Issue 3 - 2/06/08
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"While we are in a difficult transition period as markets reassess
and re-price risk, I have great confidence in our markets. They have
recovered from stressful periods in the past and they will again."
Henry (Hank) Paulson
US Treasury Secretary
As quoted in the AP |
Volume I: Issue #3
See Note below for chart explanation.
Editor's Corner
Volatility Increases Uncertainty
Ron Rowland - Editor
The equity markets staged their best gain in years last week. However, in a demonstration of just how volatile these markets are, most of those record gains were wiped out in the first two trading days this week. The US dollar lost strength last week while gaining strength in the last three days. As a result, the volatility in international markets was magnified as viewed from the eyes of a US investor.
A consensus is building that the US economy will experience a recession this year or has already entered one. Whether or not a recession becomes a reality is probably a moot point. What is important to investors is the severity and longevity of any particular recession. Real estate, financial services, and retailing are segments of the economy that are clearly in a recessionary mode already.
However, the market likes to look ahead, and if the market believes that the monetary and fiscal stimulus activities that are currently underway will help these sectors going forward, then it is possible that we are at or near an intermediate-term bottom in the equity markets. If the market believes that the stimulus will not work, and that problems will continue to spread to more sectors of the economy, then perhaps there is more downside yet to come.
Many technicians believe that a retest of the January lows is now underway. If true, we will be anxious to see the results of that test. Daily volatility remains at high levels in the bond markets as well. Still, the move pales in comparison to the equity markets and the extreme late January corrections in the Treasury markets. The panic low 3.3% yield on the 10-year Treasury has not been approached again, indicating that bond investors now believe the worst may be behind us.
Sectors
Last week's rally was led by the beaten-down sectors, leading many to believe that much of the buying activity was nothing more than short-covering. The first few days of this week have tended to favor the defensive sectors once again. It stands to reason a change in leadership is not a given at this time. The Materials sector remains on top of our rankings and is trying hard to separate itself from the pack. The Industrial sector is picking up steam, thanks to a strong showing by the transportation industry.
Styles
Our current style rankings look like a complete flip-flop from just a few weeks ago. However, this could also be an oversold bounce of those styles that have been the weakest since the October high. Compared to our sector and global rankings, the styles are still relatively clumped together and have a higher probability of the relative rankings changing again in the short-term.
International
Latin America continues to be the global leader on a relative basis. The USA has climbed in the rankings due to the magnified volatility in international markets that we mentioned above. Canada continues to exhibit above-average relative strength, and some smaller countries, such as Malaysia, are also outperforming their peers.
All the best in your investing success,
Ron
Note:
The charts above depict both the relative strength and absolute strength of various market sectors, styles, andgeographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
Pick of the Week
What Goes Well With that Gold Necklace....?
John Schloegel
With so much uncertainty circulating in the market, it's no wonder we've heard a lot about gold recently. Inflationary forces have pushed commodity prices up. As you're probably aware, gold is trading at all time highs. Natural resource-type funds have been moving up in our rankings for the past few weeks.
Why is gold so popular? Here's a couple of bullets to chew on...
* Weak U.S. dollar * A commodity play * A budget deficit play * Inflation play * Supply/demand imbalances * A hedge to your proto-typical equity allocation * A traditionally non-correlated asset * Credit crunch, derivative mess, mortgage meltdown * Government stimulus package * Fed easings, etc.
Now for a mental exercise: substitute the word SILVER for GOLD.
Why put all of your eggs in one basket? The way to diversify into silver is through SLV - the streetTRACKS Silver Trust. The shares are consolidating recent gains, and pulling back off of new highs, so a decent entry point is at hand. Look for this one to go higher in the near-term.
Good luck.
Note:
Keep in mind that the Pick of the Week is intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell.
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© 2008 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.
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