The stock market will remain defensive into the fourth quarter. The seasonally weak period for the market begins next week, and with fears over the economy, inflation, a stagnant housing market, November elections, and a tapped out consumer, things could head south rather quickly.
The rally we witnessed in early August was more of an oversold technical move than the start of a new bull market. Many want us to believe that now the fed has paused that a new cycle has begun to drive the markets higher. I wish it were that easy.
In reality, the fed normally does not begin lowering rates immediately after it stops raising them. The lag time between the two is usually laced with frustration both on the equity front as well as the investor front. The stock market will look at this frustrating period negatively.
Energy stocks remain on the top spot for relative strength, but as oil prices have been making new highs, energy stocks have struggled to reach to peaks we saw in April.
As the economy continues to slow, we may see the pressures from high energy prices ease. As prices begin to contract, energy will lose its top stop in the relative strength rankings. On significant drops in energy, we plan to increase our exposure to the sector. While the longer term outlook for energy is still positive, the sector looks much overbought at current levels.
At this juncture, market players will increase their focus on the Consumer Staples sector. We are not going to buy these stocks unless there is something significant to gain. Right now, we feel that cash is probably better since we think the rally in the Staples sector will be short lived.
I would rather have the cash to buy a stock that may gain 40%, rather than buy a stock that may go up 10%.
