So much for all that bottom calling. After struggling to stay in the green on June 13, U.S. stocks took off in early trading the following session, as global inflation readings and domestic retail sales met expectations. The "not bad news" celebration did not quite last the day, however, as the Dow Jones Industrial Index (NYSEARCA:DIA) lost 50 points in the final hour of trading. Stocks opened down another 1% on the 15th, only to continue selling off throughout the session.
Market weakness in May was widely predicted among bullish and bearish analysts based on the cyclical nature of finance. June forecasts, however, have generally been more traditional, with bullishness in abundance and bearishness scattered just enough to appease anyone seeking a gloomier take. Just halfway through the month, the herd appears misguided. U.S. indexes have already lost twice what they did in May.
The S&P 500 (NYSEARCA:SPY) is the consensus index of note for technical traders looking to time anything from intraday moves to long term trends, due to broad diversification. When institutional investment, M&A activity and the like are primary drivers of the market, such logic holds true. The index that most aptly depicts overall money flow best indicates the state of markets in general.
In slow economic times, however, economies of scale increase advantages over smaller businesses, and demand for luxuries or new products disappears. Institutional activity is focused on maintaining margins rather than top line growth. Buy and hold investors contribute less to 401Ks and even consider selling stocks or mutual funds if negativity grows sufficiently. The current market environment can be described as transitioning from a two-year-long dead cat bounce in promoted economic activity to a resumed flight to economic safety. Mega-cap stocks that compose the DJIA are a common choice for safety at a time defined by a lack of consensus for safe haven investments.
A lack of resilience in companies considered too big to fail is a terrible omen for financial markets. The fragile state of the U.S. economy and individual investment accounts leaves potential for tremendous momentum to the downside if contemplations of selling enter the psyche of Mr. Market's most loyal participants as it did in late 2008 and early 2009. Consecutive weeks closing below 12,000 sounds like a start and would likely make the week following June options expiration the ugliest in over a year.
The DJIA opened at 11,974 June 15, below the 12,000 level that carries certain weight with retail investors. After rallying early to above 12,000, the index immediately sold off. Following two additional, progressively weaker, failed moves above that critical mark, the index proceded to sell off as hard as it has for months intraday, to below 11,900. The DJIA has yet to open below and close above 12,000 since it fell below that mark June 10.
The acceleration of downward momentum is the clearest sign that a short-term bottom is nowhere near in place. There has still yet to be a 2% down day since June 1, though the 10th and 15th have come progressively closer. Corrections typically end in climactic fashion, with an upward surge following capitulative selling. Up days are losing steam and have not gone back to back all month.
There are safe havens for investors in this difficult maket climate. Despite massive inflationary injections into dysfunctional businesses and sociopolitical institutions, the U.S. dollar remains the de facto safe haven. The global economy is reliant on the currency for energy and many international transactions. Since 2001, however, fiscal policy has drastically loosened and fueled sustained rallies in commodities, notably gold and silver. Simultaneously, emerging economies have grown faster than developed ones and developed infrastructure along with internal demand to sustain economic growth. Currencies of relatively well positioned economies such as China (NYSEARCA:CYB) and Switzerland (NYSEARCA:FXF), in addition to gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV), are U.S. dollar alternatives that, unlike stocks reliant on consumer demand, have outperformed in recent flights to safety.
Investors still have excellent opportunities to close long positions and establish short positions on any sort of bounce. I continue to favor trading short-dated, near-the-money puts on the SPDR S&P Retail ETF (NYSEARCA:XRT), which holds shares in a variety of department, boutique and online retail stores. Financial (NYSEARCA:XLF) and technology (NYSEARCA:XLK) sector ETFs also offer lower options premiums than individual stocks and sell off similarly during broad market setbacks. Directly shortselling shares of highly overpriced stocks such as Netflix (NASDAQ:NFLX), Priceline (PCLN), Abercrombie (NYSE:ANF) and Salesforce (NYSE:CRM) or dysfunctional businesses like CB Richard Ellis (CBG) or Dine Equity (NYSE:DIN) may be a better alternative for investors wishing to avoid a time premium and can yield larger gains than shorting broad indexes.