 and the Naz combined were down
about —0.7 pct. Despite talk to the contrary, it was not a good week.
That was to be expected when the Weekly momentum indicator (STO) started
off the week a perfect 99.9 for the Naz. A week ago, I said, "I can hear a
bear growling".
As for Canada, the equity market was up + 1.4 pct W/W, largely on oil and
metal markets doing well.
As you know I keep an eagle eye on ten U.S. sector ETF's, which tell me
where the market is and may be headed. After four weeks running with nine
ETF's up, and one down, followed by one where all ten were up, a week ago
the picture changed. That week there were 5 up and 5 down. This week it was
7 down and 3 up.
The biggest gainer a week ago, Semiconductor Techs SMH (+3.9 pct), was by
far the biggest loser this week (-2.5 pct). Financials (XLF) took another
hit, down —0.7 pct. :-)
Energy (XLE): Over-weighted: winter storms; #2 performer this week
Basic Materials (XLB): Over-weighted: all about metal; week's #3
performer
Industrials (XLI): Market-weighted: weakness showing; down —0.7 pct W/W
Cons. Discretionary (XLY): Market-weighted: consumers don't like shopping
Cons. Staples (XLP): Market-weighted: consumers don't like shopping
Healthcare (IYZ): Market-weighted: flat on the week; Big Pharma troubles
Financial (XLF): Under-weighted: decline continues; XLF down —0.7 pct
Technology (SMH chips): Market-weighted: worst performer by far W/W
Telecom Services (IYZ): Under-weighted: 2nd worst performer (short)
Utilities (XLU): Market-weighted: #1 performer on the week
YTD (after 49 weeks this year), I note that only 3 of 10 of these ETF's are
up > +8 pct, and the Dow itself is actually down 5 points. That makes it
awfully tough if you are stuck in the wrong sectors.
YTD, XLE has been the star performer, up +44.8 pct. XLU and SMH are next,
up +18.5 pct and +16.5 pct, respectfully.
Across all assets, I am very over-weighted in Basic Materials (due to
precious metals), modestly over-weighted in Energy, very much short
Financials, and modestly short Telecom Services, within a portfolio that is
grossly over-weighted in cash (78 pct).
Bonds last week were flat as everybody's attention is focused on the FOMC
meeting and policy decision on Tuesday.
Commodities last week were up sharply again — until Friday, when oil and
the metals sold off sharply due to a 4:30 pm Thursday report on U.S. M3
that went into 14-digit historical record levels.
Oil & Gas had a modest gain — mostly flat -- but Friday was down big as the
M3 growth started up fears of Fed tightening
Gold was up +4.6 pct W/W, which was +$23 per troy oz. The new $526 level is
solidly above psychological support at $500. But with Tuesday's FOMC rate
hike, gold could pull back a bit.
Shares of North American gold and silver miners were flying last week, but
late Friday there was trading that showed nervousness going into FOMC
meeting.
Last week, the trade-weighted USD was down second week in a row, this time
—0.7 pct. The Euro was up +1.0 pct W/W; after three legs down this year,
the euro-bear might hibernate, and the Euro might turn bullish for 2006.
It was an interesting week, with a significant increase in my portfolio.
For much of November, it was hard to stay in cash and hold a short in XLF,
but I managed to get through it alive, and now feel pretty good. I am,
however, looking forward to a holiday break.
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