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You may have noticed U.S. stock indexes moving higher over the last month, offering some hope we may have found a market bottom. Unfortunately, this does not appear to be the case as many indexes failed a major test in the last few days.
There were some promising elements in the rally. Small caps were a market leader, which is often associated with a bear market recovery. Lower oil and other commodities prices should be a boost to consumers which could prop up spending. Retailers were leaders at times during the rally and considered by some a necessary ingredient for a market bottom. But as the rally matured sector rotation never moved away from consumer staples and healthcare, two defensive sectors, indicating investors are still playing defensive.
Earlier this month I updated the Dightman Capital homepage with the following: “The U.S. stock market rally that started in the middle of July and continued in early August, in our analysis, lacks the components necessary to support sustained price appreciation. Trading volume continues to be light and we have yet to see an advance/decline ratio high enough to support the action. The stock leadership that has emerged is thin and inconsistent. Also, the S&P 500 P/E ratio, based on Q3 earnings estimates, is a little high at just above 20.”
Going forward, we face the recent development of a slowing global economy. Up until the spring, many foreign stocks were holding up better than U.S. stocks. Since July 15th through today’s close, the S&P 500 has rallied over 4% while emerging market stocks have declined over 7%, Japan is down over 5%, and European markets have fallen around 3%. Until recently, some analysis felt international stocks would be somewhat insulated from problems steaming from the largely U.S. credit crises, but that appears to be less likely. European stocks are down nearly 20% since the middle of May and slowing growth continues to be reported from many markets in the region.
As bear markets go, so far this one has been shallow. If we do suffer another down leg, there may still be time to raise cash. It could get a lot worse.