August 2010

The Markets

July was the opposite of
May and by some, gave a  Dow Theory buy signal. Both the
Industrials and Transportations are now above their 50 and 200
day  moving averages. Both are below their 200 week MA which
continues lower prices are still a possibility.

Prices broke above their declining trend lines but are now below their
rising trend lines. This implies possible short term rising prices and
lower long term prices stay below them. The percent of NYSE stocks
above their 200 day moving averages is now 58%, 23% above where it was
in last month.

The daily new 52 week highs and lows have more new highs now. The
weekly highs and lows have 3 weeks of highs now on the NYSE but not the
NASDAQ. This not a healthy market but its likely to have an upward bias
for now. The markets remain distorted. Trade cautiously or wait. Be
cautious and defensive for now. Review your shopping list and be ready
to trade. If you don’t, a good percentage of cash is good.
It’s still early to judge the market’s direction
for the year but we’ll go with the cautious side for
now.    

Other Opinions
Dow
Theory Forecasts says the Dow Theory is still bearish and they would
recommend 25% to 30% cash.
Dow Theory Letters says we  had a
confirmed buy signal  with the highs of the Industrials and
Transportations of this week. They stay in 50% cash and  50%
gold they don’t t like the current risks or future taxes.

Wall Street has never met an investment demand they couldn’t
over saturate and they keep coming up with products to appeal to the
greedy even if it sounds to good to be true.

Step up bonds are showing
up offering, as an example, an AA– rating offering 4% until
2013, 6% until 2017 and 10% until 2020 when it matures. It can be
called any time after July 2013. You can buy a BBB– rated Dow
Chemical at around 7.5% until 2022.

The step yields being offered seem unusual. Wall Street
doesn’t offer higher yields unless the market forces it. If
the markets were functioning normally, these probably
wouldn’t be offered. Another possibility is they offer high
rates to be able to sell them today and they expect to call them before
them before they start paying the higher rates. They seem to good to be
true so be cautious in spite of the AA-rating. Look to buy them for the
lower yields, if they fit your objectives and not in expectation of
getting the high yields.

Sector and Morningstar Comments:
There were 7% or more  gains in each sector last month except
for healthcare and consumer discreationary. but risk remains popular.
Large caps continue to underperform  small and mid caps. The
value is big cap; the action is small/mid cap.  

Investment
Notes:                                 
 
The markets apparently haven’t finished the year long rally
in long term down trend but we still doubt any new highs for the year.
The bias of the market is up but IBD’s has
accumulation/distribution of E-heavy distribution for the NYSE,
S&P 500 and Industrials. The Dow could rally could go to the
10,700-11,100 area but it’s likely to stop there. Large cap
stocks should be performing better if we were to have a new big upward
move.

Today’s 200 point move is probably 401(k) money coming in
into the market like it does in the first 2 or 3 days of each month.
Earnings season has kept the markets active for now. We think the
earnings won’t stop the market from going lower because the
multiple investors are willing to pay for earnings will be lower.
Higher earnings may mean the market goes down less.  
 
      
We’re still looking at growing equity income values. Rates
may stay down so we’re looking at preferreds, maybe the fixed
time ETFs and a few gold stocks. Cash of 25%-30%. It’s okay
to be mostly out of the market if you’re
uncomfortable. 

Heard in the Village

Target date funds became a topic this month in the village when the
July 24– 25, 2010 issue of the Wall Street Journal had an
article on them.
Some article phrases were:
    “…"target
date” funds aim to take the complexity out of investing for
retirement,"

    “Target-date funds are
designed for investors who hope to retire around a certain date-say
2025-and don’t want to fuss with changing their allocations
of stocks, bonds and cash by themselves. Instead, the fund becomes more
conservative as the retirement date nears.”

    “Because the asset allocations
of individual target funds can vary widely, it’s important to
pick a fund family whose asset mix closely resembles your risk
tolerance.”

The villagers were upset because they felt that the article was leading
people into a questionable product. Contrary to Wall Street marketing,
villagers feel Investors DO HAVE TO DO SOME WORK OR MONOTORING if they
want to preserve and grow assets. They have to have some awareness and
responsibility for their investments or they deserve what they get in
returns.  Some nice formula or allocation will not prevent
losses when the markets go down.

Investors need to adjust allocations to the market’s
direction as it progresses through its market and economic
cycle. Wall Street and Washington think the economic cycle can
be contained by their policies or hedges. 2008 proved that arrogant
thought worthless but the financial world still tries to perpetuate it.
The market behaves differently as it reacts to changing economic,
political, geopolitical and other events. Rising market are times to
profit; falling market times to preserve and protect your gains.
Different strategies are needed to achieve both.

Their point was it is the risks in the market that need to be
considered. The market doesn’t  care what investors
risk tolerances are, age or when they retire. Wall Street is leading
people to believe investing doesn’t need watching because
they can do it for them or investors don’t want to do the
work required to protect and grow their assets anyway.Target date funds
can work well in up markets but don’t when it meets up with
the harsh realities of bad events. The villagers knew it was watching
their investments that would  grow their assets and not some
product created to give the illusion of safety.