The tone of the market last week was very concerning to me. Not only did stocks suffer significant losses for the week, but some of the darlings of the market (Facebook, Netflix, Tesla, Amazon, Google) were under the most pressure. The momentum darlings of 2015 are now starting to lead the declines in 2016.
Even more concerning than the current equity volatility is what is happening in the fixed income credit markets. What started as significant underperformance of energy and metals/mining companies last year has now spread to other portions of the debt market. The most pain has been found in securities that have the least liquidity and has not been tied to a deterioration in underlying credit. To make matters worse, rumblings of significant problems at Deutsche Bank and Credit Suisse due to their exposure to emerging markets and Glencore (an Anglo–Swiss multinational commodity trading and mining company) have added to a feeling that more downside is to come.
I still feel the market has more downside, and I reiterate my opinion that the S&P 500 Index has the potential to drop another 10-15% in the next several months. This puts a strong bid for Treasury securities and Gold. I will be closely watching the upcoming Humphrey-Hawkins testimony from Janet Yellen, the direction of energy prices and the news out of China. I plan to stay defensive at this point and use any relief rallies to lighten positions. The S&P 500 Index did hold key resistance last week by closing above 1868. Remember that relief rallies are typically rapid and short lived.
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