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Based on Zephyr Associates* analysis for large cap core growth accounts through June of this year, here is how Oristano stacks up: 

• For seven and a half years (out of 200 advisors), #2 in performance and #3 in lowest risk. 
• For five years performance (out of 261 advisors) #1.  
• Year to date performance (out of 312 advisors) #7.

 The market has corrected over seven percent from its August 9th reaction peak, while we are down ~one and a half percent. Based on intermediate signals ( source Lowry) of buying power and selling pressure, it would appear that we are in a correction in the confines of a continuing bull market. Given the oversold condition of the market, a rally should initiate shortly. It will then be a question of the rally’s quality to determine if a new leg up is upon us or if we will start at a lower base point. I’ll have more on this next week.

*Oristano does not know which specific advisers Zephyr Associates used in its performance and risk comparisons. Investors should be aware that other advisers’ portfolios may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the portfolios’ ultimate performance results. While Oristano has a reasonable belief the Zephyr’s analysis methodology is sound, it has not independently verified any of the comparison calculations and cannot confirm their accuracy.

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Despite the magnitude of Fridays decline, the odds of a new leg down appear to be remote. As stated many times, the internals of the market (as computed by Lowry research) are at odds with what would be expected in the early stages of a new bear market. Markets generally rise when buying pressure is strong and selling pressure subsides, and although the market is quite a bit lower than the June rally high, buying pressure is now higher and selling pressure is lower than it was then. With a seven percent rise from the July 2nd low, and with the market running into overhead resistance, last weeks correction was of no surprise. 

The correction may still have to play itself out, but I think we’ll be alright, and would expect a new leg up to be initiated over the short term. If I’m wrong, the hedges should continue to keep us in the game until a new up market arrives.

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Based on the technical statistics that I receive from Lowry everyday it would appear that  the recent rally from the June 8th lows was a result of a lack of supply rather than from aggressive buying, and therefore another test of the May 25th, June 8th low seems likely. On the other hand, and more important, the longer term indicators (based over the past fifty days) are inconsistent with a market that is entering a new bear phase. I am looking for another test and then a resumption of the cyclical bull market that started in March of ‘09.

The tactical moves of increasing our hedges and adding to our gold positions have buffered the latest downdraft rather nicely. I look forward to reducing our hedge positions when I am convinced that a new intermediate leg up is in place.

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At least I got the volatility right, but what about the upward bias. As mentioned in many blogs since the April 23rd peak in the market, I suggested that there was strong evidence pointing to a more than nominal correction in the market. It is down twelve percent from its peak, and I believe we are near a correction bottom. The evidence still supports a correction rather than a top in an ongoing bull market, and the recent downward volatility does nothing to dispel that theory. With the market at extreme oversold levels, I look for a weak opening this morning with some kind of reversal this afternoon. If I’m wrong about correction versus top, I’ve rolled our June puts into September with a strike price about ten percent below the market. Stay tuned.

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The multi-billion dollar bailout of Greece was greeted by a sigh of relief, but what does it say about the euro currency and the possibility of more bailouts to peripheral countries. Given the relative strength of gold recently, it would appear that people are beginning to look at the metal more as a hedge against currencies than merely an inflationary hedge. I think it prudent to add to our already significant position in gold, and I am doing so today with the addition of Newmont Mining (NEM).

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The yuan forwards rose 0.2% last night, reflecting a bet that the currency will rise 2.3% over the next year, and although modest in absolute terms, nevertheless, it is the first such rise since China pegged its currency to the dollar as a result of its anti-crisis policy in July of 2008. According to El-Erian of PIMCO, this could lead to as much as a fifteen percent appreciation over the dollar in the next few years (the yuan appreciated twenty-one percent in the three years prior to July of 2008). I believe the implications could be significant:

• It should help to relieve inflationary fears and allow China to refocus on growth and basic material consumption.
• A strong yuan would also benefit other emerging market countries whose primary export partner is China.
• Most EM sovereign debt would appreciate as their currencies would rise along side the yuan.

 I may be getting ahead of myself, but I think this is a positive trend worth following.

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The market has been frustrating for us lately, as secondary forces have begun to outperform the primary trend that has enabled us to so consistently beat the S&P 500. As our philosophy states, at times we will get out of sync, but we prefer to ignore these short term trends in order to keep the big picture in place. What works for Oristano is a weak dollar, strong Yuan, strong growth in emerging markets and their currencies. What is taking place currently is a strong dollar (Greece remains a problem), tightening of credit in emerging markets (fears of inflation), and an over supply of commodities (possibly the result of over stocking by China). It is my humble opinion that these are short term events. The dollar will certainly weaken again as the problems are resolved either by the EU or the International Monetary Fund; the Yuan will rise to promote domestic spending and reduce the fear of inflation helping China and other emerging markets as well, and commodities will resume their upswing as global demand and a weak dollar reassert themselves.

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Yesterday’s market action was impressive and marked the first 90% upside day (up volume was ninety percent of Up/Down volume) since a similar occurrence (source Lowry) on November 9th, 2009. What is interesting is that both up days occurred approximately one week after similar 90% down days, and although the market consolidated for over a month after the November surge, nevertheless, the bottom was in and eventually a breakout to the upside lead to new market highs confirming the primary trend. Whether yesterdays’ action indicated a sufficiently sold out market that will lead to new highs can only be left to conjecture, the fact that buying pressure jumped by 12 points, and selling pressure dropped by 14 was even more impressive than the November 9th rally. Although the market is now once again overbought on a short term basis, making a pullback probable, the odds that a sustainable bottom has been put in appear to be good. If the market can continue to move higher despite the overbought condition, further evidence that we are in a position for a new leg up would be arguable. Here’s hoping.