Playing Defense

Even after Friday’s sell-off the S&P only closed down 0.40% for the week. We are still above the March 10th low and volume didn’t surge on Friday in response to the Bear Stearns warning. Tuesday’s massive rally attempt is till intact, but it won’t take much to undercut it. Should additional bearish action develop there may still be an opportunity to move into a more defensive position with portfolios but most of the work has been done.

Bonds, manage futures and commodities have served well in the most recent market declines as indicated in the following 6 month charts.

The first chart illustrates:

BWX - International Bonds (Blue)
AGG - Aggregate U.S. Bonds (Red)
^GSPC - S&P 500 (Green)

The second chart illustrates:

DBC - PowerShares DB Commodity (Red)
RYMFX - Rydex Managed Futures (Blue)
^GSPC - S&P 500 (Green)

Hard assets continue to look attractive but some fundamental concerns exist with crude oil and agriculture. Supply and demand measures do not appear to support $110 a barrel crude oil and the ethanol effect on agriculture prices will develop over the years as production techniques improve.

A positive development; sentiment has turn bearish, as measured by Investors Intelligence newsletter survey, as the number of bullish writers crashed and bears surged. When more newsletters are bearish then bullish, market bottoms usually follow, but it can take weeks, even months to materialize.

One element that is missing from today’s market is individual stock leadership. The price volume action of stocks with strong fundamentals continues to be a concern.