It was another tough week as markets closed lower five days in a row. After a terrifying August drop, followed by a September of continued bouncing off a major support level of 1,120, the S&P 500 Index is now teetering on the abyss.
The market experienced another serious technical breakdown Monday as the S&P 500 fell below its August intraday and closing lows of 1,103 and 1,120, respectively. It then soared back through that resistance level in fierce end-of-the-day trading on Tuesday. Cast a glance at the chart, and you can make an easy case for the market heading straight down to nearly 1,000.
Despite yesterday’s bounce, global markets are severely oversold. The good news is that we are entering a seasonally stronger time of the year when global markets tend to rally. With the combination of recent steep declines, bullish seasonality and negative sentiment, you might expect a large and swift bounce. The question is whether it can be sustained.
Your Alpha Investor Letter portfolio did not escape the sharp sell-off unscathed. You were stopped out of your position in Market Vectors Gold Miners ETF (GDX), as the correction in gold continued. Las Vegas Sands Corp. (LVS) took a hard hit on the sell-off in China-related stocks, but bounced strongly yesterday off of its August low of $36. Japanese small caps proved their resilience as WisdomTree Japan SmallCap Dividend Fund (DFJ) ended the week higher.
Overall, it has been a lousy year for investors. When I glanced at the back page of the Economist magazine last Thursday — the page where the yearly performance of all global stock markets is summarized each week — not a single stock market on the planet appeared in the “plus” column. As I pointed out on CBS Marketwatch last week, most global stock markets are in bear-market territory, having fallen more than 20% from their respective peaks. Markets have declined even more since then.
It was not supposed to be this way. The third year in the presidential election cycle has been positive for the U.S. stock market for decades. Between 1948 and 2008, in the third year of a presidential election cycle, the U.S. S&P 500 has risen by an average of 22.34%. To match that average gain, the S&P 500 would have to rally to 1,555 during the next three months — up 38.3% from its current levels. That’s not “change” the market believes in. Yesterday, you could buy December 1,550 call options on S&P 500 for 50 cents.
Rumor has it that if markets continue their current fall, the White House may be forced to abandon its plans to have Obama’s face chiseled onto Mt. Rushmore as part of its new job-creation package.
Portfolio Update
WisdomTree Dreyfus Chinese Yuan Fund (CYB) held flat with a 0.04% loss last week. Anyone who has ever looked at a stock chart can appreciate the move that CYB experienced yesterday. A sharp move yesterday in the yuan was a real barnstormer — likely causing Chinese currency regulators to raise an eyebrow or two. The continued strengthening of the dollar, coupled with a steep sell-off in offshore yuan, is causing increased CYB volatility. CYB is below its 50-day moving average and is a HOLD.
WisdomTree Japan SmallCap Dividend Fund (DFJ) managed a 1.16% gain for the week. Performing extremely well in the face of the global market meltdown, DFJ is a terrific example of why a globally diversified portfolio is a key to surviving in even the worst economic climate. DFJ is a BUY.
Las Vegas Sands Corp. (LVS) dropped 12.46%. However, LVS recovered sharply yesterday on reports that Macau’s gambling revenue rose 39% in the month of September. LVS also bounced off of $36 on its chart, a highly significant and long-term support level for the stock. LVS reports earnings on Oct. 27. LVS currently is a HOLD.
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