Absolute Return Portfolio Management LLC

As I have written many times, it is the synergistic combination of market internals/breadth and investor sentiment that create major trends. Until today, the only missing variable to identify a market bottom was a capitulation in psychology as defined by the weekly sentiment surveys. All other short-term indicators of sentiment are already signaling a significant market bottom.

This morning the AAII released their weekly survey of public sentiment which showed an astonishing surge in bearishness (fear/concern) to over 50% with bulls (optimists) dropping to 30%. The ratio of bulls vs. bears is on par with the market bottoms of last July and this February and nearly as low as the ratio that accompanied the March 2009 low that kicked off the bull market. That's just what we needed to swing the odds in favor of a rally.

Market internals remain excellent given the 15% losses from intra-day high to low. There are several bullish/positive divergences among the market breadth indicators I follow including the McClellan oscillator and New Highs/New Lows data. The market is being accumulated by the pro's and savvy while the weak hands have been shaken out.

As I've predicted since the beginning of the year, I expect that the markets will be deadlocked in a wide trading range. Now that we've re-tested the February lows, as predicted in April, I expect that markets to rally to their April highs; perhaps marginally higher. Portfolios have been moved to a 100% long equity position domestically and internationally after successfully avoiding the entire decline.

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Matthew N. Xiarhos, Founder & Chief Investment Officer