July 2009

July's Pleasant Surprise

With the market internals showing mixed signals at best, the S&P 500 roared to its best month in over a decade with a gain of 7.56% and now stands at a positive 12.94% for the year. Our results are currently posted on our performance page. Science has proven that a bumble bee can't fly (it only flies because it doesn't know it can't fly), but the market is an art form and can do anything it wants. One explanation for the strong market performance is that the intense deleveraging (reduction of margin purchases) by individuals and institutions is masking the strong internals. In any case, July was a welcome surprise, and in fact selling pressure finally dropped sufficiently on the fourth to give the first buy signal since the July 10th correction low (Lowry). What lies ahead:

• Fundamentals- the recession appears to be ending, inflation risks appear to be low, and with a continued stimulative policy the market should continue to move higher although erratically and at a slower pace than a normal recovery (BCA Research).
• Technicals- insiders are selling, put-call ratio suggests excessive bullishness (contrarian indicator), but selling pressure is coming down and buying pressure is once again rising.

The bottom line is that there is a lot of confusion and mixed signals out there, and so I think the best policy is to ride the wave, but be particularly vigilant for any changes in the fundamental or technical pictures.

-Joe