5/23/2006 Equities: Building a Bottom

5/23/2006 Equities: Building a Bottom

Written By: Matthew Xiarhos
Categorized in: NEWSLETTERS

Global Equity Markets

In our last issue of April 26th I warned that market internals were not robust and that the spike in interest rate yields coupled with advancing oil prices might usher in an intermediate-term correction. I further noted that the global equity markets were all overbought on the intermediate-term. In the intervening weeks, little had changed to require any additional commentary.

The broad US equity markets have corrected about 7% on average with regions such as Emerging Markets, LatAm and Asia witnessing declines of between 15-17%.

Fortunately, our Absolute Return Portfolios had 0% exposure to the equity markets during this recent decline.

I had expected that the decline might take some weeks or months to unfold. However, at present, I believe that decline is largely over and that we have begun a bottom building process.

Global Equity Regions

Our Global Equity Allocation Models point to Asia and Japan as the top spots today. However, the process of building a bottom is frequently quite volatile and our trend models are on SELL for all global regions. Accordingly, we will continue to remain in cash, as we have for these past few weeks, until more definite signs of an uptrend are in place.

Equity Style & Sector Trends

As I had suspected, our Equity Style Models rotated to Micro-Cap with Small-Cap Growth in second position. As noted in the previous section, however, we will continue to stand aside until definite uptrends are in place.

Investment Grade Bonds

Models for Investment Grade Bonds both domestically and overseas are mixed with short-term models on BUY yet intermediate-term models remain on SELL. This is common when a market is attempting a reversal. Advisory sentiment and my analysis of the Commitment of Traders Report for T-Bond Futures suggests a bottom is at hand for long-term maturities. The outlook for short-term bonds is not as robust.

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) remain on a SELL for both the short and intermediate-term. If we get a reversal to the upside in equities, as I suspect, these models could soon move to a buy signal. At present, models remain on SELL and we are flat.

Inflation Hedges / Real Assets

GOLD - In our last issue of April 26th, I indicated that I expected an intermediate-term correction of 10-15% over the next couple months. We've had at least that much of a decline in gold stocks in just the past couple weeks! Our trend models remain on a SELL and I think we will continue to work lower. WE ARE FLAT GOLD/GOLD SHARES.

Goldman Sachs Commodity Index (GSCI) - The GSCI (which is heavily weighted to the energy complex) has declined from a very overbought condition as expected. The intermediate-term trend still appears higher and we may reinvest in this area in the coming weeks. WE ARE FLAT THE GCSI TOTAL RETURN.

Real Estate - I noted in March that REITs had become overbought which served as a warning against investment. We've now seen a 7%+ correction which has led to short-term and intermediate-term SELL signals on our trend models. An upside reversal in the broad equity market coupled with a possible rally in bonds would be welcomed relief to REITs and likely find them reassuming leadership among the Real Assets complex. Trend models remain on SELL, however, and we are FLAT.

Alternative Energy -The Wilderhill Clean Energy Index (WCEI) benchmark has declined about 15% since we jettisoned our positions in the tracking ETF (symbol PBW) in late April. This area is now deeply oversold and is likely to provide some good upside potential if the anticipated rally in the equity market unfolds. WE ARE FLAT the WCEI.

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