We have enjoyed a strong run while running offense since July 20th. Actually, we have been on offense for all but one month since March 12th. Since July 20th we have seen the S&P 500 Equal Weight Index (RSP) gain 16.1% and the S&P 500 Index (SPX) up 11.8% while 30 out of 40 economic sectors gained more than 10% with only one sector (Savings & Loans) falling. While the market’s move has been nothing short of impressive, a breather - of some sort - is not wholly unexpected, nor undesirable.
After Wednesdays (10/28/09) activity, the pendulum in the market has switched from demand being in control to supply being in control. With this shift to wealth preservation there are several things we can do: scale back current positions, set stop-loss points, and wait for pullbacks to initiate new positions. Remaining positive for the market is the fact that equities (US & international) are still strongly favored over cash and the overall trend of the major market indices remains positive.
It's not too surprising that after such a strong rally we see some sort of consolidation and pullback here. We will follow what the indicators are telling us and will not let recent markets unduly influence our decision making process. 2008 was bad for equities, we know that, but that has absolutely no bearing on 2009 or 2010. Right now, we know that this shift from demand to supply suggests that the risk in the market has heightened and we will be proceeding with caution.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Friday, October 30, 2009
Thursday, October 22, 2009
WELCOME BACK TO 10,000! Well, sort of…
Headlines as the market closed on Wednesday October 14, 2009:
Dow Jones Marketwatch: “Dow Reclaims 10,000”
Wall Street Journal: “Dow Tops 10,000"
Reuters: “Dow hits 10,000 Mark on Earnings Optimism”
Unfortunately, or fortunately, it was the first time the Dow closed with five digits since last October. Big picture: the sobering reality for investors is that the Dow is right where it was 10 years ago; on October 15th, 1999 the Dow Industrials closed at 10,019.
We have had one heck of a run since March but according to published data, lots of investors have missed this up move; more on this below.
Markets fall when investor’s - rattled to the point of throwing in the proverbial towel - bail out (creating supply). At some point this ‘capitulation’ diminishes available supply and the market makes a bottom. (The flip side is that the ‘defensive’ cash becomes (potential) new demand for equities.) Consider this: a fully invested account represents no potential for net new demand to the market however, an account that is sitting in cash represents $$$ of potential demand for equities. In March of this year the equity markets reached such a tipping point; supply dried up and enough new demand re-entered the picture to produce a bottom and the subsequent rally. Several months later the media (sceptics the whole way up) are celebrating the Dow's return to 10,000.
According to published statistics, many investors have missed this rally. There are a lot of costs associated with this, if that is the case. Since March 9th, an investor in long-term US Government Bond Funds has lost approximately 7%, an investor in Money Market Funds has gained less than 1/10th of 1%, while the purchasing power of their Dollars declined 15% and the equity markets climbed more than 50%.
There are two facts that as investors we must realize; #1- bond funds attracted net deposits of $209.1 billion in the first eight months of 2009 while stock funds drew just $15.2 billion. Said another way, for every new dollar moving into equities, $14 were moving into bonds. What does this mean? Investors that were burned during the collapse of 2008 were busy flocking to the perceived safety of bonds right as the 2009 bottom was materializing. #2 - the continued decline of the US Dollar. The Dow has recaptured Dow 10,000 in terms of US Dollars. While this rally has taken the Dow back to even for the decade, ‘foreign’ investors have not yet been made whole for the decade. Due to the (continued/continuing) decline in the value of the US Dollar, the Dow would need an additional rally of 45% to get back to its October 1999 levels - in Euro currency, assuming the $ declines no further.
There is risk to investing in equities; domestic or international, but there is also risk in keeping assets in money market funds when rates are 0.25% and when the Dollar is trending lower. Investors have flocked to cash and bonds because they are perceived as ‘safe’.
I have advised clients on investments since 1983 and have learned that in this business it is the conventional wisdom that can be the most dangerous, and for this reason objective tools that are based upon supply and demand rather than fear and reticence can add tremendous value. That is what I use to guide your portfolio. My primary market indicator (the NYSE Bullish Percent - BPNYSE) has kept the offensive team on the field for all but a month since March 12th and remains on offense today. I am currently emphasizing two equity based asset classes; International Equities (emerging) and US Equities (small cap) along with some exposure to metals; industrial & precious - in the commodity area.
Dow Jones Marketwatch: “Dow Reclaims 10,000”
Wall Street Journal: “Dow Tops 10,000"
Reuters: “Dow hits 10,000 Mark on Earnings Optimism”
Unfortunately, or fortunately, it was the first time the Dow closed with five digits since last October. Big picture: the sobering reality for investors is that the Dow is right where it was 10 years ago; on October 15th, 1999 the Dow Industrials closed at 10,019.
We have had one heck of a run since March but according to published data, lots of investors have missed this up move; more on this below.
Markets fall when investor’s - rattled to the point of throwing in the proverbial towel - bail out (creating supply). At some point this ‘capitulation’ diminishes available supply and the market makes a bottom. (The flip side is that the ‘defensive’ cash becomes (potential) new demand for equities.) Consider this: a fully invested account represents no potential for net new demand to the market however, an account that is sitting in cash represents $$$ of potential demand for equities. In March of this year the equity markets reached such a tipping point; supply dried up and enough new demand re-entered the picture to produce a bottom and the subsequent rally. Several months later the media (sceptics the whole way up) are celebrating the Dow's return to 10,000.
According to published statistics, many investors have missed this rally. There are a lot of costs associated with this, if that is the case. Since March 9th, an investor in long-term US Government Bond Funds has lost approximately 7%, an investor in Money Market Funds has gained less than 1/10th of 1%, while the purchasing power of their Dollars declined 15% and the equity markets climbed more than 50%.
There are two facts that as investors we must realize; #1- bond funds attracted net deposits of $209.1 billion in the first eight months of 2009 while stock funds drew just $15.2 billion. Said another way, for every new dollar moving into equities, $14 were moving into bonds. What does this mean? Investors that were burned during the collapse of 2008 were busy flocking to the perceived safety of bonds right as the 2009 bottom was materializing. #2 - the continued decline of the US Dollar. The Dow has recaptured Dow 10,000 in terms of US Dollars. While this rally has taken the Dow back to even for the decade, ‘foreign’ investors have not yet been made whole for the decade. Due to the (continued/continuing) decline in the value of the US Dollar, the Dow would need an additional rally of 45% to get back to its October 1999 levels - in Euro currency, assuming the $ declines no further.
There is risk to investing in equities; domestic or international, but there is also risk in keeping assets in money market funds when rates are 0.25% and when the Dollar is trending lower. Investors have flocked to cash and bonds because they are perceived as ‘safe’.
I have advised clients on investments since 1983 and have learned that in this business it is the conventional wisdom that can be the most dangerous, and for this reason objective tools that are based upon supply and demand rather than fear and reticence can add tremendous value. That is what I use to guide your portfolio. My primary market indicator (the NYSE Bullish Percent - BPNYSE) has kept the offensive team on the field for all but a month since March 12th and remains on offense today. I am currently emphasizing two equity based asset classes; International Equities (emerging) and US Equities (small cap) along with some exposure to metals; industrial & precious - in the commodity area.
Wednesday, October 7, 2009
Consequences of a Falling Dollar
Not only have we experienced a terrific market rally since March, we have also experienced a falling US Dollar. A steady chorus of international voices making a strong case for a global reserve currency, helped to fuel the dollars decline. Unfortunately, one can also point to our domestic fiscal policy. The decline of the dollar has a number of consequences for cash assets held domestically; one being more expensive foreign goods (imports). The dollars decline has contributed to the bullish backdrop underlying many other asset classes - such as commodities and foreign securities. As it takes more dollars to buy the same amount of ‘stuff’, commodity consumers will often stock pile to avoid making future purchases with a weaker currency, while precious metals are often purchased as an inflation or purchasing power hedge.
One beneficiary of the falling dollar has been Gold, which has moved above $1,000/oz. to register new all-time highs; at least in US Dollar terms. Interestingly, in terms of the Euro, we find that Gold is still well below its highs from February of this year.
Gold, as an asset class, offers a strong outlook based upon its trend chart however, its outlook in terms of leadership within the commodity asset class and even the Precious Metals segment of the asset class, is much less attractive. The proxy for silver (DBS – PowerShares DB Silver Fund) gave a relative strength buy signal versus Gold earlier this year and continues to exhibit positive strength vs. gold.
Silver has outpaced Gold’s proxy (DGL – PowerShares DB Gold Fund) rather dramatically thus far in 2009: DBS +45% to DGL +14% and, for the reasons mentioned above Silver appears likely to continue doing so.
Where appropriate for accounts under my advisement, DBS is part of the commodity exposure - along with DBB (PowerShares DB Base Metals Fund). The commodity group as a whole typically benefits from a falling US Dollar however, some commodities will inevitably benefit more than others during any market cycle. Going back to 1990 the average annual differential between the best and worst performing commodity is 114%*. Tactical asset allocation allows me to ‘hand pick’ exposure to the stronger areas within commodities, providing us with the opportunity to do better than a non-tactical approach like ‘buy and hold’ the broad commodity asset class. For example, while the trend for the overall commodity asset class continued higher in September, the trend of Crude Oil was derailed in recent months; oil prices stalled in early August when a high was placed at $75 per barrel. This is a negative divergence from the other raw materials.
For now it appears that metals, as a sub-group within commodities, are best positioned to provide outperformance and, despite Gold’s recent highs, Silver is in a lead role for the time being.
*Dorsey Wright - October 7, 2009
One beneficiary of the falling dollar has been Gold, which has moved above $1,000/oz. to register new all-time highs; at least in US Dollar terms. Interestingly, in terms of the Euro, we find that Gold is still well below its highs from February of this year.
Gold, as an asset class, offers a strong outlook based upon its trend chart however, its outlook in terms of leadership within the commodity asset class and even the Precious Metals segment of the asset class, is much less attractive. The proxy for silver (DBS – PowerShares DB Silver Fund) gave a relative strength buy signal versus Gold earlier this year and continues to exhibit positive strength vs. gold.
Silver has outpaced Gold’s proxy (DGL – PowerShares DB Gold Fund) rather dramatically thus far in 2009: DBS +45% to DGL +14% and, for the reasons mentioned above Silver appears likely to continue doing so.
Where appropriate for accounts under my advisement, DBS is part of the commodity exposure - along with DBB (PowerShares DB Base Metals Fund). The commodity group as a whole typically benefits from a falling US Dollar however, some commodities will inevitably benefit more than others during any market cycle. Going back to 1990 the average annual differential between the best and worst performing commodity is 114%*. Tactical asset allocation allows me to ‘hand pick’ exposure to the stronger areas within commodities, providing us with the opportunity to do better than a non-tactical approach like ‘buy and hold’ the broad commodity asset class. For example, while the trend for the overall commodity asset class continued higher in September, the trend of Crude Oil was derailed in recent months; oil prices stalled in early August when a high was placed at $75 per barrel. This is a negative divergence from the other raw materials.
For now it appears that metals, as a sub-group within commodities, are best positioned to provide outperformance and, despite Gold’s recent highs, Silver is in a lead role for the time being.
*Dorsey Wright - October 7, 2009
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