Market Commentary for the week of May 11, 2009

Not too early.
Early signs point to a “beginning of the beginning” continuum in stock price rebounds. Although it is too soon to pinpoint, in hindsight, where we “hit bottom,” actions in sector trends and equity pricing seem to indicate a widening of participation in short upside cycles. Clearly, the magnitude of downside velocity is abating, while the uptrend breadth of participation is magnifying. As I have previously cautioned, bottom-fishing is dangerous. But value exists in almost every region, every sector, all equities. Adherence to price/earnings metrics as a barometer of future performance, particularly where earnings are accelerating, is solid early-evaluation technique.

Within the framework of long-term secular motion, we are starting to see upside momentum confirmed in Biotech, Technology, Telecom, and Consumer Staples. Each of these uptrends is the “initiation of an uptrend,” not necessarily the trend itself. But in a market replete with bad news, even the origins of uptrends are positive news.

It might still be too soon to allocate a “full position” to any equity or to round-out a total asset allocation program, but I am starting to see the potential for moving cash or fixed income assets into larger capital gains potential in equities.

One positive we glean from our data is the March-April period during which prices, news, and psychology bottomed-out. Since that time, upside magnitude has been strong.

Use your science.
In the world of quantitative statistics, these upside magnitudes create inverse probabilities of performance. Therefore, as each short cycle matures, the potential for profit-taking and pullbacks increases. I would be careful about chasing equities here, and prefer, instead, to enter the market at an appropriate accumulation juncture on the next go around. The good news? I expect the lows within the bear trend to begin rising, indicating a turnaround into “bull” territory.

Clients may have recognized a significant reduction in equity exposure during the past two years. This has enabled us to mitigate the impact of an “equity-only” bear market. Fixed income performance has been somewhat disappointing, not so much because of credit risk or maturity scales, but because the liquidity/credit crisis sapped all buyers out of the market, leaving no one on the other side of the trade to make a bid. Prices seemed to fall through the floor as a result, but have rebounded recently as stimulus and enthusiasm have returned, if even modestly.

Fish in a barrel?
Global trends mirror the U.S., reversing sizeable deterioration into something akin to a broader early-stage accumulation pattern. In fact, our quarterly equity research contained more non-U.S. companies for review than any quarter in the last 3 years. I expect those quotients of distribution to remain constant for several years.

Infrastructure, Pharmaceuticals, and Basic Materials lead the global charge, currently. I expect energy companies to join in soon.

Going forward, my efforts will be to rebalance portfolio potential without increasing any appreciable risk. Our objectives are to mirror leading trends, avoid laggards, and to broaden upside possibilities through prudent use of our momentum models.