Correction begins in earnest. When will it end?
This week has shown continued signs of a market downturn with major market indices declining. This is a broad-based downturn that is also impacting market sectors that have shown plenty of recent strength.
The chart below shows a candlestick chart of the S&P 500 like the one we used last week. For comparison, I’ve added exchange traded funds representing gold and oil. Both of these sectors have been much more volatile than the S&P 500. For the calendar year, each has had strong rallies and major corrections. And after all the peaks and valleys, OIL and the S&P 500 have lost money for the year. GLD remains slightly ahead.
The gold line on this chart is streetTRACKS Gold Trust (GLD). Investors tend to seek the safety of gold during major market corrections and during times of anticipated inflation. But in spite of the massive injections of dollars into the money supply, so far inflation remains contained. The recent downturn in gold could well be because gold traders realize that with the seriousness of the current recession, deflation remains a bigger threat than inflation.
The blue line is iPath S&P GSCI Crude Oil Total Ret Index ETN (OIL). Since late February, the price of oil rose sharply on the expectation that the recession would soon end and demand for crude oil products would increase. Over the past month, with economic fundamentals showing little improvement, the price of oil began to slide.
The S&P 500 has fallen about 5% from its June high. The next area of strong technical support is about 5% lower than the current level. One of the major factors determining whether it can hold there will likely be second quarter corporate earnings reports that are just starting to trickle out.
Our assessment continues to be that market risk remains very high at this time. As a result, we recommend remaining in a money market fund until we start to see substantial evidence that the market is improving and risk is declining.
F.S