Wednesday, August 31, 2011

Defensives Leading, Again

Since we’ve moved to a much more defensive investment position over the past few weeks, we are watching very closely and trying to keep an open mind that we could in fact be wrong with our change in call. The stock market is now bouncing, with the S&P 500 up about +8.5% from the August 8th low through yesterday, which doesn’t really surprise us that much. After all, the intensity of the sell-off earlier this month was such that some technical measures indicated that stocks were nearly as oversold as they were in the worst of the 2008 financial crisis! So even while we believe this is essentially an oversold bounce and not the beginnings of a new, sustained advance, we are watching various indicators closely to make sure we aren’t missing anything.

One of the biggest clues supporting our overall call may be the fact that defensive sectors like Telecom, Utilities, and Health Care are leading on the bounce (as shown in the table below), just like they did this spring prior to the market’s peak in late April following the mild correction in February and March. Defensives leading to the upside would seem to go against the conventional wisdom that the cyclical sectors that have been hit the hardest lately would thus be poised to bounce the most, and to us is a warning that additional volatility in the weeks ahead is likely. Therefore, we continue to believe that a below benchmark risk posture is appropriate for the time being.