After a ferocious week, it’s still unclear whether this week’s trading is a “calm after the storm,” or whether last week was “a preview of coming attractions.”
Whatever turns out to be the case, last week’s U.S. market action was unprecedented. In terms of market breadth, last Monday’s market drop was the worst performance since the bombing of Pearl Harbor. In terms of volatility, last week was only the sixth time since 1897 that the S&P 500 index swung at least 4% up or down for four straight days. In terms of sentiment, the August 2011 University of Michigan Consumer Sentiment survey recorded its third-lowest reading since the survey began in 1952. U.S. consumers have not been this blue since Jimmy Carter was in the White House. Yet, for all the hell and fury, the S&P 500 ended the week down only 1.63%.
Despite a large Tuesday pullback, the market actually recorded its best three-day percentage gain since the S&P 500 bounced 11% off of its March 2009 lows. I believe there is a very good chance that the lows of Aug. 9 will mark the low for the year. What we have seen so far is highly unusual in terms of volatility, but the follow-through has been typical. In addition, we are heading into what tends to be some of the lowest-volume weeks of the entire year as traders in the United States and overseas take vacations. This means that there currently is no reason to enter any of the short positions that I highlighted in the “Hedge Portfolio” described in the September 2011 Alpha Investor Letter that I finished last week.
The good news is that your Alpha Investor Letter portfolio outperformed the broader market substantially. The Las Vegas Sands Corp. (LVS) position soared 10.75%. The WisdomTree Dreyfus Chinese Yuan Fund (CYB) jumped an almost unprecedented 1.49%. The Market Vectors Gold Miners ETF (GDX) had a respectable 4.47% rise for the week. It was only the WisdomTree Japan SmallCap Dividend Fund (DFJ) that came in flat. None of your Alpha Investor Letter positions changed BUY/HOLD ratings, nor hit their stop levels.
Remember our rule of thumb on BUY/HOLD ratings. A recommendation that trades above its 50-day moving average is a “BUY,” while any position that has fallen below its moving average, but has yet to hit its stop price, is a “HOLD.” Use this simple approach to determine if you should be accumulating shares, or decreasing/holding your positions. A quick check of our Watch List selections shows that, based on this rule, the Market Vectors Indonesia (IDX) now is back to a BUY. Place your stop at a relatively tight $28.00.
Portfolio Update
WisdomTree Dreyfus Chinese Yuan Fund (CYB) rose 1.49% this past week. China’s currency edged up to its highest ever against the U.S. dollar late Tuesday, after the central bank set a fifth straight record-low dollar/yuan reference exchange rate in a sign of its determination to let its currency strengthen. CYB is well above its 50-day moving average and is a BUY.
WisdomTree Japan SmallCap Dividend Fund (DFJ) managed a 0.59% increase. DFJ is making a recovery right along with the nation of Japan and global markets in general. Making a valiant attempt at its 50-day moving average, DFJ remains a HOLD.
Las Vegas Sands Corp. (LVS) roared back with a 10.75% gain for the week. Stocks associated with the Macau region continue to post strong financial results and act as a relative safe-haven for investors. Although declining in lock-step with global markets, LVS’ recovery has been swift. Once again above its 50, 100, and 200-day moving averages, LVS is a BUY.
Market Vectors Gold Miners ETF (GDX) rose 4.47% over the past five trading days. The gold mining industry did not escape the recent global meltdown. But with gold’s almost parabolic rise in recent weeks, gold miners have been attracting a lot of attention as a terrific relative value play on the yellow metal. GDX is a BUY.
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