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9/3/2010 - ...More of the Same

 

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Equity Market Overview
2010 has been a wild ride so far and the indications are that the roller-coaster will continue. Today a dichotomy exists between investor sentiment and the market's internal technical condition.

Weekly sentiment surveys from both AAII and Investors Intelligence have shown a spike in bears (worried and concerned investors) and a commensurate drop in bulls (optimists). The levels of bull & bears and the low bull-to-bear ratios suggest a bottom and a rally.

The technical condition of the market, however, isn't particularly healthy. As the market declined into late August the number of 52 Week New lows expanded dramatically even beyond the number of New Lows reached at the early July lows. This is important because the July low was at a lower price level. In other words, even though the market did not drop as far in late August, the technical condition was worse than in was in July when the market was even lower. While this does not preclude a rally it does suggest that upside remains limited and risks remain higher.

The markets have continued to trade in a very technical fashion bouncing on and off key moving averages. This behavior reflects little conviction in the economy and fundamentals and lower confidence in any trends, up or down, resulting in this year's volatility and trading range.

With yesterday's advance, most major indexes have rallied right up to their key moving averages. Given the recent propensity to use these moving averages as key support and resistance this year, it will be very telling how the market behaves over the coming week. I suspect that the extreme bearish sentiment that we have witnessed lately will prevail and allow the markets to rally moderately above these key moving averages.

The basic definition of a downtrend is lower highs and lower lows and that is what we have witnessed since April. A well-defined trend channel has contained all of the price highs and lows since that April high. This is further evidence of just how technically the market is trading.

The trend channel suggests resistance just above current market levels below the June highs around 10,500 on the DJIA and 1100 on the S& 500. Unless the market can substantially better these levels and break out of this down trending channel, the poor technical condition of the market and defined downtrend will likely prevail and suggest that risks remain quite elevated over the coming month.

 


US Equity Markets (Equity Style Model)
 Since the April highs, the Large-cap Value segment of the market has provided the best relative performance. In absolute terms, this meant that this area declined the least. This suggests that investors are still looking for safe havens for this year's volatile climate.

Mid-cap Growth stocks are top ranked by our models due to their nascent relative strength since mid-August.

 


International Equities
 As is typical during trading ranges, markets have become more selective. During the past two months I have been exhaustively testing and rebuilt our International Equity model. Since the firm's inception I have focused on International region ETFs (Exchange Trade Funds). The new model is built on the same foundation and takes advantage of the growing number of single country ETFs which finally have enough data for proper modeling using our techniques.

The performance of this new International Country model is superior to the regional model it replaces in both performance and draw-down statistics due to its ability to be more selective.

Top Country Recommendations:
IDX - Indonesia
ECH - Chile
GXG - Columbia
EWM - Malaysia
THD -Thailand
TUR - Turkey

 


Investment Grade Bonds
 We are long domestic investment grade bonds.

 

High Yield Bonds
 High Yield Bonds are on a BUY.

 


Real Assets / Inflation Hedges
 Commodities and other inflation hedges, after spending about a year in a moderately declining trading range, appear to have started a new uptrend.

 


Currencies
We are still long foreign currencies but our currency model has switched to the Yen due to its superior strength.


 

 

 

 

 

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