Massive liquidity can have mixed impact on the markets. We are seeing that right now. The stock market has gone down in each of the first four days of May. This lends credence to the saying, “Sell in May and go away.” Liquidity can drive prices up for commodities and stocks. But this liquidity can get restless. Then the disruptions can overflow causing all risk assets such as stocks to go down. So far, the S&P 500 is down over 3% for May.
Silver is a bubble bursting. Oil and gold are sharply down for the month. Leading industry groups in the stock market are rolling over and many headline stocks are currently undergoing significant corrections. As we have seen in this bubble driven liquidity-ocean, trends get locked in where prices move to extreme levels. Then, softly, almost imperceptibly, these trends reverse.
Now is a time for caution. For the time being, stocks appear to have more downside than upside. This condition shouldn’t last too long. For investors, however, it would be most constructive to implement some decisive defensive measures. These would include shorting stocks in the commodity and energy space. It also means locking in profits on consistent winners.
The stocks most likely to weather this short lived storm are consumer stocks like the restaurant group, selected financial stocks like Visa and Goldman Sachs, and defensive companies like utilities.
posted 5-5-11
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