Down Friday – Down Monday

While the market ended up for the week, we made note of a little reported item: a down Friday followed by a down Monday. Friday June 4th the market closed down and then Monday June 7th it closed down again. Historically, this has been an indicator of a top of a run rather than a bottom. We were also not impressed by the low volume on the days where the market rallied.

We see both of these as concerning and continue to make plays accordingly. We raised a little more cash over the week: these were positions that hit our sell stop price and we did not reinvest in other securities. We are not overly bearish at this point but, other than brief rallies, are not seeing anything that would move us back to the bullish camp.

This week we are going to look at two energy commodity based ETFs. These are for informational purposes only. Commodities should not be used as buy and hold investments. Please consider them carefully before purchasing.

Consider: United States Natural Gas Fund, LP (UNG) – while not the most attractive chart with the 50 day Moving Average below the 200 day MA, the 50 day MA recently turned up and UNG is trading well above that line. It also ranks near the top of all commodity ETFs at this time. We would consider this in the low $8.00 range, with a stop loss of $6.50, which breaks recent and all support. Short term target would be $11.00.

 

Avoid: United States Oil Fund, LP (USO) – USO is trading well below its 50 and 200 day MA. USO also ranks low in relative strength to other commodity ETFs. With all the coverage of the tens of thousands of oil spilling into the Gulf daily, you may be thinking this has to be bullish for oil prices. In the long term, maybe. However, there is a huge amount of oil that has already been extracted and is floating around various oceans waiting to be refined. In the near term, there is more oil available than capacity to refine it, which is anything but bullish. We would not be buyers of USO.

Dow Below 10,000 - In Correction Terrority

The market continued its slide this week as we saw the S&P 500 fall -2.22% for the week and the month of June.  Two months into the second quarter it is down -8.61% and year to date down -3.69%.  We had surprisingly weak job numbers and news that Hungary could be the next Greece in the Euro-drama story.  Nothing new, just a continuation of the theme we have been seeing.  We are continuing to watch positions and as stop loss points are hit we use that as an opportunity to raise cash.

This week we will look at a couple of fixed income ETFs.  In times of turmoil, capital migrates to bonds, but not all bonds are created equally.

Consider:  Vanguard Long Term Bond (BLV) - while off its recent high, BLV ranks high in the fixed income universe and is trading above its trend lines providing a nice alternative to consider over equities.  We would consider BLV with a stop loss around $76.50.

Avoid:  SPDR Barclays Capital Short Term International Treasury Bond (BWZ) - BWZ ranks near the bottom of fixed income ETFs and is trading well below its 50 and 200 day moving average.  We may see a little consolidation here but there isn't much reason to be holding the ETF.  We would be avoiding BWZ.

What Now?

The -8.2% decline in May 2010 turned out to be the second worst May monthly decline since 1950, surpassed only by May 1962 (escalation in Vietnam and soon-to-be Cuban Missile Crisis).  Though it was not quite bad enough to go down as a top 20 worst performing month for the S&P overall.  So what might we expect for June?


We have moved rather swiftly down and that is putting us into a technically oversold area.  An oversold condition can resolve itself one of two ways:  it can snap back up with a big rally or it can trade sideways for a bit and let the moving averages catch up with it.  In the latter case it can become no longer oversold without having to move back up significantly.  With several of our major indicators indicating weakness we would expect to see the second case and then more possible downside moves after the consolidation period.


This would mean a much more selective approach, especially when picking equity positions.  We are focusing on more sector positions than broad equity ETFs.  


Consider:  iShares Dow Jones US Real Estate (IYR).  IYR has held up well in the latest correction and is one of the top spots in relative strength of our asset class comparisons.  We would consider this with $44 as the point where it breaks its 200 day moving average and turns negative.  FULL DISCLOSURE:  We own IYR in some of our accounts.


Avoid:  Utilities Select Sector SPDR (XLU).  XLU on the other hand, ranks at the bottom of our relative strength comparisons and is well below its moving averages.  Its 50 day has moved below its 200 day which is not a positive sign.  We would look to be avoiding XLU.  


We own IYR in some of our accounts.