CI Outlook - Archives

July 2009

July 1, 2009

In the last three months the Dow Industrials rallied from 6600 to 8900.  For the last nine weeks they have fluctuated in a 300 point range around 8500.  On the surface this range bound trading could be seen as a consolidation before a further advance.  But, looking below the surface of this price-only analysis reveals a far different picture than the “all clear” signal being emphasized by the well known faces on CNBC.  While the market may well advance from these levels without further consolidation, we are not willing to take that risk with your money.  As you know we have been quick to sell losers and realize outsized gains where appropriate. This defensive stance in the face of improving prices is due to our analysis of the markets internal indicators.  While we normally discuss our investment outlook in terms of fundamental factors such as earnings or economic indicators, technical analysis is the other half of our forecasting tool kit.  Technical analysis methods become especially important during indecisive markets such as the current trendless one.  Presently they project the breakout from this trading range will be down not up.  They predict that without surprisingly good earnings and economic announcements in the next month, the odds of higher stock prices are not good.

Two of the most basic technical indicators we use are volume and breath.  Both should confirm the movement of stock prices for that movement to be considered healthy.  In the case of volume, it should expand as prices increase.  That shows a greater willingness on the part of investors to commit more capital to markets as prices move higher.  Since late May that has not been the case, volume has declined as prices have attempted to move higher.  This is not a sustainable situation.  The other measure of market health, “breath”, is a little more complicated to explain.  In theory as prices rise, the number or stocks rising (closing higher on a daily basis) vs. the number of stocks falling (closing lower) should expand.  This would reflect the expanding inclusion of greater numbers of stocks in the rally, a very healthy sign.  However, since May, this has not been the case.  When adjusted for the effect of interest rates breath has been especially weak as fewer as fewer stocks have participated in the markets rise.  Thus with both volume and breath failing to confirm recently rising prices, we feel the odds of a further advance in prices without a correction is unlikely.  This correction may take the form of a drop in prices or a continuation of the current narrow trading range.  We think a continuation of the current trading range is unlikely and expect a period of lower prices in the near future.  However any drop in prices should be cushioned by the trillions of investment dollars which are currently positioned in short term government bonds and money market funds.  We are positioned to take advantage of this potentially volatile market and will attempt to do so as the summer unfolds.

As always we thank you for your patronage and encourage you to contact us with any questions or comments.  As you know we plan to convert back office operations from RBC to First Clearing on July 17th.  If there is any paperwork in need of your signature we will be mailing it to you shortly. 

 

CJ Brott                       Karen Burns

 


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