(By Mike) Has this been one roller-coaster summer or what?
Back in April and May, it looked like the economy was falling apart, the euro was going to come unglued, and stocks were going to plunge. Sentiment was extremely bearish and volatility was jumping.
Now in August, you can't find a bear anywhere on Wall Street! According to the new party line, the economy is back on track, the European debt crisis has been deftly handled by a couple of ECB and EU policymakers, and stocks are set to soar to infinity and beyond! A key measure of investor fear and market volatility — the VIX — just sank to the lowest level in five years!
Me? I continue to be worried about the likelihood of a sharp market decline this fall for several reasons, reasons I will share with you now.
Market divergences, metals slump, freight
index drop all flashing yellow!
If all you own is Apple (AAPL) or Google (GOOG) shares, you would be pretty happy right now. These mega-capitalization technology stocks, and a handful of other big caps, are performing fairly well.
But have you checked out the activity in the Dow Jones Transportation Average? The average tracks the performance of "real economy" stocks like truckers, shippers, railroads, and more. You can see in the chart below that it topped out in March and has made a series of lower highs ever since then.
If you're a bull, that's not what you want to see. You want to see the Transports "confirm" any high in the Dow Industrials. So far? It's not happening.
Or how about the Russell 2000 Index? It's a benchmark for smaller capitalization, more domestically focused stocks. I keep hearing about how the U.S. economy is supposedly doing better, especially in the wake of this week's slightly stronger than expected July retail sales report.
But if that's the case, why is the Russell lagging the advance in the Dow Industrials or the S&P 500? Why isn't it rocking and rolling? That's another divergence that calls into question the recent rally.
Then there are other indicators of global economic activity I follow, like charts of key industrial metals such as copper, zinc, and aluminum. These metals were barely able to pick themselves off the mat in June and July. And now their charts are rolling over again.
Ditto for the Baltic Dry Index, a benchmark for global freight shipping rates. It tends to rise and fall with economic expansions and contractions. As you can see, after a brief rise in the spring, the index is rolling over again. It's closing in on February's low, which itself was the worst reading since the 2008 depths of the Great Recession!
My Prescription for Action!
I'm a flexible guy. You have to be in this kind of market environment. If the latest actions by the Europeans and the U.S. Fed do somehow manage to re-inflate equities, commodities, and the like, I'll play along for a while with investments to ride that rally.
I've even identified select companies that should be able to prosper no matter WHAT the broader market is doing. I just added a bargain-basement name to Safe Money Report, for instance. And if you're interested in the details of these kinds of picks, you can click here.
But I have to tell you, many, many market signals I follow — including those I told you about last week and the ones I'm highlighting here — suggest this move isn't all it's cracked up to be. If anything, it's at increasing risk of falling apart in the coming weeks.
Until next time,
Mike
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