4/11/2006 Equities: Intermediate–term outlook warrants caution
- Categorized in: NEWSLETTERS
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April 11, 2006
Global Equity Markets
For many months now, market internals have not been particularly robust. However, until recently there have been few catalysts to undermine the liquidity-driven bull market in equities. The spike in interest rate yields coupled with advancing oil prices may finally usher in an intermediate-term correction. Coupled with these fundamental catalysts, the global equity markets are all overbought on the intermediate-term. Near-term, Friday and Monday's sell-off has created an oversold condition that could lead to a short-term bounce but not the resumption of the uptrend.
With respect to market internals, it is interesting to note that the number of new lows has spiked to fairly high levels following a very modest 1% correction in the broad market. This suggests a lot of underlying weakness in the market. The last time we witnessed this number of new lows nearly coincident with a new high was last September before a fairly significant market correction into October. Global Equity Regions
Our Global Equity Allocation Models point to Asia and Japan as the top spots today. I mentioned in our last report that I was beginning to see strength building in Asia which had been a laggard among the higher growth regions and that it was an area to watch carefully if equities were able to build some upside momentum. Singapore, India and Korea were singled out as the best. Asia has been the best performing market by far in the past two weeks but is very overbought at present.
Equity Style & Sector Trends
On the whole, Mid-caps have performed better recently and our Equity Style Model retains Mid-cap Growth as its recommendation. Small-caps were quite buoyant during the rally but have been hard hit in the recent bout of selling.
Investment Grade Bonds
Models remain on SELL for Investment Grade Bonds both domestically and overseas and have done an excellent job of keeping our portfolios out of the ongoing bear market in bonds. Interest rate yields continue higher across almost all maturities which leads to losses in bond holdings.
Sentiment Models for the Treasury Bond Market show some of the lowest levels of Bulls that I have seen in many, many years. Additionally, the Commitment of Traders Reports for Bonds continues to show that the smart-money Commercial traders are carrying among the largest long position in 30 year Treasury Bonds I have ever seen - a huge bet that long-term interest rates are near a peak! Similarly, the less-sophisticated (and frequently wrong) Large Speculator and Small Trader categories are making substantial bets on a continued decline in bond prices and for interest rates to continue higher. It's time to begin looking for an intermediate-term trend change in bond prices from down to up. We'll wait for the trend models to give us the AOK to buy but forewarned is forearmed. High Yield Bonds
Both Domestic High Yield Bonds and foreign Emerging Market Debt (EMD) are on a SELL for both the short and intermediate-term. They have each declined about 4% since peaking in late February. Their weakness speaks to a growing concern about credit quality. We are flat high yield bonds.
Inflation Hedges / Real Assets
GOLD - After moving to a timely sell signal in early February, our GOLD models gave and equally timely BUY for Bullion and gold shares several weeks ago and gold and gold shares have rallied sharply. Presently, Gold/gold shares are overbought and will at least consolidate recent gains. We are still long gold stocks.
Goldman Sachs Commodity Index (GSCI) - Intermediate- term Model moved to a BUY following our last report two weeks ago. Crude Oil is the key here and it now challenging all time highs. We are long funds that track the GSCI. Real Estate - I noted several weeks ago that REITs had become overbought which served as a warning against investment in REITS. We've now seen a 5% correction which led to a short-term SELL on our trend models. REITs must find support here or risk moving to an intermediate-term SELL as well. We are flat REITs. Alternative Energy - In our last report, I added Alternative Energy to our Real Assets (Inflation hedge) coverage using the Wilderhill Clean Energy Index (WCEI) as a benchmark. A new exchange traded fund that tracks the WCEI , symbol PBW, makes investment in this area possible. My research shows that this benchmark is highly correlated to our Real Assets Composite showing it to be a good investment addition to the other inflation sensitive members of the Real Assets complex. A fundamental shift higher in the demand for crude oil globally coupled with potential supply problems provides a bullish backdrop for renewable sources of energy. As prices within the energy complex go up, I expect to continue to see the WCEI move higher too. Intermediate and Short-term Trend models are on a BUY and we are long PBW. 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.
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