The Nuttiness of This Market

Includes: DIA, EEM, GLD, QQQ, SPY
by: Roger Nusbaum

There was a great riff in the Four at Four Marketbeat post yesterday. The money quote was from Kenny Landgraf of Kenjol Capital Management: “The nuttiness of this market makes your head spin.”

In case you have not surmised by now, the market action in the last few weeks has been abnormal. A lot of market leaders and popular segments have gotten crushed. Oil was down $60 yesterday (a slight exaggeration). Currencies have been whacked very hard in the last few weeks. Other commodities have been thoroughly pistol-whipped.

The nature of these markets is such that the fundamentals do not change so quickly as to justify these sorts of price moves. Don't take that as me saying the market is "wrong" or that these moves cannot happen, because the last few weeks shows us it can happen... but it is abnormal.

This summer is not the first time you have encountered abnormal price action in certain markets, and obviously this will not be the last.

The important thing here, I think, is the ability to recognize when things do get cattywhompus as they are now, and take a step back (if you are one to get too focused on the shorter term) and try to realize that things are disjointed and if you have a properly diversified portfolio you should be able to weather things just fine.

In all likelihood you will quickly forget this bit of turmoil quickly enough.

On April 12, 2003 iShares MSCI Emerging Market Fund (NYSEARCA:EEM) closed at $20.20, adjusted for splits. On May 17 it closed at $15.88. That works out to 21% in 36 calendar days. Does anyone remember what happened? I do not, but how much fear do you think there was then? How many segments on TV or written commentary proclaiming the end of emerging markets do you think there were?

On May 12, 2006 StreetTracks Gold (NYSEARCA:GLD), which is a client holding, closed at $71.12. On June 14 it closed at $55.62 which coincidentally was also a 21% decline. You might remember there was a decline during Q2 2006 but does anyone remember what the catalyst was? How many commodity corrections have there been in the last five years and how quickly are people ready to give up on diversification altogether when the drops do come?

Those were rapid dislocations that eventually stopped dislocating. The current dislocation will also stop dislocating.

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