The Stock Surfer

Bears Can Climb Trees

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Every corner of this market is getting raided by the bear. The latest was commodities and gold, which have been crowded plays on the weak dollar. In my thoughts on a bear market rally on March 11, I wrote:

Very simply put, the Fed today hinted that they will try to help solve this credit problem in ways other than lowering interest rates. At least, that's what they're hoping. Since the dollar was falling at the promise of more rate cuts (and big ones at that), I wonder if this action isn't paving the way for a rebound in the buck. Why do I care? It means the inflation plays might not be such a sure thing. There's a lot of money chasing commodities, ag names, and gold names right now, and I just wonder what would happen if deflation (as a function of a slowing economy) replaces inflation as the "flation" of concern. Hmmmm.

I can't take credit for considering the danger of commodities; it came from a lot of sources, especially Minyanville. (If you're serious about investing, I can't stress enough how good that site is.) I also can't take credit for making a lot of money off the commodity crash, but I did save some money by not chasing gold or oil.

So, safe areas of the market are no longer safe. Interestingly, even the shorts were hammered this week. Between government intervention, Fed action, recession, and perceived value, there are so many sides to the market story that it can be difficult to find a focused play. I've seen this play out on the Strategy Lab Open contest. Many of the people on the leaderboard on Monday were betting against the market with short ETFs. After the huge spike, many leaders were commodity players. On Tuesday the short sellers got rocked, and on Wednesday the commodity players got smashed. As for me, I've been trading too much, but it has probably worked in my favor to keep a quick trigger finger. It's rough out there.

In short, I don't see any sector that is safe. This market should teach anyone that money doesn't just grow on trees in a simple buy-and-hold way. Even if it did grow on trees, bears can climb them. That doesn't mean the market can't rally from here, or that we should head for the mattress. It just means that risk management is still the name of the game. Consider the following options.

* Commodities / Materials / Energy: Do we really know the supply/demand equation, especially if economic growth slows sharply? How much speculation is in commodities? What if the dollar heads up for a while?
* Financials: The Fed is helping, but was Bear Stearns the only firm on the brink? So now investment banks are going to the discount window--it's good to avoid a downward spiral, but what does it say that they need it?
* Technology: Is it recession proof? Can Google and Apple lead again?
* Health Care: This is not an area I know well, but I noticed the carnage in the managed care sector. Biotech and Pharma have been equally treacherous.
* Consumer: What consumer? Remember, safe consumer plays (like PG, KO) might outperform on a relative basis, but negative relative returns still lose money.
* Industrials: Might rally first to end a recession, but have we all acknowledged that this is a recession? One up day on Wall Street and many think the bear is dead. I've seen him, and he's quite alive.

Pick your poison. For my money, I still like my core video game holdings. Other than that, I think the big money is rotating around, trying to find a home. It's good to be in cash, and wait until some clear trends emerge.

[Simultaneously posted on my personal stock blog.]