WEDNESDAY, DECEMBER 30, 2009
GETTING TECHNICAL
January Could Unleash Run to Safety
By MICHAEL KAHN
The new year could see a shift from stocks and junk bonds to Treasury bonds.
INVESTORS ARE FAMILIAR with the ubiquitous warning that past results are not indicative of expected future results. Basically, it is Wall Street's way to cover its derrière in case a hot hand goes cold. In 2009, stocks and emerging markets in particular, were the hands-down winners. For 2010, I think a performance warning is indeed the right call.
One look at a chart comparing various, broadly defined asset classes confirms what we all know -- stocks were hot (see Chart 1). But it also tells us that Treasury bonds, not the U.S. dollar, were the biggest losers of the year.
Chart 1
The greenback is off a modest 4% on the year while the iShares Trust Barclays 20+ Year Treasury Bond Fund (ticker: TLT) lost over 22%. That is an eye opener for sure.
This makes sense after 2008 when stocks got clobbered and money fled to the safety of Treasury securities of all maturities. In 2009, money sought higher returns and accepted the higher risk inherent in stocks, especially emerging markets, hence the performance flip-flop.
But here we are on the cusp of a new year and there is finally talk of exit strategies from loose economic policies and the flood of stimulus money. And in side conversations, Wall Street is ready to pat itself on the back for its huge gains with big bonuses. Next month, the incentive for institutions to hold the line on the stock market will be gone and my own view is that sellers will be unleashed.
While not a switch to be thrown on Jan. 1, the end of the liquidity gravy train will be the main driver in coming weeks with the fear of swelling supply for sale as the second. And with sentiment polls showing bullishness at levels similar to those late 2007 it is a high perch from which to fall. The change in market tone from joy to fear can easily flip-flop stocks and Treasury bonds, again.
In the middle of the 2009 pack were commodities, specifically gold and oil. If we look at the performance chart again we will see the SPDR Gold Trust (GLD) up 24% and the United States 12-Month Oil Fund LP (USL) up nearly 35%. I am using the latter instead of the more popular United States Oil Fund LP (USO) because it is constructed to avoid some of the futures contract rollover problems that USO sometimes brings.
The interesting observation here is that the dollar was down 4% and these commodities were up by many multiples of that amount. Clearly, there was more at work here than just the falling dollar that drove commodities higher.
To be sure, all commodities as measured by the Reuters-CRB index of 17 commodities futures prices were up over 30%. This index is the original formulation of the CRB index and has a heavier agricultural commodity component. Having it up by as much as it was tells us that it was more that just the two big guns -- gold and oil -- that rallied.
For 2010, I think we will see a shift in performance away from so-called risk assets, such as stocks and junk bonds, and back to safety assets, such as Treasury bonds. I also see commodities staying firm, which is quite contrary of what economists might say due to weak demand and ample supplies.
I want to stress that this is not a forecast for 2008 redux but rather a shift in relative performance among asset classes. It should also prove that past results really do not translate into future results.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
The new year could see a shift from stocks and junk bonds to Treasury bonds.
INVESTORS ARE FAMILIAR with the ubiquitous warning that past results are not indicative of expected future results. Basically, it is Wall Street's way to cover its derrière in case a hot hand goes cold. In 2009, stocks and emerging markets in particular, were the hands-down winners. For 2010, I think a performance warning is indeed the right call.
One look at a chart comparing various, broadly defined asset classes confirms what we all know -- stocks were hot (see Chart 1). But it also tells us that Treasury bonds, not the U.S. dollar, were the biggest losers of the year.
Chart 1
The greenback is off a modest 4% on the year while the iShares Trust Barclays 20+ Year Treasury Bond Fund (ticker: TLT) lost over 22%. That is an eye opener for sure.This makes sense after 2008 when stocks got clobbered and money fled to the safety of Treasury securities of all maturities. In 2009, money sought higher returns and accepted the higher risk inherent in stocks, especially emerging markets, hence the performance flip-flop.
But here we are on the cusp of a new year and there is finally talk of exit strategies from loose economic policies and the flood of stimulus money. And in side conversations, Wall Street is ready to pat itself on the back for its huge gains with big bonuses. Next month, the incentive for institutions to hold the line on the stock market will be gone and my own view is that sellers will be unleashed.
While not a switch to be thrown on Jan. 1, the end of the liquidity gravy train will be the main driver in coming weeks with the fear of swelling supply for sale as the second. And with sentiment polls showing bullishness at levels similar to those late 2007 it is a high perch from which to fall. The change in market tone from joy to fear can easily flip-flop stocks and Treasury bonds, again.
In the middle of the 2009 pack were commodities, specifically gold and oil. If we look at the performance chart again we will see the SPDR Gold Trust (GLD) up 24% and the United States 12-Month Oil Fund LP (USL) up nearly 35%. I am using the latter instead of the more popular United States Oil Fund LP (USO) because it is constructed to avoid some of the futures contract rollover problems that USO sometimes brings.
The interesting observation here is that the dollar was down 4% and these commodities were up by many multiples of that amount. Clearly, there was more at work here than just the falling dollar that drove commodities higher.
To be sure, all commodities as measured by the Reuters-CRB index of 17 commodities futures prices were up over 30%. This index is the original formulation of the CRB index and has a heavier agricultural commodity component. Having it up by as much as it was tells us that it was more that just the two big guns -- gold and oil -- that rallied.
For 2010, I think we will see a shift in performance away from so-called risk assets, such as stocks and junk bonds, and back to safety assets, such as Treasury bonds. I also see commodities staying firm, which is quite contrary of what economists might say due to weak demand and ample supplies.
I want to stress that this is not a forecast for 2008 redux but rather a shift in relative performance among asset classes. It should also prove that past results really do not translate into future results.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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