Is That a Bear Knocking? Part2

Hi, Friends,

Is that a bear knocking?

I asked that rhetorical question last week, and this week, the answer remains the same. Perhaps. But overall, the market looks as weak as it has since summer’s swoon, now reaching oversold conditions and sitting on two month lows.

The midweek rally faded to a fractional gain for the week, and the leadership rotation out of Asia and tech. stocks has been nothing short of breathtaking with the NASDAQ down 7.8% and the China MSCI Index down 18.36% since Halloween..

Month to date, only 14 ETFs out of the 72 I monitor show any kind of short term strength, down from 18 last week. Overall market risk is very high and strength is weak.

How We’re Doing

This week we continued raising cash in the portfolio in response to the deteriorating conditions when we were stopped out on Monday with a 6.93% gain in IXP and 13.96% gain in EEM for the trades entered in September. Both of these stop losses demonstrate the rotation out of Asia and the weakness and volatility in those markets.

Leaving China 25 Index last week was a positive for us, as this index dropped another 5.9% from our stop loss point and is now down 19% from its peak just two weeks ago. We will certainly reenter this position sometime in the future but, for now, will stand aside.

Profunds recently introduced a short China 25 index that moves at double the index. The launch was met with great fanfare and already is trading close to a million shares a day, but this one would be a real roller coaster ride considering the underlying volatility of this index. This one’s too aggressive for my blood and I think would be very difficult to trade. But if you’re right, you’re going to be really right, and if you’re wrong, it’s going to be painful.

Overall, September trades returned 11.9% in realized gains in approximately two months, October trades a -0.74% return, and for November we are down -5.0% with two positions remaining open. The S&P 500 is down -5.9% for November.

Year to Date we stand at +18.96% compared to +2.82% for the S&P500.

As mentioned last week, we’re automatically switching from portfolio accumulation to portfolio protection. With our exit this month from China, Emerging Markets and Global Telecommunications, we are automatically raising cash levels in the portfolio to protect us from further declines in the market. If this decline continues, we will continue getting stopped out and locking in gains or minimizing losses.

Our two remaining positions are largely uncorrelated to the S@P and should help protect us from further declines in the general market. These are two of the strongest remaining sectors.

If a bear market is confirmed, we will switch to positions on November 1st that can profit from overall downward trends in the markets. Lacking that confirmation, we will consider hedging the portfolio with positions in sectors that are in confirmed bear markets.

The Week Ahead

The week ahead promises to be a quiet one as investors head towards a shortened week and the Thanksgiving Holiday.

Reports we’ll be watching are:

National Association of Homebuilders November report—Monday
October Housing Starts—Tuesday
Conference Board Gauge of Economic Growth--Wednesday

Sector Spotlight

As I mentioned earlier, the leadership in the market has completely changed in just the last two weeks. Month to date the only sectors showing gains are Bonds, Precious Metals and Bearish Dollar, and those gains are miniscule, at best.

Laggards are many of the former leaders; International, Tech., Emerging Markets, Asia and Software.

This rotation into negative columns for so many sectors shows the overall pervasive underlying weakness of the market.

Winter is settling into Bend with snow falling in the mountains and rain blowing the Ponderosa pines outside my living room window. Mt. Bachelor has been shrouded in clouds all day. I’m sure it’s snowing up there and I bought my ski pass this week, so I’m ready for opening day. It’s a nice Friday evening to settle in by the fire with my family for dinner and a family movie.

I wish each of you and your families a very happy and healthy Thanksgiving Holiday.


Your partner in prosperity,

John Nyaradi
Publisher
Wall Street Sector Selector
http://www.wall-street-sector-selector.com