What goes around comes around

This post is a follow up to Rotation, Rotation, Rotation in June.

Over the last month, we have seen the trends highlighted in that note accelerate. The March lows did not hold in the SPX and the financials led the way with the XLF (Financials Select Sector SPDR) dropping a full 26% for the month at its lows just two days ago. The SPX “only” dropped almost 11% in comparison.

But in the last two trading days, both have almost halved their losses for the month with the XLF jumping almost 25% from top to bottom in two days! Of course the math still leaves XLF down over 12.5% since our writing and SPX lagging relatively in the comeback with a loss of still over 7%. Since Wrong Again Ben in December, the XLF is down over 31% with the SPX down almost 15%.

This rally has come at the same time commodities, led by oil, have corrected some. To keep perspective, we’ll update our chart from last month. What was a difference of 31% in return between the SPX and CCI, has grown to over 40%, peaking at just under 50% around the July 4th break. Not bad for 7 months work. It would be irrational to not expect some profit taking after a run like that, by both shorts and longs, respectively. Is it time to rotate back to stocks? No one can be sure, but if you don’t take some profits on that spread you are a PIG and we all know “bulls and bears make money. pigs get roasted.”

Another even more interesting chart we are going to show again is the comparison of two widely held mutual funds, the Dodge & Cox Stock Fund (DODGX) and the Pimco Total Return Fund (PTRAX). Last month, we found the difference since December to be almost two years worth of expected gains (around 8% per year). This month, I am afraid the difference has jumped to almost three years! I personally have never met a mutual fund I liked, and I’m not really sure what excuse Dodge and Cox is giving currently, but this fund is clearly in the toilet. I guess size does matter (and what you do with it makes all the difference).


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