Commodity and Bond ETFs: "Stuff" and "Safety" Beating Stocks

It happened three weeks back on June 6. Nearly every sector in stock land received a severe pummeling, with the benchmark Dow dropping 3%.

It happened again yesterday, June 26. Oil tested $140... and investors said, "Fuhhhhgetttttttt about it." Down went the market by yet another 3%.

In complete contrast, commodities of all types gained enormous ground. Safe-haven bond buying also came back in vogue.

Here's a smattering of commodity ETFs and bond ETFs alongside their 1-day gains:

iPath Oil ETN (OIL)				4.00%
SPDR Gold Shares (GLD)				3.65%
iPath Natural Gas ETN (GAZ)				3.30%
AIG Total Commodity Index (DJP)				2.60%
Lehman Internat Treasury Bond (BWX)				1.10%
iShares Treasury Inflation-Protected (TIP)				0.90%

Perhaps it should come as no surprise, then, that energy stocks were the least affected. The Select Energy SPDR (XLE) shed about 1% in value.

Relatively speaking, the iShares Dow Jones Health Care Fund (IYH) provided a bit of protective shelter. It dropped only 2%. But Consumer Staples (XLP) failed in its role as a safe harbor for all economic environs. (Methinks that driving to the supermarket for peanut butter may be as costly as driving to Nordstrom for designer clothes.)

However one chooses to look at it, the only way that this market can get out of its bearish funk will be with leadership from recent laggards; that is, Dow Jones Technology (IYW) and Financial Select SPDR (XLF) were beaten up by 3.6%... more than the market itself. And you can't have early business cycle leadership without these segments.

Oil shocks have trumped the housing mess. The commodity has crippled airliners and battered automakers. In fact, General Motors (GM) hasn’t been this beaten down since 1955.

It’s not just GM that’s struggling, though.

Since the beginning of June, the market (Dow) has fallen 1200 points. That’s 10% in a single month, marking the worst 4-week period since September of 2002.

Granted, there are 9 bills before Congress to curb speculation by oil traders. What’s more, global demand for oil has slowed. Yet the irrationally exuberant trading may still continue.

Like the housing market, and the Nasdaq before it, bubbles do not burst overnight. It may take the summertime months… or longer… before oil prices have less of an effect on the overall economy.

Why not throw in the towel on stocks completely? After all, the Dow is less than 1% away from an official bear market.

Precisely! Would you rather be buying at Dow 14000 or Dow 11450? The idea is to buy low, while maintaining vigilance against the market going much, much lower.

Keep in mind, the last time that the markets fell so rapidly in a single month, September 2002, was the bottom of the 2000-2002 bearish down cycle. If you sold everything in fear then, you would have missed the start of a 5-year bull market up cycle!

Investing success requires discipline. Exercise your right to sell at a small loss... use stop-losses!

In the meantime, never pass on your free lunch; that is, diversification across stocks, bonds, currencies, commodities and cash has been the best protection against the 2007-2008 bearish declines.

My favorites through it all? I've written extensively about my affection for foreign fixed income in the International Treasury Bond Fund (BWX). I've blogged endlessly about the total commodity route with the Dow Jones AIG Total Commodity Index (DJP). And infrastructure stocks continue to factor heavily into my asset allocation.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[bluesmoke]

Diversification is critical. DJP is one of my favorite etf's. Trying to stay ahead of inflation is the name of the game these days.

[GMiki]

Diversification is a mug's game. :) Know the sectors and where value lies--in hard assets these days. Metals, energy, agriculture, water...

[veeblefetzer]

GMiki: Don't be so sure. The market consist of thousands, if not millions, of people trying to outguess each other every day. Just because the market should react in some way, given underlying values, etc, doesn't mean it will react that way. Logic and reason don't work. Diversification is a way of dealing with the seeming irrationality of the market.

[Panskeptic]

If you can make sector bets, do it. If you can't, diversify.

It's like when somebody says "You can't time the market," what they're really saying is "I can't time the market."

Do what you can. If you can't do something, do something else.