Being Street Smart
No Place To Hide
by Sy Harding, editor
Street Smart Report Online
Investors
are frustrated with the markets, all of them, not only because
of their volatility and propensity to change direction every
week, but because there have been few places to hide, and those
that seemed safe a month or two ago have also become treacherous.
For instance, during
the worst of the bear market, in 2000, and again in 2001, for
those who were reluctant to profit from short-sales or bear-type
mutual funds, bonds provided a profitable safe haven, rallying
as the Fed cut interest rates to re-stimulate the economy. But
since peaking last November when it became apparent that the
economy had turned the corner and interest rates were likely
to begin rising again, bonds have been in the tank. (Bonds go
down in price when interest rates rise).
The utilities sector
looked very promising in early March, beginning to rally off
a very oversold condition created by the Enron scandal. But after
rallying into late April they ran out of steam and have been
back to the downside since.
Concerned about the
lack of hiding places in the U.S. stock market, Wall Street began
recommending that investors diversify into foreign markets.
Some firms recommended
Europe, and probably as a result of the extra money that pushed
into those markets the Dow Jones Europe Index has not been as
volatile as the U.S. market in recent months. But it also hasn't
gone anywhere, with the Europe Index at 199 this week, 1.5% below
its peak in March, which was also its peak in December. Even
cash in a money-market outperformed the Europe Index.
Other firms recommended
emerging markets a few months ago. That was more promising for
awhile, depending on which emerging markets an investor chose.
Those of Latin America have certainly not been the place to be,
thanks primarily to the currency and political problems in Argentina
and Brazil. The Dow Jones Latin America Index is down 11% since
mid-March. Emerging markets in Southeast Asia performed the best,
for awhile. They rallied some from their early March low into
mid-April. But six weeks was about all the energy they had. Just
as investors began to believe and moved into them in mid-April,
they topped out. The Dow Jones South East Asia Index has declined
7% since, and is just about back to its level of early March.
Another promising hiding
place that's not so promising now is the area of small-capitalization
stocks, as represented by the Russell 2000 Index. The small-cap
stocks plunged 38% in 2000 and 2001, along with the rest of the
market. Small-caps then began to rally with the rest of the market
last October. But when the rest of the market ran out of steam
at the end of the year, the small cap stocks continued to rally.
However, the Russell 2000 Index also ran out of steam a few weeks
ago, and is already back down to its level of mid-January.
But be careful about piling in at this point. Gold bullion and the gold stocks are extremely overbought from a technical standpoint, with momentum indicators spiked up to levels that almost always bring a reversal to the downside. And brokerage firms have begun to downgrade the sector and warn of that overbought condition and excessive investor euphoria for the shiny metal.
One problem with the gold sector is that it is very small. For instance, the market value of all the gold stocks combined is only $40 billion. That's less than the market capitalization of many individual stocks on the NYSE or Nasdaq. For instance, the market cap of Home Depot alone is $111 billion, BankAmerica $95 billion, Microsoft $324 billion. So, as you can imagine, it doesn't take much inflow of investor money into the gold sector to drive the prices of gold stocks and mutual funds through the roof. The downside of that is that it also doesn't take much profit-taking, or selling, once the sector becomes overbought, to spike them back down again. And that is the situation I believe is just around the bend for the gold sector.
Let's hope that the rest of the market finds a bottom and is ready for a summer rally soon, or that some new areas begin to show potential, or investors are really going to become disillusioned. And this is not the time for that, after already suffering through the worst of the bear market, assuming you agree that the 72% plunge in the Nasdaq got rid of most of the damage the bear is likely to inflict, (although I still expect an even lower low later in the year).
Editor's Note: Sy Harding is president of Asset Management Research Corp., 169 Daniel Webster Hwy., Suite 11, Meredith, NH 03253, publisher of The Street Smart Report, 1 year, 17 issues, $250 (now in its 15th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com, 1 year, $225. Mr. Harding has consistently ranked in the Top Ten Timers by Timer Digest for years. In March 1999, he authored the book, Riding the Bear How to Prosper in the Coming Bear Market, $12.95. (the Dow topped out just 9 months later). In Riding The Bear, Mr. Harding explains not only bear markets, but how bull and bear markets get started and end; how public investors can break their pattern of only becoming interested in bull markets in their final stage, get killed, and then are too scared when the next bull market begins. He explains in plain English how the market reacts, how cycles work, and how to take advantage of them to hold onto your bull market profits - and actually increase them during a bear market. Harding also explains the Seasonal Timing System in detail. This highly recommended book is FREE as a bonus with a subscription to Sy Harding's Street Smart Report.
