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%.

Rotation, Rotation, Rotation

Since Bernanke’s bungle (See Wrong Again Ben) in early December, rotation has been everything if you intended to not lose your shirt (possibly even your mind) in this crazy market.

Financials were absolutely the worst sector to be long despite having started to fall as early as April of 2007. Put options on stocks like BSC and LEH and GS proved to be big winners. The XLF Financial Select SPDR ETF fell faster from December to March than it had in all of 2007.

The S&P 500 was not spared, dropping as far as 13.5% from the December Fed meeting to the March bottom.

So where do you hide? Bonds did pretty well relatively.

But commodities really made your money grow!

Here is a comparison of two widely held mutual funds, the Dodge & Cox Stock Fund (DODGX) and the Pimco Total Return Fund (PTRAX). Even though DODGX is a waning fund, crushed by the weight of its own success, the difference here is quite remarkable. By making the switch, a passive buy and hold 401k investor could have saved two years worth of gains (at an average of 8% per year) in only six months. Not to mention the lower stress level that comes with a shallower drawdown in equity.

Update:

What goes around comes around July 17, 2008