Some types of investor behavior are expected during periods of market weakness. For example, investors tend to move away from technology funds. As a result, we see the Nasdaq decline more sharply than blue chip indices because it is heavily weighted toward tech stocks.

When investors move away from the tech sector because of concerns about economic weakness, money often flows toward the health care or utility sectors. Traditionally, these industry sectors have been considered more resistant to economic downturns.  Right now these sectors are breaking even– better than the major indices, but not providing positive returns investors seek.

At times money taken from stocks has been invested in the real estate sector. We saw quite a bit of that during the last recession. Obviously we are not seeing it now as real estate remains one of the weakest sectors.

The chart below shows how ETFs representing some of the strongest market sectors have fared over the past six months.

Long-term government bonds are viewed as a safe haven during significant stock market corrections. But during the major downturn we saw in 2001 and 2002, even bonds did not perform very well. During this current correction, bonds have returned to their traditional role and are one of the few market sectors that are performing well right now. On the chart, the brownish red line is iShares Lehman 10-20 Year Treasury Bond (TLH).

Over recent weeks the best performing sector has been precious metals. After reaching a record high in January, gold has pulled back slightly, but shows no signs of breaking its long-term upward rise. The blue line is streetTRACKS Gold Shares (GLD)

The energy sector has been up and down. The black line is iShares Dow Jones US Energy (IYE). Energy showed strength in December, but has declined sharply since then.

The gold line on the chart is the Nasdaq. It has fallen about 20% since its peak at the end of October 2007. So when one does a ranking of ETFs over the past three months, those that have done the best are funds that short the U.S. market. That is obviously a sign of an extremely weak equity market.

Unfortunately, right now investors can’t find any significant relief by moving assets to foreign markets. A handful of international ETFs are showing gains over the past three months, but most are faring no better than the U.S. market. The weakness is widespread as the whole world watches to see if the U.S. economy is going to fall into a recession.

After equities rallies last week, I expected to see more follow through to the upside. The fact that there has not been a more sustained advance in the wake of two rate cuts and talks about an economic stimulus package shows that traders and investors see little reason to be optimistic about the economy over the next few months.
F.S.

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