10/4/2008: Portfolios Unscathed by Week's Nearly 10% Stock Market Plunge

10/4/2008: Portfolios Unscathed by Week's Nearly 10% Stock Market Plunge; Fear Curiously Absent

Written By: Matthew Xiarhos
Categorized in: NEWSLETTERS

A Message for Absolute Return Portfolio Management clients:

I am happy to report that our model portfolios had no equity exposure during the past two weeks which witnessed 10%+ losses in both the domestic S&P 500 of large capitalization stocks and the Dow Jones World Indexes and a nearly 20% in the Russell 2000 index of small capitalization stocks.

Global Equity Markets

The most notable development of the past weeks is the lack of a surge in pessimism and bearishness. In reviewing the American Association of Individual Investors (AAII) weekly sentiment polls I have noted that bearish sentiment still hasn't even reached the levels seen at the mid-July or March lows even in the face of significantly deteriorating fundamentals and global media pessimism. Further, the level of bullishness has remained persistently high over the past two weeks in spite of the near collapse of the banking system and inability of our government leadership to develop a timely and thorough response to the crisis.

At a time like this, I would have expected to see a tremendous spike in pessimism/bearishness and for the levels of bullishness/optimism to plunge. Such a sea tide change in psychology is a necessary prerequisite for a market bottom that is presently missing.

Further, there has been a marked deterioration in market internals. The number of 52 Week New Lows had been restrained until this week. With this week's nearly 10% plunge the number of 52 Week New Lows rose sharply.

On the whole, the lack of bearish sentiment and weakening market internals points to an intermediate-term bottom still being some weeks away, at best, and possibly a more lengthy bear market.

While it is possible that we could see a sharp rally from this very oversold condition it should be viewed with caution and I would expect that a re-test of this week's lows would come later this month before any intermediate-term rally would develop a foothold.

Further, anyone counseling "holding for the long-term" and/or touting the present times as a "buying opportunity" should be countered with the fact that the S&P 500 is trading at 21 times Q2 2008 GAAP earnings. A 21 P/E ratio has represented periods of market OVERVALUATION in the past 80 years.

International Equity Regions

Our portfolios remain in a defensive position. The recent strength in the US Dollar is undermining returns of overseas investments for US-based investors. We remain 100% in short-term government bonds.

ASIA (ex-Japan) -

EMERGING MARKETS -

EURO -

JAPAN -

LATIN AMERICA (LatAm) -

USA -
(see Equity Style section for specifics)

Equity Style & Sector Trends

Our Domestic Equity Model continue in a defensive position at this time and our allocation to domestic equities remains 100% in short-term government bonds.

Investment Grade Bonds

As noted in the International Equities section, US Dollar strength is undermining overseas positions. Our Investment Grade Bond model switched to Domestic Bonds since our last newsletter one month ago.

High Yield Bonds

Our models remain on a SELL for the High Yield Debt Markets and are invested 100% in short-term government bonds.

However, this area is tightly correlated to the equity markets. A recovery in the equity markets in the coming months would bode well for this area.

Inflation Hedge / Real Assets

Our Real Assets/Inflation Hedge model remains 100% invested in short-term government bonds. There is little chance that the Commodity or Gold segments would be purchased in the near-term.

GOLD Bullion - (GLD) - On a SELL.

Goldman Sachs Commodity Index (GSG) (largely energy ) and DB Commodity Index Tracking Fund (DBC) on a SELL .

Real Estate - Our models rank REIT's as a SELL.

If you have any questions about our research or Absolute Return Portfolios do not hesitate to call. We can be reached toll-free at 877-632-7491.

Absolute Return Portfolio Management LLC provides absolute return oriented portfolio management and institutional research on global macro trends including equity style rotation, global regional equity trends, short-selling and market neutral strategies as well as fixed income strategies. Contact us for information on account minimums and institutional research offerings.

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