May 27th, 2011 – A "V" recovery
Market Updates
05/31/11In just two years, the stock market is up 100% from its bottom in what will probably go down, at least for most of us, as the worst market correction of our lifetimes. The stock market has experienced a V recovery over this time and we believe the probability of a market correction to be fairly high in the near future. As a result, any cash that we have received over the past few months has been held in cash. In our balanced accounts, we rebalanced back to target in late February and just recently lowered our equity exposure in all our of our client accounts. There are a number of fundamental and technical reasons that we are raising some cash in everyone’s portfolio.
The difference between fundamental and technical analysis is best explained by analyzing how the value of your house is determined. Fundamental analysis bases the value of your house on the land value, cost of materials and labor and square footage. Technical analysis looks at how the market is pricing your house – in other words, setting the value of your house at a price someone would pay for it today.
Some of the fundamental reasons for our trade include:
- QE2 (Quantitative Easing Part 2) – the Federal Reserve has been injecting money into the markets by buying US Treasury Bonds directly from the US Treasury. This program ends June 30th. Less money injected into the system means less money to purchase stocks.
- Emerging markets such as China, Brazil and India have all enacted measures – raising interest rates, raising capital requirements for banks to name a couple – meant to slow the rate of inflation and growth in their respective countries. These markets have helped drive the recent economic recovery.
- A slow down in the US economic recovery. First quarter GDP grew at a much slower annual rate of 1.8% than the fourth quarter and the Index of Leading Economic Indicators dropped -0.3% in April – the first drop since June of last year. Consumers also are getting squeezed by higher gas and food prices. Click here to view an article on how it is affecting low-end shoppers. (hold ctrl key while clicking)
- After-tax corporate profits as a percentage of GDP are at their second highest level since 1960. The last time it was higher was in December of 2007 – just before the 2008 market correction.
- The uncertainty over the debt ceiling.
- Accelerated problems in the Euro zone after the election results Spain last weekend and growing debt problems in Greece.
- Japan has been contemplating raising its sales tax from 5% to 10% as a result of the earthquake.
- Increased government regulations which we highlighted in our last market update.
On the technical side, we see even more signals that point to a potential downturn. Some of the more important technical signals we are seeing include:
- If there is more demand – money coming into the markets – the market will likely go up. Attached is a weekly chart of the S&P 500 Index and two money flow indexes. As you can see, the rate of money flowing into stocks has fallen since the beginning of the year, yet the market continues to rise. This is not normal and will be corrected by either additional money flowing into the stock market or by stock prices falling.
- Many emerging markets have fallen 10% in the last two to six weeks.
- The rise and fall of commodity prices. The recent drop in silver prices by 30% over a few days points out that risk is still a factor to be considered. More importantly, the spot rate of lumber has fallen almost 25% since March 21st – a sign of an economic slowdown.
- Consumer staple and health care stocks outperforming other sectors of the market the past few weeks. These two sectors typically outperform toward the end of a bull market cycle.
- There are a few other technical indicators that we see now, but don’t include here. If you would like to discuss these indicators, please call us.
For many of you, it may also be an appropriate time to reduce your exposure to stocks in your 401(k) plans in the same manner as we have in your portfolio at THOR. If you would like us to review your plan, please contact Neal.
Please also welcome Nate Wine to THOR – he just joined us for the summer. Nate is entering his senior year at Ohio Dominican University this fall. He is a finance major with an economics minor. Nate has passed the first level of the CMT exam.
Sincerely,
Your THOR Team
