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1/30/2009: Equities Likely to Retest November Lows

Equities Likely to Retest November Lows

ARS



A Message for Absolute Return Portfolio Management clients:

I am happy to report that our managed model portfolios had no equity exposure during the market collapse of the past 4+ months which have witnessed 30%losses in both the domestic S&P 500 of large capitalization stocks and the Dow Jones World Indexes and a nearly 40% in the Russell 2000 index of small capitalization stocks.

Our equity allocation was defensive for the vast majority of the year and remains so today. As a result, portfolios finished 2008 with only very small losses. We believe this is further evidence that active management, rather than fully-invested "buy-and-hope" advocated by academics, mutual funds companies and most professional investors, is a superior approach to risk management.


Global Equity Markets
In our last issue of December 31st, I indicated that 2009 may have a rough start because bullish sentiment had climbed to levels that, on some indicators, were the highest of the entire bear market which, near-term, dictated caution and hinted at the possibility of a re-test of the November 20th lows early in 2009.

The rally attempt of earlier this week has appeared to fail with yesterday's and this morning's weaknesses. This suggests that the market will re-test the November lows as I've been warning.

Internally, the market appears to be building some underlying strength which bodes well for the coming months, however. What is lacking for a decisive bottom is heightened fear and high levels of bearish sentiment. This may occur in the coming weeks as the Obama "honeymoon" optimism wanes and if the market re-tests the November lows as expected.

 


International Equity Regions
Our portfolios remain in a defensive position due to the near-term outlook. 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 remains in a defensive position at this time and our allocation to domestic equities remains 100% in short-term government bonds.

 


Investment Grade Bonds
Extremely high levels of bullish sentiment among bond market participants earlier this month was indicative of a market top. Now bond prices are in free-fall across all maturities. Fears of the inflationary implications of the Federal stimulus packages and bailouts have replaced deflationary expectations.

 


High Yield Bonds
Our model is signaling strength in High Yield Market Debt. Our aforementioned near-term analysis suggests caution but, like Equities, this area bears watching. We are invested 100% in short-term government bonds.

 


Inflation Hedge / Real Assets
Our Real Assets/Inflation Hedge model remains 100% invested in short-term government bonds but GOLD Bullion has moved to the top of the ranks and could soon move to a BUY signal.

GOLD Bullion - (GLD) - On a SELL but that could change soon.

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

Real Estate - Our models rank REITs as a SELL.

 

 

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