|
Today's Market WrapUp 11.01.2007 Mon Tue Wed Thu Fri Goldberg Archive Aggressive
Portfolio Insurance
There is a strong case for positioning into some sort of market plunge protection as a hedge against downside risk. That insurance would be in addition to the risk protection that is provided us free of charge by the Fed. There are a number of conventional strategies involving options which may be used. But tonight, I’m going to propose a more aggressive approach. That is “insurance” by being short or owning puts in the stocks of lagging sectors. Of course, you should consider that in the markets, “more aggressive” generally implies more risk and this strategy is no exception. With the Nasdaq making multi-year highs and many foreign indices at or near all time highs, and the major indices getting ready to do the same, it would probably be wise to be fearful while the crowd is being greedy. At the moment, there is not a technical reason to sell out of winning long positions. But one can make a good case for taking some bearish positions against the bullish sentiment that is apparent. One sector that appears ripe for such hedging is the US department stores. While the S&P seems to surge to every Fed musing, except for Saks (which caters to the upper class), this sector has been unable to muster an intermediate term technical reversal. For your consideration, the charts of this sector, viewed as a ratio of each stock to the S&P 500, are presented below. Here’s Dillard’s as a ratio to the S&P 500. Currently DDS is at former support which is now resistance.
The chart of Dillards below shows its intermediate technical position. It appears to be in a long term bear market, with a rally up to support. It is now in a corrective pattern, but the long term trend is down. If Dillards turns down from here, it will confirm a lower high.
The ratio chart of J.C. Penney suggests a consistent lagging pattern.
In spite of the fact that the Fed threw everything it had to the US consumer short of printing money and mailing it to each citizen, J.C. Penney has failed to muster a significant rally. If the wealth effect doesn’t kick back into gear soon, JCP will probably have a new leg to the downside.
Similar technical predicaments are exhibited by Nordstrom, Kohl’s, Sears, Macy's and Target illustrated below. With the exception of Target, all of these stocks are well below a falling 200 day moving average at a time when the Fed has been as friendly as they can be toward the US consumer.
Today’s Market With the quarter of a point a done deal, the market sold off strongly today. Of particular note were the department stores featured above (drafted last night). Except for Macy’s, all were down between 4 and 6% today, some on heavy volume. Today was another distribution day for the Dow and NYSE which is significant according to Investors Business Daily’s method of characterizing the market as bullish (confirmed rally), or bearish (downtrend). With most market indices trading at or near all time highs, a one day selloff is enough to make the fed “pump” $41 billion into the US financial system. I’m no expert; only a technical analyst, but this would not appear to be a healthy situation. With the US housing market in shambles, the elevated stock market is all the fed has to support a continuation of the wealth effect in the US. Without that, the economy and the market go into recession. With the infusions, may be the market and economy will still go into a recession. Only time will tell on this score. In the meantime, I’m comfortable with being long uptrend stocks (especially gold and precious metals stocks), and short those sectors (retailers) that appear to be in bear markets. It seems as though all of the monetary tools available to support elevated stock markets are inflationary and therefore, absent manipulation, bullish for precious metals. Have a great evening. Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
INFORMATION |
