October 2011

All Aboard or Not So Fast

Absent Monday's drubbing in the market, the S&P 500 would have recorded it's best month since 1974 as it soared 10.93%. Our numbers are currently posted on the performance page. Does the strong performance in October signal an "all aboard strategy", or is a patient approach still warranted. Unfortunately, rallies of this magnitude have been seen before in bear markets: Oct.-Nov. '08 19%, Nov.-Jan. '09 27%, Jul.-Aug. '02 24%, Oct.-Dec. '02 24% as well as several during the torturous bear market of 1973-1974. To help in getting a sense of where we go from here, I've listed some thoughts of my own as well as my favorite gurus. 

• Lowry was unimpressed by the seventeen percent rally from the October lows, with the exception of last Thursday when demand was added to the equation of reduced supply. A pullback to support on light volume would be positive, but a high volume, supply induced pullback that broke support would have negative implications and suggest a retest of the August- October trading range lows.

• The Bank Credit Analyst is looking for the market to stay range bound, but believes the correction in commodities and gold may well be over, barring a complete global melt down which they feel is unlikely.

• In a Special Report, The Bank put out their thesis on why they think commodity prices are headed higher over the next five to ten years: China capex, resource intensity of Chinese consumer spending (think passenger cars), and Indian urbanization.

• Marc Faber believes that given the reluctance of the Fed to tighten credit before unemployment falls to below seven percent is certain to intensify inflation. His conclusion is that investors will abandon bonds and purchase equities. He also is very positive on gold as long as we continue to have negative real interest rates (in essence you're being paid to store the metal).

• The Bank's China Investment strategy believes that China will avoid a hard landing as the authorities now have room to maneuver given the 9.1% growth in the third quarter despite the severe tightening over the past year.  

The key to the "Efficient Frontier" of investing is to take a balanced approach. The most important dynamic in our investment history is that from January 2002 through September 2011, we have captured 67.5% percent of the market upside, but only 39.7% of the downside (source: Zephyr Associates). Minimizing our losses in a down market plays a key role in outperforming the market over the long term. Please take a look at our historical performance vs the S&P and the impact the swings have had on an initial investment of $100,000: performance page. Despite the market surge that occurred in October, I think it wise to remain diligent and defensive during the highly volatile markets that we've experienced for the past ten years.

-Joe