Sunday, April 23, 2006

The Major Movement Below the S&P 500 Surface

Here is what has happened over the past 25 trading sessions:

S&P 500 (SPY): Up .09%
Long Bond (TLT): Down -4.85%
Real Estate Stocks (IYR): Down -3.72%
Financial Stocks (XLF): Down -.18%
Consumer Staples Stocks (XLP): Down -2.82%
Retail Stocks (RTH): Down -2.80%
Energy Stocks (XLE): Up 9.62%
Gold (GLD): Up 14.20%

You get the idea. The S&P has gone nowhere, but this masks considerable movement beneath the surface. Energy stocks and precious metals are soaring, while bonds fall (interest rates rise). This is taking a toll on consumer and retail stocks, as well as real estate issues. Financial stocks are not feeling a similar pinch at this juncture. Because they are the most highly weighted group within the S&P 500 Index, they are a major prop for the bull market. It is difficult for me to see how sustained energy price increases, coupled with rising interest rates--a continuation of the weak dollar vs. commodities phenomenon--will not, over time, so weigh on consumers that an economic slowdown, if not a recession, becomes a reality.