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Coming Down From A Rocky Mountain High?

It was a little after 6 AM as the plane rose from the tarmac of Denver International Airport Saturday morning. Out the windows on the right the sun was just peeking above the horizon. The warm glow of the early morning light washed quickly across the prairie. The land was golden … and flat.

As far as the eye could see the grassland had that wheat-colored, golden brown hue we see out west all summer long. Only an occasional tree interrupted the even level of the landscape.

It was a totally different picture outside the left windows. While the golden prairie still spread from the runway off to the left, at the horizon the view abruptly changed. The Rocky Mountains sprang full grown from the once level plains as if thrust higher by some subterranean giant. Where the landscape was once barely undulating, the rugged crags and lofty spires of rock seemed to violently interact along the border of earth and sky.

I was in Denver most of last week attending the Alternative Investment Strategies conference where I spoke on a panel investing in real assets. My talk focused on the first non-ETF, gold bullion mutual fund, QGLDX, which began more than a year ago and Flexible Plan sub-advises.

With gold up more than 7% year to date and with it being a prominent portion of our FUSION portfolios throughout that time, it was natural to talk about our gold fund. While this fifth annual Alternatives conference was, like its predecessors, a great learning experience, as I met attendees at our booth, answered questions on the panel, and attended sessions on what is the fastest growing sector of the financial services business, it was hard not to think of the gyrations occurring in the stock market at week's end.

Up until last week, the stock market had been on a fairly even keel, like the plains viewed through the aircraft's right-side windows. However, while the week in stocks had begun relatively flat, similar to the opposing view on the left side of the jet, stock prices changed abruptly. And like the Rockies rising suddenly from the prairie, volatility in stocks spiked abruptly higher on Wednesday and stayed there throughout the remainder of the week.

Last week's stock market action, however, was not unlike the pattern followed for much of July. The market started the month strong and new highs were plentiful, then price action deteriorated as the month wore on. While July is normally a positive summer month in stocks, this year the S&P 500, for example, finished the month more than 2% lower.

For most stocks, though, July was much worse. In fact, the average stock in the Russell 3000 Index (which encompasses stocks representing more than 98% of the market capitalization of the US stock markets) lost over 19% of its value since hitting its 52-week high. The average stock in the index lost almost 8% in July alone!

Source: Bespoke Investment Group

While many individual stocks are in their own personal bear market, the fact that all of the major indexes, save those focused on small cap stocks, are still positive year to date (although generally less than half as positive as gold) demonstrates that a directed focus on the right investments can improve results even when the average stock is down.

It's like when you drive across the plains to those Rocky Mountains I mentioned earlier. As you approach, the peaks loom high above the prairie. They appear impenetrable. Yet by following the twists and turns of the highway through the valleys that follow ancient pathways trail blazed years ago, they can be overcome.

Still, it was a rough three days in the market. As we have been saying, the conditions were ripe for a correction. Stocks were near their highs, making them overbought. Political unrest in the Ukraine and the Gaza sparked new headlines daily. The Federal Reserve spoke out and carefully reworded its previous month's statement to take on a tone that suggested it might start tightening sooner rather than later.

Among our closely watched indicators, most had a decidedly negative cast last week. Political seasonality remains negative, and economic reports, while containing some very positive news in terms of GDP growth, consumer confidence, and some manufacturing data, leaned strongly negative in numbers, with seventeen failing to meet economist projections and just eight outperforming. Indicators of increased inflationary pressures in the economy rated among the worst of the reports.

These mixed reports obviously riled not only stocks but bonds. As the chart of last week's 10-year Treasury bond market yields illustrates, rates gyrated throughout the week. Unfortunately, after all of the ups and downs, they ended the week higher.

Source: Bespoke Investment Group

In addition, while company earnings have been beating estimates throughout this earnings reporting period (which is good news), they certainly didn't help last week. Reports that failed to "beat" analyst estimates dragged the "beat rate" lower throughout the week. While the cumulative rate of overachieving earnings reports started the week at 64.3% (having been as high as 65.6%), by week's end the rate had tumbled under the weight of less-than-stellar reports to just 61.4%. This, as much as anything, caused last week's downside volatility.

Source: Bespoke Investment Group

These short-term indicators cannot be regarded as anything but negative. And the stock market, for a change, perhaps, correctly responded to them. As I've mentioned, we could be in the beginning of that 10% correction that I have warned about and for which we have been overdue since last December.

But as an investor of over 45 years' standing, I know that the number-one indicator to keep my eye on is the trend. You have to focus on the trend. The chart below discloses three facts: 1) we have broken under the short-term (50-day) trend line, but 2) while we are not in definite oversold territory yet, we are no longer in overbought terrain, and 3) most importantly, the intermediate upward trend in stock prices remains solidly intact.

Source: Bespoke Investment Group

Unless this broad upward trend line is broken, stock market breaks like last week have to be viewed as buying or repositioning opportunities. The objective has to be, first, to stay invested, and, second, in the strongest intermediate-term asset classes. Right now those are domestic, large- and mid-cap stocks and their indexes. In this type of broad, long-term bull market, stocks remain the primary place to be, but active management can help select the best of the best.

Not far from Denver's airport, we passed over the cloud cover that had largely socked in the city for the first two days of my visit, preventing me from seeing both prairie and mountains during my time there. Like the plains below, the fields of cumulus clouds stretched flat out like prairie-land to the right of the aircraft.

After a while though, off to the left a thunderhead of dark black clouds stretched high into the heavens. It looked like it could get quite bumpy. But then the plane pitched slightly to the right as the experienced and trusted pilot expertly steered us around the potential turbulence. Soon, we landed at our destination, safe and sound. Something to think about?

All the best,


P.S. Were you thinking I was going to be writing about something else?