For the week ending Oct 30 2009

And what a week it was!  Flight to safety was the name of the game.  Let's recap:

The Yen, US Dollar, and the Pound all made gains this week, rising 2.3%, 1.2%, and 0.7% respectively.  Silver took the biggest hit, down 7.7%, and followed by the Kiwi down 4.9%.

Treasury bonds, TIPS, and high-grade corporate bonds stole the show this week all rising roughly 0.8%.  Meanwhile small-cap growth and emerging market equities were taken behind the woodshed and beaten down 6.5% and 7.8% respectively.  As an investor focused intensely on small-cap emerging market names, last week was not a pretty week!

Red red red.  Japan lost the least down 1.4% and Russia lost the most falling over 10%.  The US fared better than most, but still lost over 4% in this week's selloff. 

As far as sectors go, consumer staples and healthcare lost the least down 0.9% and 2.2% respectively.  Meanwhile materials and financials took a beating and ended the week down 7%. 

After an incredible rally off the March lows, breadth is finally starting to weaken.  The number of stocks hitting new highs has dried up just as the number of stocks hitting new lows awakens from its half-year slumber.  We've also seen a negative divergence in volume at the same time the NYSE and Nasdaq BPIs register bear alert signals.  This is not the typical shallow correction we've seen half-a-dozen times over the course of the rally; it is much worse.

On Island Sector Signals

Buy: Technology, Energy, Consumer Staples, Consumer Discretionary, Healthcare

Buy-Hedged:  Transportation, Industrials, Financials

Sell-Hedged:

Sell: Utilities

With the market breaking down on increased volume and a clear confirmation in breadth, now is the time to reign in your long positions and adequately hedge them.  Bring your stops up to a minimum of the 10-day low and/or 50 day moving avg.  For many positions, the lows set last week will become your new stops.  Best case is the market churns in place for a while, digesting the huge gains before continuing the next leg up.  Worst case is an '87-style selloff (which, judging by the action in the small cap names this week isn't actually all that far fetched).  Hope for the former, but prepare for the latter.

Small-caps Taking a Beating

Small-cap growth and value stocks have taken a heavy beating over the past week relative to the bigger names comprising the S&P500.  Yesterday the the Russell 2000 Growth Index (IWO) failed at the 50 day SMA, today it took out the previous rally low of 62.71, and volume has been notably heavier on the down days recently.  Not a good sign.  Typically the small-cap indexes lead the larger ones, as investors sense the dwindling momentum and shift out of the volatile small-caps into larger more stable stocks.  This divergence is not good news for those hopeful on the continuation of the current rally.

For the week ending Oct 23 2009

The Kiwi and the Swedish Krona stole the show this week, rising just over 2%, and followed by silver up 1.3%.  The South African Rand was hit the hardest, down 2.1%, and followed by the Loonie and the Yen both down roughly 1.3%.

For the week, the US Dollar was down 0.2%.

Commodities were the strongest performer this week rising 3.4%, while small-cap growth stocks fell the most down 2.5%.

The S&P 500 fell 0.7% for the week.

After a few weeks of underperformance, China was back in the lead this week rising 2.8% and followed closely by Chile up 2.4%.  At the bottom of the pack was India, down 3.4% and followed by Brazil down 1.5%.

Sectors

As for individual sectors, technology was the lone gainer up 1% on the heels of numerous blowout quarters by leading tech names.  Transportation took a beating, down 5.4%, while the rest of the sectors saw light selloffs in the 0-2% range.

Despite the recent market weakness, all sectors remain in outright buy territory.

Breadth

The NYSE BPI index remains in bull-correction camp and signals caution.  Be ready to hedge if you have not hedged your open positions already.  The Nasdaq BPI however still signals that the bulls are in control.  Other market internals continue to show relative strength against the market, with the AdvDec indexes at cyclical highs and the HighLow indexes continuing their climb northward.  The number of stocks hitting new lows has risen slightly from its recent lows but is nothing to be concerned of yet.

Action is getting choppy and volume has consistently been higher on the down days and light on the rallies.  This is not the kind of behavior you want to see as a bull.  Still, dip buyers (though completely MIA on Wednesday afternoon's late selloff) are standing ready to buy into any weakness.  Only once their resolve has been tested and broken will the market finally be able to make its much needed and much awaited correction.  Continue to hold your long positions and enjoy what's left of this rally, but be ready to hedge if we begin to break to new lows.  With the VIX at its lowest point in over a year, some put options should work nicely and benefit two-fold when the time for hedging arises.