Friends
The good news is that Consumer Staple and Healthcare stocks (of which we here at CHJ have been fans of for a few years now) have been moving to yearly highs in recent days. The bad news is that Consumer Staple and Healthcare stocks have been moving to yearly highs in recent days. Okay, all kidding aside, the recent action in the stock market has been somewhat disturbing as the most recent market leaders – Energy, Industrials and Materials – have all seen sharp declines in May. Money has been rotating to the Consumer Staples and Healthcare shares as well as treasury bills. The result has been a modest decline in the averages even though energy itself is down nearly 10% in May alone. The S&P 500 is still hanging in at the 1340 level which we identified as a near term support level weeks ago.
So why are we bothered by this rotation? Well, typically a move to treasury bills and “defensive stocks” is a sign of negativity in the market. Traders are selling the leaders of the most recent rise and rotating to “safe havens”. Don’t get me wrong, we like these “safe havens” for their great balance sheets and juicy dividends, but the fact is, when they are going up it is a sign that market participants are worried. In fact, investor sentiment has grown very negative very quickly. I guess this doesn’t come as a great shock these days as sentiment changes faster than it ever did in years past (I won’t bore you with stories of the good ole days before the internet and e-mail). Anyway, the new negative sentiment may actually serve a purpose, yesterday’s silly action in LinkedIn notwithstanding, for as you know we like when the crowd is not too bullish. Just can’t help the contrarian in us.
Back to the S&P 500 for a moment. The 1340 support area would be nice to hold on to, but we will be watching today to see if 1334 can hold to the downside. 1346 is our near term resistance level that we would like to get through to thoroughly frustrate the bears. Of course the direction of the dollar seems to dictate the market direction in recent times and the slight uptick in the dollars vs. the euro recently has caused many speculators to take the “risk trade” off the table. To that end, we have seen the commodity trade unwind somewhat and the steam come out of gold, silver and oil.
The big question is – what comes next? If the market has lost its leadership (Energy, Industrials and Materials), then where will the necessary leadership come from to continue the bull market? Bull markets are not built on “safe havens”. We are glad we own many of these defensive type stocks, but in a weird twist, we get a little nervous when they go up too fast. We would rather see some confidence come back to the global growth story. On the other hand, diversification comes in handy when sentiment changes. Sometimes boring companies that pay nice dividends are just what the doctor ordered.
Have a nice weekend everyone.
