2010Oct8 Quarterly Review

2010Oct8 Quarterly Review

In a figurative sense, the market has been in a "whirlwind" since the market top in April of this year, or even since the market bottom in March 2009. Much has happened in the global markets in short bursts of activity. One of the many definitions for whirl is "to turn abruptly around or aside".

 
Previous tops in May, June and August became exit points for investors to move to fixed income. In September, broader market participation became apparent and has been confirmed with a movement of money from bonds to stocks for the first monthly change with investor money flows this year.
 
The short-term trends have resulted in a higher turn-over than we should normally experience. Further, the difference between leaders and laggards has been abnormally narrow. The return differential between leaders and laggards is increasing and should be a positive for your portfolios.
 
Our high cash balances this year have provided stability and avoided larger declines. The rapid September rally advanced ahead of our portfolios which is typical of a trend following strategy. However, the positions now in your account have been outpacing the familiar S&P- 500 Index.
 
The first blue line in the chart below is September 10th where we added international and gold positions to portfolios. The second is September 28th when we added domestic positions favoring small and mid cap and exposure to sectors with strong relative performance.
 
 
Bullish percent is a measure of how many stocks within a sector or specific market are trading above their bullish support line. If the line is increasing that means more stocks in the sector or market are moving from negative trends to positive trends. This week the NYSE data reversed up because at least 6% of the stocks on the NYSE have moved into a positive trend. Said another way, they are now driving on I-5 North.
 
Both International and Domestic Equities are now "emphasized" in our primary asset allocation screen. The equity fund groups are improving their scores in the DWA Fund Database.
 
The following chart illustrates the reason we have changed from Modern Portfolio Theory to Relative Strength for portfolio construction. The capital markets have many components to use in a portfolio. We see no justification for long-term, arbitrary commitments to weak segments. Media and market mavens keep investors focused on the quick and simple when more digging could identify some gems.
 
12/31/1999 to 9/23/2010 Source: Dorsey, Wright & Associates

 

Some sectors have separated themselves from the pack with strong leadership. One of these areas is the Basic Materials group which includes a whole host of sectors that are vital to the global economy. Its improvement hasn't necessarily been "abrupt," but it has definitely turned positive. This is beneficial for the domestic sector as well as emerging markets that export raw materials.
 
Gold is making headlines again. Some of the attention comes when an asset goes to new highs. However, gold is also getting attention because of the Fed's recent statement. The Fed’s balance sheet expansion (known as QE2) could lead to a weaker dollar and highergold prices, though not everyone agrees. International currency “wars” between central banks may push gold prices even higher. No one can know the eventual outcome but for now Gold has already made its decision. Except for small accounts, we added Gold Miners ETF (GDX).
 
We remain cautiously optimistic about the market in the near term since the economy appears to be catching up with the stimulus money that was used inside our country. However, for reasons we continue to reiterate, sustained increases in consumer spending seem highly unlikely.
 
Statistical odds are in our favor for a positive October whenever preceded by a strong September. Further, the Fed is regularly intervening in the market through proxy banks with newly printed money which seems to be insurmountable for those who short the market. The Fed’s intervention changes market dynamics from long-term investing to needing an active short-term defensive strategy.
 
The following chart is an update on positions in accounts at the end of the quarter. At the end of the day, we update our sell targets. Whenever a position traded at a new high during the day, the sell target is automatically raised. RFG – mid-cap growth is our weakest position and possibly sold before long. PGX – PowerShares Preferred pays a 6.95% dividend. Portfolios still hold approximately one third in cash.