The indices certainly took another beating Wednesday as investors wanted no part of buying into an oversold market. As I've said before, this is a classic sign of a primary downtrend, or bear market.
I and other money managers on the
site have been warning investors that the market was exhibiting bear market characteristics since late last year. I suggested investors start taking profits and move protective sell-stops under current support levels in their stocks and exchange-traded funds in late October of last year.
The hoopla that the talking heads create from day to day keeps average investors so confused that it forces them to react based on their emotions. They're bombarded by either the positive talk as the market is going up or the negative talk as the market is going down. Investing or trading on emotion is one sure way to consistently lose money.
The key is to do your research and look for stocks, mutual funds or ETFs in the top-performing sectors of the market and then diversify your holdings among those areas. Also, you need to make sure the action in the market or your stocks confirms your conclusions. If that doesn't happen, then you need to step back and reevaluate your beliefs.
The only way to do that is to closely monitor the actions institutions are taking. That can usually be done quite easily because institutions usually make moves in fairly systematic and predictable patterns.
The first and easiest way average investors can spot this behavior is by recognizing large volume spikes along with an abnormal move in a stock or sector. That signals a possible change in the current trend of institutional buying or selling.
Today we're going to look at the basic materials sector. This group looks like it has put in a short-term and probably an intermediate-term top. We're also going to look at how investors can profit from the increasing inflation pressures that consumers are facing.
The basic material sector broke down hard Wednesday, which was led by the extreme weakness in the steels followed by the coal sector and names such as
. You can see from the chart below of the Dow Jones U.S. Basic Material Index that it clearly broke below support and its intermediate-term trend on heavy institutional volume.
The signs of weakness started appearing over the last month as buying volume decreased and selling volume, represented by the red bars, increased. You can also see that the institutional money flow started going out of the sector while the price was still moving up, and that is not a good sign.
Going forward, we are likely to see a sharp bounce back up to the previous support level, and that will probably be a good opportunity to take profits in these sectors and stocks. I've been stating that long-term I am very positive on the commodity markets, but I believed they were due for a correction and it certainly looks like that time is upon us.
Most of my columns have been focused around warning investors to take profits in their holdings and pointing out the increasing risks in the market. However, I always like to make investors aware of possible profit opportunities that exist even in tough markets like this.
I currently like the Treasury inflation-protected bonds, such as the
iShares Lehman Tips Bond Fund
ETF. I believe that inflation is drastically understated by the U.S. government's numbers and that as long as the world doesn't enter into a global recession, Treasury inflation-protected bonds may turn out to be a pretty good investment option.
You can see from the chart below that the price recently broke above the 50-day moving average and intermediate-term downtrend on increasing volume. I was glad to see it pull back to test that support and then move back up. Along with the potential of appreciation in the shares, the TIP sports a 5.8% dividend.
At time of publication, Manning had no positions in stocks mentioned, although holdings can change at any time.
Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback;
to send him an email.