Risk Off – Investors Rotate to Safety

The S&P 500 closed Friday, May 11, 2012 at 1,353, it’s lowest level in two months.

All markets worldwide continue to be heavily influenced by the activities in Europe, especially the countries Greece, Spain & Italy.

We recently commented on how these countries debt problems and their effect on the European Banking system could impact equity markets worldwide as we move into the historically more challenging months of May – September.  Much the same as last year, the unresolved European debt crises has emerged again as a source of risk angst among investors worldwide.

Looking at the USA markets, our technical indicators are flashing caution for the intermediate term.  While the overall markets are much more oversold then they were a few weeks ago and that short term a bounce higher is too be expected, we have noted that recently, since the high of 1,422 on April 4, 2012 –  the S&P has put in a lower high and then another lower low.  This is how the beginning of a downtrend in prices would look like.

We have identified 1,340 as the intermediate support level for the S&P – and if the S&P were to convincingly  break this support over the next few weeks then there will be a confirmed downtrend in the S&P 500 and lower prices for all equites.


(Click on Image of Chart for a Bigger Picture)



To obtain a better understanding of how the USA markets are performing, we  need to examine the performance of the nine sectors of the S&P since the high of 1,422 on April 4th.  All 500 of the S&P 500 stocks will fall into one of these nine sectors.

  1. Materials
  2. Energy
  3. Financials
  4. Industrials
  5. Technology
  6. Consumer Discretionary
  7. Health Care
  8. Consumer Staples
  9. Utilities

Sectors #1 – #6 tend to outperform when there is improving expectations for economic growth and Investors wish to assume More Risk.

Sectors #7 – #9 tend to outperform when there is decreasing expectations for economic growth and Investors wish to assume Less Risk.

Below is a Performance chart of the nine sectors of the S&P 500 since the recent top on April 4, 2012.


(Click on Image of Chart for a Bigger Picture)



As you can see – out of nine sectors of the S&P 500 – only one sector has a positive return since the recent top on April 4th – and that one sector is Utilities – the most defensive sector of the group.  Investors are clearly shunning risk in their portfolio’s for the time being.

Below is a Bar Chart showing the same performance for all nine sectors of the S&P 500 for the period April 4, 2012 (recent top)  – May 11, 2012.


(Click on Image of Chart for a Bigger Picture)



It is clear that since the recent top of 1,422 on April 4th that investors have been rotating from riskier assets into less risky assets.

I would also like to note the following:

Most markets worldwide put in recent tops between March – April, 2012 – they have been in a downtrend ever since.  The USA markets have been stronger than the worldwide markets so far in 2012 – this has been a reversal of trend for the past decade when most markets worldwide outperformed the USA markets.

However, as we have already written about  Here and Here earlier – All worldwide markets are basically correlated  – meaning they move in the same direction together – and the USA markets will more than likely not escape moving lower if that is the direction of equity markets worldwide.  Right now the direction of most worldwide markets is downward.

For the intermediate term we would urge caution to investors as the macro events unfold over the next few weeks.  We think at some point between now and October the markets are going to offer an excellent – fear based –  buying opportunity and prudent investors need to have the funds available to put to work at that time.



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