Apr 16 2008
Stocks are Telling an Interesting Story Right Now
It’s my job to track the stock market. I look at other stuff too, but during the day I watch stocks. One of the things I do each day is apply a proprietary trend indicator we use in-house to identify stocks moving into new trends. It will come as no surprise that the vast majority of those new trends I’ve been seeing of late have come from stocks moving lower.
What I’ve found interesting in the number of stocks where those new trends are being signaled, but for which prices have not yet made new lows. Don’t get me wrong. A number of them have, but I keep finding stocks that are not yet making new lows and in many cases have decent looking earnings and valuations. To me that’s potentially a really good sign. If they can hold up from breaking lower, we could really see a nice rally somewhere down the line.
Here are some other posts which might interest you:
- Divergences Gave An Early Warning in Stocks
- GBP/USD: Can You Say Consolidation?
- Extreme readings?
- Guaging the prospects for a range break
- EUR/JPY: Might Be a Good Time to Be a Seller
Hi John,
Do you believe (as I do) that we are in a period of stagflation right now?
Given this, what sectors of the US equity market would you be in right now from a long term perspective. Just in general terms if you don’t mind.
Thank you for your time.
Lou,
If it weren’t for the fact that there has been massive asset devaluation going on (homes, paper assets, etc.) then I might agree on the stagflation view. Then again, if we didn’t have that asset deflation, we might not be in a low/no/negative growth environment. So I guess the bottom line is that you need to look at things in terms of whether they are an expsoure to the inflationary or deflationary parts of the economy.
My mentor told me in a very depressed tone of voice yesterday that he was afraid the economy might be headed for a lasting cycle of deflation not too different from the Depression. I think, though, that comes in part from him being a little beaten down by things (not necessarily market things) of late. So take it with a major grain of salt.
One of my more senior colleagues has been saying stagflation for a while now. Maybe he and you are right. I try to stay out of those prognistications. I’ve never been particularly good at them.
In terms of what sectors to play in that kind of environment, I would have to say you want to favor the inputs – producers of raw materials and things of that sort which go into finished goods – especially non-discretionary goods or services. You’d want to stay away from sectors which are driven by discretionary spending. Those sorts of businesses will not only suffer from a weakening economic situation, but also would likely have a hard time passing along cost increases.
Hope that answers your question.
John