MARKET CONTINUES TO ERODE -- COMMODITIES OUTPACE STOCKS FOR FIRST TIME IN 20 YEARS
DOW HITS ANOTHER FOUR-MONTH LOW... The major averages fell to another four-month low today. The S&P 500 ended down 10 points near 818 and is bearing down on its October lows. That will be an important test for the market. As we've said before, we wouldn't be surprised to see the market bounce off that low -- if only temporarily. One of the things increasing the odds for at least a short-term bounce is the recent selloff in gold and gold stocks. Gold prices fell another $10 today and gold stocks lost over 3%.
Chart 1
XAU BREAKS 200-DAY LINE... Two days ago we showed the XAU Index breaking its (blue) 50-day average. Today, it broke its 200-day average. Gold prices fell another $10 today to close at $353. That puts gold in position to test its 50-day average near $350. [In our January 24 market update, we warned that gold had gotten over-extended and advised that this was "a time to be more cautious on gold". We also said, however, that any significant setback in gold and gold stocks would represent another buying opportunity. .
Chart 2
Chart 3
DUKE, GM, AND JNJ PULL MARKET LOWER... Utility stocks lost 3% today and were the day's weakest sector. A large part of the reason was the tumble in Duke Energy. The stock gapped to a new 52-week low today on very heavy volume. General Motors was the biggest loser in the Dow today. The stock gapped to a new three-month low on heavy volume. Health care also had a bad day. A big reason was Johnson & Johnson, which tumbled to a six-month low -- also on big volume
Chart 4
Chart 5
Chart 6
CONSUMER STAPLE WINNERS AND LOSERS... Consumer staples held up better than most sectors today. Two of the best performers were Gillette and Clorox. Both stocks are rebounding off their October lows on rising volume. One consumer staple that's not holding up is Campbell Soup. The soup stock is tumbling on heavy volume.
Chart 7
Chart 8
Chart 9
COMMODITIES VS. STOCKS ON A RELATIVE STRENGTH BASIS... We've been making the case recently that a generational asset allocation shift appears to be taking place out of paper assets (mainly stocks) into hard assets (commodities). The best way to show that is with a relative strength (ratio) line. The chart below is a ratio of the CRB Index divided by the Dow since since 1980 -- using a log scale (which measures percentage rather than absolute changes and is better for longer-range analysis). Over the past twenty years, paper assets were clearly the place to be as commodities consistently underformed stocks. To the bottom right, however, we can see that the CRB Index has been outperforming stocks since 1999 and, more importantly, the ratio has broken the twenty year down trendline. These long term shifts between asset classes tend to last for a long time. That's why we still believe that a good asset allocation play is to build up positions in hard assets (preferably during period of weakness). That can be done via sector mutual funds that emphasize commodity-related stocks or commodities themselves. Last week we showed a chart of the Oppenheimer Real Asset fund, which mimics the trend in the Goldman Sachs Commodity Index. That's one way to participate in a bull market in commodities without actually buying the commodities.
Chart 10
BLOOMBERG TV TOMORROW MORNING... i'll be appearing on Bloomberg TV tomorrow morning (Thursday) at 7:54 am. Tune in if you can. We'll be discussing many of these same trends.
