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.
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