Market Commentary for the week of June 1, 2009

Sometimes, portfolio performance is ruined before the first dollar is allocated. That’s because, although the task of portfolio allocation is difficult enough, false objectives and unrealistic expectations sully the endeavor.

The market this year is “flat,” having recovered from a first quarter downward swoon with an incredible surge since March. Are you flat for the year? Or up? Or down, possibly?

A fairer test of portfolio performance is whether one’s methodology accurately portrays a possibility of performance through prudent quantifying of any success probabilities. Rather than being fixated upon an integer that represents performance, one should focus upon objective themes that resonate the characteristics of portfolio identity.

In life, as in investing, there are no norms nor strategies for perfection. One wouldn’t raise children expecting their life performance to adhere to an index or benchmark. Instead, we expect certain tenets and codes of behavior which we expect will lead to the “right path.” We don’t quantify norms by integers, nor should we expect to reproduce with exact certitude any other benchmark, in life or investing.

In addition, the best investment strategies are not impeded by unnecessary emotion. Obviously, subjective review and analysis are part of our makeup. But we don’t label things as success or failure simply because they don’t measure up to some fantasy or ideal.

My work revolves around the search for leadership and momentum, ideally earnings-driven quotients. One might wish otherwise when evaluating equities, but prices tend to anticipate, or respond to, good management and solid balance sheets. Here again, while all data is subject to interpretation, those factors create relative value amongst their peers.

Currently, there exists broader, but shallower, pockets of opportunity for capital gains. The best opportunities may not yet have been invented, secular long-term equities that might trigger market demand and fundamental value. It is no accident that markets ebb and flow based upon psychological evaluation of the opportunity landscape.

Today’s advance/decline data and volatility numbers are showing a redistribution of portfolio potential from bonds to equities. However, the short term push into stocks since March makes them very expensive right now. Of the 100 or so proprietary relative strength quotients I review, most are indicating a pause in their rate of acceleration.

For the time being, I’m focusing my attention on secular earning’s acceleration in Energy, Biotech, Basic Materials, Utilities, and Non-Cyclicals.