S&P Downgrades U.S. Treasuries

Markets Plunge, Market Commentary : August 2011The stock market has been under tremendous pressure for the last two weeks.  A default by the U. S. government was avoided at the very last minute, but S&P took the unprecedented step a week ago of reducing the rating of US Treasuries from AAA to AA+.  Intuitively, that move should cause a sell-off in bonds with bond prices dropping and the yield on bonds going up.  But, to a global economy in financial trouble, U. S. Treasuries still look like the safest haven.  Money flowed in causing prices to go up while yields declined.  The downgrade roiled international stock markets Sunday night from Israel to Asia to Europe before it sent the U. S. markets plunging on Monday morning, August 8.

On Tuesday, the 9th, the Fed released a statement saying that the committee expects a slower pace of recovery over the coming quarters and it expects unemployment to decline only gradually.  As a result, the board agreed to “keep the fed funds rate exceptionally low at least until mid 2013”.   The market had a hard time deciding whether to go up or down after the news.  Looking back over the entire week, the market was a rollercoaster ride as buyers and sellers battled it out, but it closed on Friday, the 12th, close to its high for the week.

There is a strong probability of a stock market bounce in the short term because the market dropped so far so fast.  But, technical indicators are favoring other asset classes rather than stocks right now.  Our plan is to use any bounce to reduce our equity holdings and shift to areas that are more favorable in the short term.  At the same time, we are watching equities closely to see which sectors hold up the best against the downward pressure.  Times like these are when future leading stocks start to emerge and build the constructive bases necessary for future gains.  These strong stocks will form our new inventory.

The economic news is gloomy; however, the stock market is a leading indicator.  It will change before economic news changes.  The market has been moving sideways since May searching for direction.  The events of the past two weeks have caused extreme volatility, but the market anticipated this news for a few months.  The market finds a bottom when everything seems to be the most pessimistic, and it takes off before most investors expect.  The key is to be prepared for the next rally with a strong inventory of leading stocks and to have enough cash available to take advantage of the opportunities that are sure to come.

This report is a publication of Guelich Capital Management LLC, a registered investment advisor.  Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.  All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

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