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2/20/2009 Equities: Retest November Lows As Predicted...Will They Hold?

ARS


Global Equity Markets

In our last two issues of December 31st and January 30th, I indicated that 2009 may have a rough start because bullish sentiment had climbed to levels that, on some indicators, were the highest of the entire bear market. This dictated caution and hinted at the possibility of a re-test of the November 20th lows early in 2009.

Today, equity markets around the world are sinking close to their respective November price lows. The Dow Jones Industrial Average has already exceeded its November lows due to the weakness of the financial and auto stock components.

Internally, the market appears to be building some underlying strength which bodes well for the coming months, however. To date, the number of 52 Week New Lows remains considerably less than occurred in November. Should this condition persist as yet other indices push towards their November price lows, it would indicate the possibility of a bottom.

This week's AAII Sentiment polls witnessed a significant shift towards bearish sentiment. This is also indicative of building fear and the forerunner to a possible market bottom. However, put/call ratios still remain elevated and suggest further downside in the near term.

In looking for a bottom, ideally, we would see a condition of both high levels of bearishness/anxiety coupled with strong market internals. The re-test of the November lows that we are currently experiencing provides a silver lining to an otherwise gloomy situation by allowing us to evaluate the market's internal strength and to judge the prevailing market psychology.

At the present time, caution is still warranted. The possibility that the November lows are violated could create a panic among investors that leads to a rapid plunge as more hope is lost and doubts grow about the government's ability to turn the tide of economic woes.


International Equity Regions
Our portfolios are in a defensive position. Our International Equity model turned positive earlier this month on some short-term market strength but the ensuing market weakness quickly moved us back to a 100% cash position.

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 remains in a defensive position at this time.


Investment Grade Bonds
I noted in our last issue of January 30th that extremely high levels of bullish sentiment in early January indicated a market top and since that time bond prices had been in free-fall across all maturities. Fears of the inflationary implications of the Federal stimulus packages and bailouts have replaced deflationary expectations.

This overbought condition has not yet been cleared and bond prices are likely to continue lower with only brief respites as a safe haven for equity market weaknesses.


High Yield Bonds
Our model is signaling strength in High Yield Market Debt and remains on a BUY. Our aforementioned concern about the equity market necessitates caution and potential weakness in this area, however.


Inflation Hedge / Real Assets
Our Real Assets/Inflation Hedge model is invested in GOLD Bullion.

GOLD Bullion - (GLD) - On a BUY. Speculators might be interested in knowing that the valuations of gold equities (basis XAU) is the lowest we have witnessed in the 25+ years for which we have history. This suggests that once the equity market weakness subsides there could be tremendous potential in this area. However, be forewarned that the risks and volatility of gold stocks is also quite high.

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

Real Estate - Our models rank REITs as a SELL.

 

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