April 2009

Tail Wagging the Dog

The market has witnessed its biggest rally since 1975, its biggest month, March, since 1991, was up 9.57% for April and yet remains at negative 2.50% for the year; our results are posted on our performance page. Despite the impressive rally, the jury is still out as to whether this meteoric ascent is the start of a new cyclical bull market or merely a dramatic rally seen so often in prolonged bear markets. From a technical standpoint, my primary source (Lowry Research) is still looking for selling pressure to drop a tad more, but if today’s market holds up, we may see that happen in this afternoon’s readings. The theory goes that until the bears have thoroughly exhausted themselves, they still have the ability to claw the market down with the advent of any negative news not already discounted by the market. Given that technical analysis hasn’t worked very well over the past year, however, let’s turn to some thoughts from my favorite fundamental research put out by BCA Research:

• The downturn has passed its peak, and the recession should end by year end.
• Monetary and fiscal policy will remain highly stimulative through 2010.
• US equities should outperform treasuries and cash, but be up modestly versus historical norms.
• Corporate spreads should narrow which should be bullish for high yield bonds.
• The dollar should weaken as confidence returns to the system.

If the above thesis is close is to the mark, it would be my contention that the tail (emerging market equity and debt) should be in position to outperform the dog (US equity and high grade corporate bonds), and with a weakening dollar and a resurging China, gold and basic materials should do just fine as well.

-Joe