As anticipated, major indices find bottom and start advancing
A week ago, I stated my opinion that U.S. stocks were on the verge of a rally. Major stock indices have been rising ever since. I guess we all get lucky from time to time. Now I must warn that stocks are unlikely to continue rising at this pace for much longer. That doesn’t mean we are going to see a major correction. I just expect that a continued advance will be more measured.
As a mentioned last week as well, this correction has been much more serious for the Nasdaq than for blue chip indices. The chart below paints a clear picture. The black line is the Nasdaq and the gold line is the Dow. You can see that the Dow has recovered most of what it lost during this correction and is back to its level of lat April and early May. Another good week like we’ve just had would have it back at its May high.
The Nasdaq still has a long ways to go by comparison. This week’s rally has been nice, but the Nasdaq hasn’t even made it back to its July high, let alone the highs reached in April and May.
In the midst of this correction, I wrote that the sectors and funds that were doing the best before the fall would likely be the quickest to regain leadership when the market recovered. That has also proven to be prophetic. Since the major indices bottomed the fastest rising sectors have been emerging market funds–market leaders for much of the past three years. The technology sector is also improving. Technology stocks tend to move strongly at the beginning of major market rallies, so the re-emergence of tech funds near the tops of the recent rankings is a good sign.
The chart below illustrates the situation. The black line is iShares MSCI - Mexico Index Fund (EWW). Since June 16, this fund has risen 22.5%. The red line is iShares MSCI - Emerging Markets Index Fund (EEM), up 11.79%. While both corrected sharply in May, they bottomed in mid-June and have made strong recoveries since. Other Latin American and emerging markets funds have performed equally well.
The technology funds have really come on strong in the past month. The blue line is iShares Goldman Sachs Semiconductor Index Fund (IGW). Since July 14 it has risen 10.51%. The gold line is Merrill Lynch Software HOLDRS Dep Receipt (SWH). It is up 11.01% over the same period.
Asian and Pacific Rim funds are also doing quite well right now.
As long as the market continues to advance, these sectors are likely to be near the top of the rankings. As the rally gains momentum, other industry sectors will begin to participate. Since 2003, we have not seen a market rally that endured for more than a few weeks. Perhpas if the Federal Reserve can keep from raising interest rates the rest of the year we could see a longer advance carrying the markets into the early part of 2007. Keep your fingers crossed!