4/26/2006 Equities & Inflation plays will take a breather
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April 26, 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.
With respect to market internals, it is interesting to note that we are seeing the very first divergences in the advance-decline line since the start of this bull market. This shows that fewer stocks are participating and that the breadth of the rally is becoming narrower. Such conditions are often an early warning sign of a correction. Global Equity Regions
Our Global Equity Allocation Models point to Asia and Emerging Markets as the top spots today. However, the global equity markets are overbought at present.
Equity Style & Sector Trends
Our domestic equity style models continues to recommend Mid-cap growth as the top equity style box. Small-cap and Micro-cap stocks have eclipsed the mid-cap sector, however, and any continued strength in this area is likely to lead to a switch in our models in the coming months.
Historically, when the NASDAQ Composite has out-performed the broad market one could be fairly certain that an intermediate-term uptrend was in place as it is indicative of an affinity for risk-taking. Conversely, when the NASDAQ Composite under-performed the broad equity market it showed a general risk-aversion. For the past two months, the NASDAQ has under-performed the broad market and, historically, such a long period of under-performance has ushered in an intermediate-term decline. 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. Their weakness speaks to a growing concern about credit quality. We are flat high yield bonds.
Inflation Hedges / Real Assets
GOLD - Our GOLD models gave a timely BUY for Bullion and gold shares at the end of March and gold and gold shares have rallied sharply. I recently jettisoned about 1/2 of our Gold/gold shares the day before the big drop last week and I sold the other 1/2 as the gold market rallied towards its previous highs. I expect an intermediate-term correction of 10-15% over the next couple months. WE ARE FLAT GOLD/GOLD SHARES.
Goldman Sachs Commodity Index (GSCI) - Like gold, I think the GSCI (which is heavily weighted to the energy complex) is very overbought and likely to correct. Our strategy here paralleled our recent moves in gold. WE ARE FLAT THE GCSI TOTAL RETURN. Real Estate - I noted last month 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 has led to a short-term and intermediate-term SELL signals on our trend models. We will now be viewing opportunities for this area from the SHORT side only. Alternative Energy -The Wilderhill Clean Energy Index (WCEI) is our benchmark and a new exchange traded fund that tracks the WCEI , symbol PBW, makes investment in this area possible. Like GOLD and the GSCI, we took profits in this area and now expect a correction in the Real Assets area over the coming months. WE ARE FLAT the WCEI. 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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