Market Wrap - week ending 7/19/2013

Below is a client email alert that was sent earlier today ...

Hello everyone.   A quick update on your Resnn portfolio …

CURRENT MARKET EXPOSURE: 110%

CASH POSITION: 0%

Margin / Leverage use: 10%

For those of you who have opted out of margin use, your account is fully invested (100%) in the market.

This week the market continued its’ strong resilience and as a result (on Monday) we moved all margin accounts onto margin, albeit only 10%.  As I have mentioned in the past, using leverage can have very powerful results for your account (both good and bad), so we use it very cautiously and are quick to exit margin at the first sign of trouble.   Remember that our primary purpose is to protect your capital, so the use of leverage is something that we are very careful to apply.

For the week, the S&P 500 climbed 0.7%, and the Nasdaq slipped 0.3%.  All in all, most of the week was spent consolidating the recent run up in prices … more settling down.  After such a sharp upward movement, I am very happy to see more calming action, vs. what we usually see after a strong run up … which is an equally strong decline in price.  This ‘quieting down’ shows that investors are interested in keeping their money invested in the  market for the time being. 

This is further evident by observing the disproportionate rise in price of smaller company stocks vs. the safer “blue chips”.  The Russell 2000 advanced 1.59% this week.  When ‘small caps’ move ahead of the rest of the market as they have for a few weeks now, it usually signifies investor’s appetite for riskier investments.  Smaller companies are much more prone to wild movements and news driven events, so seeing this sector outperform the larger companies can be a bullish indicator in its’ self, signifying a healthy market and higher prices to come.

Another bullish indicator this week is the markets’ continued resilience of news.  This week there were a slew of technology company disappointing earnings releases (Microsoft, Google, Dell and Intel to name a few) that beat down the individual company stock’s price but in a more finicky market could have dropped the entire market and did not.  All week long, various representatives of the Federal Reserve distributed conflicting information about the eventual slow down of its’ bond purchasing program which should have caused the market to get spooked and drop, none of which occurred. 

One item that continues to concern me and bears watching is the sharp rise in oil prices.  Today WTI crude oil closed at an almost all time high at $109.00 a barrel.  On July 1^st the price was $96.00.  Most of this rise in price is due to panic set in by the instability in Egypt and any stability there could send it right back to the $90s in a hurry.  Yet, in the mean time, this ultimately is going to result in much higher gas prices which will dramatically impact the economy … and potentially the market. 

The economy is driven almost entirely by consumer spending (approximately 70%) and when gas prices (and other essential purchases) rise, people ultimately spend less on non essential items.  The price of gas has a huge impact on the overall health of our economy and something that concerns me for the latter part of this year.  It will be interesting to watch how this plays out, but it certainly is something I’m not excited to be watching.

For now all of our data point to rising prices ahead, and we are positioned nicely if that occurs.  As you know, our model is entirely data driven.  The decision to be invested in the market is driven by the strength (or lack therefore) of the underlying stocks that we analyze.  As you know, my personal feelings and interpretations have no bearing on the decision process.  Although I mention a number of hypotheticals and news items in these weekly emails, it is only the reaction of the market to these various issues that we care about.  What looks like bad news to you or me really means nothing if the market sloughs it off and keeps rising and that is what our analysis is geared to discover … removing the opinion and emotion and just using the price strength or weakness to identify whether it is safe to be invested at any moment.

For now, the uptrend continues and we hold on for the ride.

May you have a peaceful weekend.