2011Sep6 Schizophrenic August
"There seems to be an impression that we can solve our problems without pain.
There is no conceivable way that can happen,”
-- Former Federal Reserve chairman, Alan Greenspan.
August was a tough month with our indicators tripping the cash safety switch at the end of trading on the 2nd. Our IRI Global Opportunity and IRI Select portfolios, using exchange traded funds, were sold the following morning. Our 401k RS Portfolios, which use mutual funds, were sold on the 3rd, too. All portfolios continue to be 100% in money market accounts.
By August 8th, the S&P-500 was almost 11% negative for the year. By month’s end, it had see-sawed its way back to slightly more than 3% negative for the year. Mid-day, September 6th, the index was down 14% for the past two months. The market has had large moves on very light volume indicative of computer trading. Traditional investors, concerned over US and European debt, have continued withdrawing from stock mutual funds adding sell side pressure. Equity mutual funds have very little cash to capture any value from recent price declines.
CAUTION:You are entering the “September Zone.”
Historically, September is the most dangerous month for stock investors with downdrafts occurring more often than not. However, over the past decade, the probability of a positive investment return in September has improved.
Until the Fed meets again on September 20th, positive drivers for the market remain elusive. IF the Fed begins another easing program (a big IF), the market could advance into next year. IF corporate earnings reports which begin at the end of the month are strong, they could fuel a major advance. Both catalysts require looking into a crystal ball and making a bet.
Analysts have revised earnings forecasts over the past four weeks. The utilities sector is the only industry with a positive adjustment. Net of earnings increases, 29% of the S&P-1500 had negative adjustments. That is a tough market. We are waiting for the actual data – that is what trend following requires.
August selling pressures drove prices for most sectors into oversold territory. As the market continues declining in September, it creates a better risk/reward opportunity for recommitting capital. Support for domestic equities has been improving. If September 1st had been a positive for the market, it would have generated a buy signal in the midst of strong headwinds. Since it did not happen, we will wait a little longer.
Consumer sentiment surveys to the contrary, new cars (except the Chevy Volt) and appliances have been selling. (Selling is defined as inventory moving from the manufacturer to the dealers). Consumer stocks, though battered last month, have consistently reflected an economy stronger than investors anticipate.
Developed Europe has substantial problems which will take years to resolve. With poor demographics and unaffordable social programs, financial disruption and civil unrest will be their “new economy” for a long time. Paraphrasing Winston Churchill, European socialism has run out of the other guys’ money, and the beneficiaries are in denial. Adding to the problems, their manufacturing index fell to a two year low this week indicating a weakening economy.
Growing consumer populations and low debt levels exist in the emerging markets of Europe and Asia. It is where we expect to find most investment opportunities this decade. If the US Dollar remains low, emerging market consumers will find products “Made in the USA” very attractive. That is one positive for our economy.
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