Absolute Return Portfolio Management LLC

Some clients have requested greater regularity and frequency in the publishing of the newsletters, which have previously been published largely at times of expected trend changes. Going forward, I will produce a newsletter on the FIRST FRIDAY of every month and intermittently as required by market conditions.

This warning proved prescient as it occurred within less than 0.50% and 3 trading sessions of the ultimate high. Equities have plunged in the intervening weeks wiping out months of gains.

At present, it appears that the lower boundary of the forecast trading range is being established. We are presently 7.5% off the recent highs. This is certainly enough to define the lower boundary of the trading range.

Technically, I am seeing bullish/positive divergences in some breadth indicators suggesting the the bottom process has begun. It may take another few days or a week as the equity markets grind out a bottom.

Sentiment indicators have come off of their wildly excessive levels that led to my warning of several weeks ago. However, yesterday's market plunge is yet to be totally reflected within these data sets. In other words, we find ourselves in bit of a no-man's land with respect to sentiment indicators and the requisite polarization of psychology to the fear camp is not yet established.

If the coming days find that the sentiment indicators begin reflecting a newfound fear and anxiety I will have more certainty that the lower bounds of the trading range have been established. Until that time, caution is still warranted though I suspect that most of the price damage has already occurred.

Investors, 2010 and the years ahead are likely to prove very challenging for over 90% of investment strategies. A new paradigm and a new approach is required. A passive complacency with your "buy-and-hope" approach is unlikely to prove effective in generating adequate returns and offers no hope of downside protection, in our opinion.

If your present investment adviser/broker was not able to successfully navigate 2008's financial Armageddon or the 25% plunge into the March 2009 lows you must seriously question their ability to navigate the complex and chaotic markets your portfolio will certainly face.

Within these reports you have years of real-time analysis of our ability to make successful forecasts of market trends. We offer personalized investment guidance at rates that are more competitive than the average mutual fund expense ratio. Yet, a mutual fund cannot offer personal guidance or ongoing contact directly with the portfolio manager. Call us today at 877-632-7491 if you'd like to learn more about our portfolio management services.

The intermediate-term uptrend of the US Dollar has been successfully established. Using my equally-weighted indexes of global equity market regions (Asia, Emerging Markets, Europe, Japan and Latin America now favors domestic investments for US-based investors.

The performance of International investments is driven by both local market performance and currency changes relative to the US Dollar (USD). Strength in the USD translates into currency losses for US-based investors and has the effect of reducing the performance of overseas investments.

In the last issue preceding the market peak I noted "a movement back to the safety of large-caps, particularly the value segment, which typically coincides with market tops." This illustrates the value of a diverse multifaceted analytical approach as equity style analysis is unrelated to my oft-mentioned sentiment and breadth studies.

The focus will likely be on Small and Mid Cap Value stocks once the bottom of the trading range has been successfully established, This year will likely be similar to the 2004 experience which involved a multi-quarter trading range following 2003's huge gains. In 2004, value stocks provided the best performance during the gut-wrenching churning the markets experienced that year. I suspect that 2010 may have a similar outcome following 2009's gains.

Presently, Small and Mid Cap stocks are reflecting the general market weakness which is to be expected. However, as a bottom develops I expect that the value axis of these two segments will resume their leadership characteristics as investors once again upgrade their risk exposure.

High Grade Corporate and International Bonds issued a SELL signal in December. International Bonds have moved into an intermediate-term downtrend due to the strength of the US Dollar.

Domestic Bonds are a mixed bag with ultra short-term maturities (<1 year) still flat and reflecting tremendous government liquidity intervention. Short-term (1-3 year) Intermediate-term (3-7 year) issues have become a safe haven from the recent equity market weakness. Long-term maturities have improved but still remain in an intermediate-term downtrend.

Our High Yield Bond model is on a BUY. Whether they can remain so as the equity markets, to which they are highly correlated, grind out a bottom remains to be seen. Given last year's gains, it seems unlikely that excess gains will be found in this area.

COMMODITIES, like most risk assets, plunged over the past few weeks and the furtive strength I noted in the last issue was completely upended. At present there is a growing possibility that our trend models will switch to a intermediate-term downtrend for this area. This seems to be reflecting a strong deflationary undercurrent and bodes well for bonds.

REAL ESTATE INVESTMENT TRUSTS (REITs) enjoyed a good period of performance off the March 2009 lows. Since year-end, however, momentum has slowed notably being exacerbated by the recent plunge in risk assets. Fundamentals certainly don't support continued gains in this area given excess supply and as the government's supportive liquidity campaigns are reeled in over the coming quarters.

Overall, it appears that foreign currencies have peaked and the US Dollar is working on building a prolonged uptrend. As noted in the International Equities section, the intermediate-term trend of the USD is still defined as down so I need to see a little more strength before committing to the long of the USD.

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