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U.S. stocks have been struggling for nearly two months now. Early in the correction I made some defensive moves, not because U.S. stocks indexes started to see big declines, but because those declines were accompanied by warnings about a global economic slowdown later this summer by leading economic indicators. There are other aspects of managing investments in a secular bear market that influenced the decision as well.
When selling comes into the market it helps to dissect the action for possible clues about the future direction. As I have noted in other posts during this time, leading stocks with strong fundamentals have held up well in the current sell-off. This is a more bullish data point. The IBD 50 only declined 0.8% in Friday's sell-off, versus a fall of 1.3% and 1.2% for the Nasdaq and S&P 500 respectively. We have even seen broad strength in some of the attempted rallies. So the market appears conflicted and that is one of the reasons I have only become partially defensive and stand ready to put money back to work.
It is natural for the market to take a breather and consolidate gains. In this environment, however, it would not take much for a consolidation to turn into a severe market decline. With ongoing debt issues in Europe, unrest in the middle east, the tragedy in Japan, high unemployment, local-state-federal debt issues, ongoing housing weakness, the potential for a new crisis to erupt is higher than normal and could send stocks into a tail spin. That is why risk management is playing a more important role in our strategies than growth or tax efficiency. There will come a time where we can rearrange the priorities in our strategies, but we are not there yet.
Beyond our initial defensive moves much earlier in this sell-off, current stock market and business cycle data has not suggested any additional action. As a matter of fact, in some asset classes attractive entry points may be forming. I am always on the lookout for good investment opportunities. India's stock market started its correction back in November and has piled up much bigger declines. Late last week it started a rally attempt. If the current rally attempt sees a follow-through, it may prove to be an attractive entry point.
In terms of the broad asset classes I track for a general sense of market opportunities, International Fixed Income had the strongest price performance over the last 4 weeks, followed by U.S. bonds. The U.S. Dollar and Emerging Markets had the strongest gains for the week.
The defensive team has clearly take the field for now but I stand ready to put money to work in more aggressive assets should my analysis suggest it is a good time to do so.
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Last week stocks experienced a strong advance followed by mostly selling. Tuesday's bullish gain did see strong action by leading stocks. Informatica (INFA), W.R. Grace (GRA) and Brightpoint Education (BPI) all marked new highs on strong volume.
But the enthusiasm was short lived. Wednesday's action undermined the prior day's move and put stocks back into a correction. The S&P 500, Nasdaq, and NYSE were each down 2.3% on the day. The IBD 50 was down only slightly more at 2.5%.
Thursday's action was mixed but leading stocks outperformed. The Nasdaq was up 0.1%, the S&P 500 down 0.1% but the IBD 50 gained 0.5%. Some stocks, like 2010 IPO Accretive Health (AH), saw constructive trade on the day.
Broad stocks indexes closed last week by falling below recent lows. Weak jobs data aggravated an already fragile environment. Leading stocks were mostly quiet on Friday.
The selling continued on Monday as the global economic recovery may be showing signs of fatigue. Supply disruptions caused by the tsunami in Japan are being blamed for some of the slowdown in manufacturing but other problems persist in real estate and employment. Continued debt challenges in parts of the global economy only complicate the situation.
More leading stocks are starting to come under pressure, potentially a negative development for the broader market. The Nasdaq is struggling to hold onto its gain, up 1.87% for the year. So far the Nasdaq is down just under 6% from highs reached in April.
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Just one day later stocks reverse all of their gains from Tuesday's follow-through, casting doubt on the sustainability of the new rally.
This development has created a more cautious environment for new investments.
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