In this week’s Macro Theme update, we review “Reflation’s Rollover.” Last we...
The Problem Is Confidence
03/02/2009 11:22 am EST
Jim Farrish, editor of SectorExchange.com, says several sectors are trading near support levels, and he says they could go lower.
Given how the market is going, I am thinking about changing the name of this column to just ETF Losers. The basic challenge to the markets is not so much the economy-bad as that is-as the response to government policy.
The initial reaction to the banking bailout and restoration of the lending process was positive. The reaction to what has followed has been negative. The bank plan (or lack thereof), the stimulus package, higher proposed income taxes, the new budget (all $3.7 trillion), nationalized health care, trade restrictions, endless social programs, carbon limits, and alternative energy all combined last week to break the back of the market's support.
I stated in my previous posts that if government intervention was the catalyst for an up trend, we were in for a rude awakening. That alarm clock is buzzing loudly now. Intervention always starts out with the best of intentions and then ends with more government controls and higher taxes to pay for them. Neither of those is good for capital markets.
Unfortunately, you and I are investing in the very capital markets the government is disturbing. Thus, you have to be very cautious in putting your money to work in this environment. In fact, cash is king for this market currently.
Last week, nine of ten sectors ended down, and the down side trend has gained momentum over the last three weeks. I would like to blame President Obama's budget proposal as the catalyst last week, but that would be unfair. OK, maybe it isn't unfair.
In fact, the changes proposed in health care alone caused that sector, the second largest in the Standard & Poor's 500 index to drop 11.1%. The HMO (healthcare providers) index dropped more than 20%.
Meanwhile, industrials were down 8.4%, and that is the sector many thought would benefit from the stimulus package on infrastructure rebuilding. I guess investors finally got around to reading the actual stimulus bill.
Of the ten sectors we follow, five are currently negative and five came closer to breaking support last week. If this sounds like I am negative, I am! In fact, I have been for the last three weeks. The challenge remains investors' lost confidence.
This recent round was started after Treasury secretary Tim Geithner presented his banking plan-or lack thereof. It has snowballed from there with President Obama's approval of a fat-filled stimulus bill and proposed budget with a $1.7-trillion annual deficit. It's hard to garner confidence in the capital markets when government is spending more money than any of us can conceivably imagine. Thus, the break in support and potentially the next leg lower for the broad market.
The most common question I've gotten over the last couple of weeks is, should I consider being short the broad market indexes? I have tried to be optimistic in my view of holding support, but technically the charts have been showing this push lower since January. I have recommended 85%-95% cash allocations since last July. That doesn't make me smart; it just makes me risk-averse.
Being short the broad market indexes looks extremely smart right now, but it also carries plenty of risk. The market is oversold and I understand it can stay oversold for a long time. Capital preservation is the priority, not bragging rights for picking the bottom.
However, you have to evaluate the risk of such a trade and whether or not you have a strategy to for doing so. If you do, then by all means join the selling. If, however, you do not, stay in cash and wait for your opportunities. You can always make up for lost opportunities, but making up lost capital is a tougher challenge.
Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.
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