The fourth of July is a mere few days behind us now, but the fireworks are still going on in the market and I wanted to take this opportunity to update you on how the market indicators I follow stand at the halfway point of 2009. Interestingly enough, one of the main equity indicators that I follow, the NYSE Bullish Percent, forced us to get a bit more defensive at the end of last month for the first time since March. Coming into the second quarter of this year the NYSE Bullish Percent had already reversed back up to signal us to get more offensive with our equity exposure, and remained offensive for roughly three months until just recently. Following this indicator forced us to be invested in one of the best quarters for equities in more than 10 years. In general we were able to participate in a market that was driven by new demand, and the returns across various segments of the equity landscape reflect the fact that the investing climate was generally positive. Looking more specifically at the monthly returns this quarter, both April and May were huge contributors, some of the best on record in fact. April's returns in particular were among the best handful of months since 1987. Given the broad strength many of the worst performing US Equity ETFs were still in positive territory for the quarter. Specific winners was the Emerging markets side of the Non-US equity arena. Small Cap stocks notably outperformed Large Cap stocks, and Crude Oil provided exceptional returns relative to the broader commodity benchmarks. The weakest asset class was clearly the fixed income category, and even it had pockets of strength in corporate bonds. Overall though, the diversified fixed income market was effectively flat on the quarter, and the Gov't Long Bonds were among the worst. With that said, here are some of the other notable thoughts I have about the financial markets as we head into the third quarter of the year.
Market Thoughts:
· A comparison of stocks to bonds has moved back to favoring stocks for the first time in a year, suggesting that the equity market is a place that is likely to outperform fixed income. This certainly does not mean that stocks won’t experience pullbacks or breathers along the way, but it suggests that we use those pullbacks as buying opportunities so long as this relative strength relationship holds true. The last time stocks were favored over bonds was from July 2003 to July 2008. This comes at a time, interestingly enough, that defensive team is on the field. What this means to me is that we will maintain much of the equity exposure that we current have, however, we will not begin to put new money to work until we see offense return to the field.
· The international equities market and commodities are the two asset classes that are showing superior strength versus all asset classes that we follow including domestic equity, international equity, commodities, foreign currency, fixed income, and cash. Specifically, for international equity exposure, we are focusing on emerging markets.
· The Energy markets have seen a tremendous rally over the course of the past few months with Crude Oil moving from $34 back in February to a recent high of $72.50 per barrel. The picture for Crude now shows that this commodity remains among the tops on a relative strength basis, however, in the near term Crude Oil is overbought, which suggests the probabilities of a pullback or consolidation period for Crude is high here.
· After a positive year in 2008 where the US Dollar gained about 6%, the greenback returned to a negative trend in March of this year, and continues to show weakness on an absolute basis as well as relative to the broader foreign currencies market.
· Focus is essential. We don’t want to become a victim of following the crowd by turning to the financial news media for investment advice. The goal of these outlets is to get more eyeballs to watch or listen, not manage a portfolio. My goal is to balance risk with reward in your portfolio. So, I turn off the TV and radio and instead turn to my charts and data to analyze changing trends in the market place and how best to position your portfolio.
We have no way of knowing how this defensive possession will play out. Ideally, we would like to see demand regain control over the equities market so we can begin focusing on wealth accumulation again; however, we are not going to jump the gun in this regard and attempt to tell the market what it should do. Rather, we will let the market tell us when the time is right. Until then, I will continue to diligently review your account. Additionally, while we are on defensive I will be looking for new opportunities to surface when we go back on offense so we are ready to take advantage of the next offensive session. We will adhere to both the buy and sell side of our decision making process and let the discipline which has helped us successfully navigate this market continue to be our light in any stormy environment. If you have any questions regarding these strategies, or any other strategies for that matter, feel free to contact me and I would be happy to discuss them in further detail with you. In the meantime, kick back, relax and enjoy the summer.