Absolute Return Portfolio Management LLC

As readers know, we were able to pinpoint the March bottom quite accurately and I was quite hopeful that the March bottom would begin a new up-leg in the market. I am of the view today, however, that we are actually in a BEAR MARKET and that the next leg down is imminent.

My expectation is that the next leg down will, at least, see the markets decline into the March lows which are about 10% lower. More likely, the next bear market leg decline will equal that of the drop from the October '07 highs to lows of this March. This was approximately a 20% decline. From present levels, this suggests a decline, over several months duration, that would bring the S&P 500 from its present level of 1400 to around 1100 by mid-summer. This would represent a total decline of about 30% from the October '07 highs; very much in line with both the average historical magnitude and duration of bear markets. On average, bear market declines are approximately nine months in length and decline about 30%. As October represented the highs, going nine months forward would bring us to around July (though one can't view such things with an expectation of exactitude).

What is weighing so heavily upon my mind is the fact the investor optimism, as measured by the American Association of Individual Investors (AAII) is showing as high a percentage of bullish pollees today as that of the market peak in October! In fact, there are TWICE as many bulls(optimists) as there are bears (pessimists). These 2 to 1 ratios of Bulls/Bears when accompanied by a high percentage of Bulls have historically been an accurate indicator of an intermediate-term market top. The last time I remember seeing such a rapid cycling from extreme pessimism to extreme optimism was during the rallies of the 2000-2003 bear market.

Secondly, the market's technical condition is deteriorating. As the market rallied off the March 17th lows, we should have seen an ever-increasing number of daily New Highs and a corresponding contraction in the number of daily New Lows. This would have shown that large numbers of stocks were participating in the rally and would have been testimony to a healthy market advance which requires broad participation.

However, what has actually occurred is that the increase in the number of daily New Highs has been relatively anemic and the daily number of New Lows have remained high and spike to even higher levels on any down days in the market. While this is difficult to convey without graphics, the essence of these factors is that the underlying health of the market isn't particularly robust. Coupled with the aforementioned high level of sentiment and lack of general concern, I feel that more downside is possible and that the ultimate bottom either is still being formed or the market is still in the process of a longer-term decline.

If there is sufficient interest, I would be happy to prepare a special report that would provide graphical analysis of these sentiment studies and new high/new low studies to which I constantly refer. If you would be interested, please email me and let me know.

International equities are continuing to out-perform the US equities, however. The US Dollar (USD) decline has continued due to the tremendous Fed liquidity measures which are viewed as inflationary and USD bearish. This favors overseas markets as local equity performance gets the added advantage of a positive currency gain for US-based investors.

LatAm, Asia and Emerging Markets remain the top equity regions globally in our models. When a recovery in global markets is confirmed by our models, it will be to these areas that we will look.

ASIA (ex-Japan) -

EMERGING MARKETS -

EURO -

JAPAN -

LATIN AMERICA (LatAm) -

USA -
(see Equity Style section for specifics)

As noted earlier, the acceleration of weakness in the US Dollar translates into strength in overseas investments.

GOLD Bullion - (GLD) BUY

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

Real Estate - REIT's have recovered nicely. Our models now rank REIT's as a BUY. However, one must be mindful that the general market trend is quite risky at present.

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.