Absolute Return Portfolio Management LLC

The outlook for the global equity markets remains negative. For the quarter ended September 30th global equity indexes posted losses of 15-20% or more. With the exception of investment grade bonds, few assets classes were spared in the carnage.

Last month I suggested that August's market consolidation and rebound rally appeared complete and that "It appears that the equity markets have now started another down leg." That forecast was accurate and equity indexes broke their August lows. The decline was particularly severe for international markets and domestic small/mid cap stocks.

At present it appears that the bear market decline is not complete as neither investor sentiment nor market internals suggest a viable intermediate-term bottom.

In spite of the recent market decline breaking the August lows and the exceptional volatility of the past few months, I find it remarkable that bullish sentiment has actually been increasing over the past three weeks as recorded by AAII.

This indicates that the public feels that it can successfully identify a bottom in the market. Such behavior indicates that the decline is not over as outright anxiety and fear are the prerequisites for a bottom. In other words, fear and skepticism should be the prevailing emotions at the start of any sustainable rally not any increase in optimism as we have seen.

Further evidence of a continued equity market decline comes from the continually increasing number of 52 Week New Lows. This shows an erosion in the market's internal health. When the August lows were recently broken the number of 52 Week New Lows expanded even further indicating that the final bottom was not yet in place.

Historically, at final market lows/bottoms we see that the number of 52 Week New Lows begin contracting. The bottoming process usually finds that that maximum number of 52 Week New Lows occurs before the actual price lows in the price indexes.

Accordingly, any price rallies should be viewed with skepticism. Once we see a capitulation in emotions and extreme anxiety and fear recorded in the sentiment studies coupled with improving market internals then we will know that we are close or at a market bottom.

I suspect that the bear market lows could occur sometime this month and lead to a viable 4th quarter rally.

Our Domestic Equity model is in a defensive (100% cash) position at this time.

We continue to be long International investment Grade Bonds.

Our High Yield Bond model is on a SELL.

The Real Assets model is still bullish on Gold but bearish on REITs and Commodities.

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