Three Themes to Help Track Market Sentiment

7/8 - "Given this nature of the economy, the questions that comes to our minds more often than not are—should I dig in my heels and grind it out or should I convert my stocks into cash or gold ? (I like gold—it’s not my favorite color but it’s a great hedge and adds a nice balance to my portfolio and if you follow my blog, you’ll understand why)

In any case, here are 5 stock sectors (with a representative stock pick– you can also look at other related stocks in that sector to pick one that floats your boat) which typically do well in times such as ours and in days like the past few weeks have been."

"1) Education providers (APOL): When there’s panic in the marketplace and job security’s a concern or job losses are on the increase, guess what do people do? They go to school to get better qualified for the competitive market place."

"2) Utility providers (NGG): People always need utilities, contracting or growing economy notwithstanding. "

"3) Dollar Stores (FRED): In contracting economies, people go cheap."

"4) Tobacco (PM): Smokers will be smokers and guess what boom or recession, they need to light up."

"5) Basic clothing companies (GPS): People don’t wear Armanis or Diors when the economy’s in a downturn or there’s a risk to jobs."

7/3 - "Price momentum is a well known "market anomaly", defying efficient market theorists. In general, the effect is stocks that have been outperforming in the past tend to continue to do so, and vice versa. Whether there is some information leakage that allows the better informed to bid up stocks over time, or just a variant on the "greater fool theory", buy high in hopes to sell higher, price momentum (PM) is an empirically justified market phenomenon (at least without trading costs!)."

"There are better PM measures than just T6M, but it does encapsulate the effect. Over the period, the top ranked stocks outperformed the worst ranked by about 1% per month (again without trading costs, which can substantially diminish returns)...In up markets, which seem kinda scarce around here these days, the average monthly spread was only 40bps, and with the variability, that positive spread wasn't statistically significant. However, down markets are where at least this measure of PM really shined, averaging nearly a 2% monthly best/worst spread consistently enough to be significant. So, in falling markets, investors will dump losers more so than relative winners - no big surprise."

"Next, I looked at month of the year, and again the results varied considerably. The net effect is that PM doesn't work too well from Jan - May, generating no positive spread, but from June-Sep the strategy blazes, in up and down markets, averaging a 3% monthly spread! Then things reverse course and PM fails in Oct & Nov, only to revive in Dec, and then back to failure the first part of the next year."

"...being aware of PM, on margin, might help when deciding to make an investment. During this time of the year though, you are going against the odds if you buy stocks that have lagged the market over the last 6 months. It appears that at least until October, now is not the time to be a contrarian."

7/8 - "Interesting analysis via David Rosenberg of Merrill Lynch:"

'There have been five phases to this current down-cycle – the first four are still in full swing, but it is the fifth that will very likely emerge as the most difficult stage of this economic downturn and bear market:

The first wave was the end of the housing cycle when starts peaked and began to roll over...The second wave was the end of the home price bubble...The third wave was the end of the credit cycle...The fourth wave was the employment cycle, which peaked when payrolls did in December 2007...The fifth wave will be the end of the consumer cycle and the beginning of what may well prove to be the most significant recession since the mid-1970s...'

7/8 - "We are doing all the things necessary to form a bottom - the natural gas stocks are finally being hit, fertilizer is now joining coal in the outhouse, and we are getting some minor rotation into financials. All things we've been looking for to form a bottom.

On the negative side - this move into technology as 'safe haven' is, aside from idiotic, stalling the process - now people are using Apple (AAPL) and Google (GOOG) as safe havens. We need to eliminate all safe havens. And then it will be safe(r) to swim."

"This has to be one of the more orderly carnages I've ever seen. We're taking a lot of boffo hits in the portfolio in individual names, but I remain on the sideline with new buy orders despite some salivating prices since I want to have cash at the ready when (if) a real panic emerges. I still don't see that panic. Maybe there will be no "panic moment"... but I am hoping for some between now and Friday when I think General Electric (GE) [just a hunch] will provide a soothing moment to the market."

"We'll see how the market handles S&P 1225. If no hold there, then maybe the panic will begin. Every move up without crossing over S&P 1275 is just fools gold for now..."