The U.S.stock market is bouncing like popcorn. The Dow just finished a week in which every single trading day posted swings of over 200 points. It was thus fitting that the week ended with another 260 point gain for the day, recording a 3% gain for the week.

This can either be construed as bottom scraping or a bear market trap. Only time will tell, but when the market seems to shift direction, it is important to look at the bigger picture.

A recent Wall Street Journal poll of economists surveyed agreed that the U.S.economy is in recession. The stock market has reacted in a very bearish tone. At the recent lows, the Dow Jones (Ticker: DIA) was down 17%, the S&P 500 (Ticker: SPY) 19% and the Nasdaq (Ticker: QQQQ) 24%.
Major trends like this don’t reverse easily.
 

While equities rebounded last week, the real focus was on the commodity pits, where prices of wheat, sugar, corn, copper and platinum all fell. Oil (Ticker: OIL) and Gold (Ticker: GLD) fell almost 10% in less than 36 hours.

The precipitous drop in commodity prices began last Wednesday morning, hours after the Federal Reserve lowered benchmark interest rates by 0.75%.

The PowerShares DB Agriculture ETF (Ticker: DBA) lost almost 15%, the PowerShares DB Precious Metals Fund (Ticker: DBP) lost over 10% and the iShares S&P GSCI Commodity Trust (Ticker: GSG) which is diversified into 24 different commodities corrected almost 10%.

Why?

Many investors had expected the Fed to cut rates by a full percentage point, which would have sunk the value of the dollar even lower. With the dollar in free fall for months, investors have plowed their funds into commodities (which are likely to go up as the dollar falls).

However the Fed’s smaller-than-expected rate cut sent the dollar up, and it has since extended its gains against the euro and the yen. The European currency fell more than 1% on Thursday to $1.5429. As a result, investors who had viewed commodities as a conservative hedge against inflation were scrambling to get out of their positions thus sending prices lower.

Getting back to equities, the 417 point move on March 11^th and another 420 point move (both up) on March 18^th did not really alter the technical reality that we are in a down trend. Bear market rallies often are head fakes. In fact, we've seen this before. Remember July 2002? A 489 point jump on July 24^th and a 447 point jump on July 29^th were followed by the October 9^th low of 7,286.

The stunning collapse of Bear Stearns came over night (Bear Stearns’ CEO denied problems as little as 48 hours before the news hit the fan) and there are plenty of candidates left that could potentially follow suit.

Regardless of how you calculate, the U.S. equity market is still a nervous wreck. Further declines in equities will make commodities more attractive yet again.

The conservative approach is to maintain exposure to ALL asset classes.

While some boom others will bust, but your overall portfolio will display much less volatility than the equity markets, which is considered low beta.

Consider it natural “beta blockers” against a heart attack caused by market anxiety.

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