10/22/2008 Uptick in Investor Sentiment Signals Further Declines Ahead

10/22/2008 Uptick in Investor Sentiment Signals Further Declines Ahead

Written By: Matthew Xiarhos
Categorized in: NEWSLETTERS

A Message for Absolute Return Portfolio Management clients:

I am happy to report that our model portfolios had no equity exposure during the market collapse of the past few weeks which have witnessed 20%+ losses in both the domestic S&P 500 of large capitalization stocks and the Dow Jones World Indexes and a nearly 30% in the Russell 2000 index of small capitalization stocks.

Global Equity Markets

The most remarkable development in the past week was an INCREASE in bullish sentiment among those polled in the American Association of Individual Investors (AAII) Sentiment Survey. Such reckless and wanton disregard for the current state of the financial crisis speaks to both complete ignorance on the part of the public to understand the gravity of the present situation and the assumption by the public that the market has, in fact, hit bottom and they can successfully identify same.

The ONLY consistent thing I have every seen on Wall Street is that the public is nearly always wrong. When high levels of bullishness and optimism are reached you can safely assume the top is nigh at hand and the risks are high. Today, what we should see it outright panic on the part of the public. Such pessimism and bearishness would signal a bottom. Yet, as indicated, the public actually became more bullish and optimistic after a 20%+ decline. Not only is this a rare an historic event, but it clearly signals that the bottom, and the requisite "catharsis", is still in the future.

On the positive side, market internals have seemingly improved. The number of 52 Week New Lows have dried up during this recent consolidation of the past week. The true test will come when/if the markets re-test the lows of October 10th. At that time, if the number of new lows remains contained AND sentiment surveys show heightened fear and pessimism we will have the prerequisite factors for a market bottom.

Until then, the markets should be viewed as highly risky. The possibility of a further market collapse due to the domino effect of the present credit crisis still looms large and probable.

While it is possible that we could see a sharp rally from this very oversold condition it should be viewed with caution and I expect, at least, a re-test of this month's lows (if not lower lows) before any intermediate-term rally would develop a foothold.

International Equity Regions

Our portfolios remain in a defensive position. The recent strength in the US Dollar is undermining returns of overseas investments for US-based investors. We remain 100% in short-term government bonds.

ASIA (ex-Japan) -

EMERGING MARKETS -

EURO -

JAPAN -

LATIN AMERICA (LatAm) -

USA -
(see Equity Style section for specifics)

Equity Style & Sector Trends

Our Domestic Equity Model continue in a defensive position at this time and our allocation to domestic equities remains 100% in short-term government bonds.

Investment Grade Bonds

Our Investment Grade Bond model remains on a BUY though even high grade credits have not been immune from the present credit contagion and have fared poorly of late, as far as bond go.

High Yield Bonds

Our models remain on a SELL for the High Yield Debt Markets and are invested 100% in short-term government bonds.

We expect the default rate on high-yield paper to move to double-digits over the next 12-18 months. The credit crisis most severely affects issuers with poor credit histories and high risk. These are the "sub-prime borrowers" of the corporate bond market and will face the greatest hurdles with respect to acquiring financing or refinancing. However, in time, this area will provide some handsome yields when a "return of capital" becomes more probable...

Inflation Hedge / Real Assets

Our Real Assets/Inflation Hedge model remains 100% invested in short-term government bonds. There is little chance that the Commodity or Gold segments would be purchased in the near-term.

GOLD Bullion - (GLD) - On a SELL.

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

Real Estate - Our models rank REIT's as a SELL.

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.

Absolute Return Portfolio Management LLC provides absolute return oriented portfolio management and institutional research on global macro trends including equity style rotation, global regional equity trends, short-selling and market neutral strategies as well as fixed income strategies. Contact us for information on account minimums and institutional research offerings.

These reports express our opinions and suggestions, provided only as a supplement to your own further research and decisions. We take care to assure accuracy of contents but accuracy is not guaranteed. Past performance does not imply future results. The publisher shall have no liability of whatever nature in respect of any claim, damages, loss or expense arising out of or in connection with the reliance by you on the contents of our website, any promotion, published material, alert or update. ALL RIGHTS RESERVED.