Market Commentary for the week of September 12, 2011

Bring it down.

September has been a wild ride for global financial markets, and October is expected to bring more of the same.  On the horizon is a key inflection point at which portfolio allocation might either protect or bury any portfolios.

As global economic recovery sputters, there is a new urgency about either continuing on a portfolio path of growth, or reverting altogether to a default cash position.

Within each scenario, however, is a psychological uneasiness that borders on shock and awe.  It is much more difficult to manage client’s downside risk appropriately, than to pick winners when all stocks are rising.  It would be better to endure slow torture than to be a strategist for global mutual funds, at present.

Ever since the last manic decline in 2008 investors have suffered from an “all or nothing” passion which seems to spark panic or euphoria with every tick of the averages.  In reality, though, they shudder at the notion of one more cataclysmic decline.

Market volatility, as a result, has accelerated.  Downswings, and upswings, during the last month took on epic proportions, sometimes gyrating 4 percent in a day, and aggregating week by week to near double-digit levels.  Unfortunately, the integers look to be getting worse, not better.  Economic and market woes are pushing sentiment and relative strength data downward.

Crossroad.

While the numbers on a daily basis occupy most of investor’s attention, it is critical to realize that the overriding secular trend is still down, and that cyclical rallies this summer have all occurred within that backdrop.  Oversold, bear market rallies are sucker plays that hold up nicely for a week or two, but erode under the weight of previous owners looking to get out.

It is also quite apparent that the kind of breadth required to move markets upward just isn’t going to happen anytime soon.  Instead, upticks are limited to defensive growth companies, while sector allocation by speculators is limited to gold, currencies, or tangible assets.  As a result, 80% or more of my equity responses are to the downside, with nominal refuge being offered in basic materials, healthcare, or technology.

As if these data aren’t enough, exogenous overlays weigh heavily upon any potential exuberance the markets might sustain.  In the United States, we are about to begin the race for a new presidential election, while in Europe the issues of debt sovereignty, terrorism and domestic fiscal policy occupy the spotlight.

It seems obvious that, despite short rallies’ attempts to move the needle, there are few compelling reasons to make equities the only choice for portfolio appreciation at this juncture.  By raising cash levels in our balanced accounts, we have averted the volatility conundrum for most “long only” investors, and are actually ahead (in absolute and relative terms) for the year.  That’s not saying much, because the clay we have been given to work with is contaminated and contracting.

I look for aborted attempts, still, to drive valuation and sentiment ahead, but with a predictable pratfall likely, nonetheless.  While the “are we or aren’t we” debate is likely to heat up, the key turnaround inflection point is months down the road.