A reader left the following question/comment;
If we are looking to play defense against a falling market does the casual link works like this:
rising oil = inflation = rising rates = faltering stock market
If the above holds then I would think a defensive position should be in oil companies with proven reserves.
As part of a defensive strategy sure but yesterday oil was up, the market was down and so were a lot of energy stocks. This corrected some toward the end of the day but the sector may not work perfectly in the role of defense.
Looking at just one day is not exactly right of course. If oil goes higher or just stays where it is it creates some measure of headwind for the economy, perhaps not deathblow, recession or even slowdown but some sort of effect.
Energy stocks at a minimum have favorable conditions with oil at this price but it is not clear that this adds up to energy as a defensive strategy but perhaps just a bullish case for oil stocks. For now a bullish case for oil stocks may be a proxy for a defensive strategy but that may not stand up forever.
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5 comments:
Speaking of defensive strategies:
How can individual investors purchase international bonds? This would be part of an attempt to hedge a falling US dollar in an IRA account. Thank you!
Other than higher energy and transportation costs, we haven't seen increasing oil prices cause other things in the CPI to inflate. I think if consumers are sending an extra $100 or so to OPEC every month, this means they're not spending it at (insert name of business here...) Cheesecake Factory. Lots of cheesecake going unsold at CAKE, and affecting that stock. Not like they can raise the price of cheesecake, no?
I've been casually looking for causal links...between inflation and stock prices...
Generally speaking, owning stocks has been a very good hedge against inflation in the long run....
Read David Swenson for more info.....
Gary Dorch over at Seeking Alpha posted an interesting article about a relationship between the Dow and Gold(it's under the gold tab). Do you think the etf GLD has created a 'wealth effect' relationship between the Dow and GLD? What do you think of his trading strategy? Tom in Indy
I kind of know Gary. We worked at Schwab at the same time but did not know each other then.
Gary has clearly spent more time on this than I have.
A ratio between the two does not intuitively make sense to me, not that I have to be correct.
Over the last 100 years gold have had fewer up period compared to stocks. The things that move them are very different. While the correlation is low to negative I don't see the value. I said the same thing after James Turk was in Barrons two times ago.
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