July 2, 2008
The selloff today coincided with a spike in oil prices, like we have begun to get used too, which closed at a new record high once again. As for now this market is being held captive by oil prices and will not rally until crude sells off. In fact the bear market is here. The downtrend has been here for a while and it’s going to stay for a while as long as oil or all energy prices stay stratospherically high.
One school of thought in these market conditions is to use the ETF’s to mitigate volatility, rather than investing in individual securities. For instance, the financials are already down over 50% from their 2007 highs. Why is this important? It is important because most of the easy money has already been made on the short side. Most of the financial sectors have already been battered multiple times, and while some individual equities may still be vulnerable going forward, there is a limit to the amount of blood left that can be squeezed from a broad-based ETF like the XLF. This argument can be easily applied to other sectors as well.
Anyway, for the time being we must ignore the talking heads on CNBC who keep calling a “bottom” and be prudent to invest in companies that have dividends, buybacks and any other source of downside protection and be sure to hedge our bets using ETF’s.
Here’s the NASDAQ and S&P Charts…