Lane Asset Management Stock Market Commentary August 2010

8/9/2019 Lane Asset Management Stock Market Commentary August 2010

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The Ability to React vs. The Abil-

ity to Predict

Following steep declines of about 8% and 5% in

May and June, respectively, July was a stellar

month for the S&P 500, posting about a 7% re-

turn, the best monthly result in a year. Yet, de-

spite being up over 8% in mid-April, the S&P was

basically flat for the first seven months of the

year, Since it is not likely that the true econ-

omy, valued on a discounted basis by the stock

market, really gyrated in value to this extent,

what explains this volatility? Even more impor-

tant, how does one invest in this environment?

In a nutshell, the market is driven by two primary

forces: publication of corporate earnings and

economic reports, and fear/greed as markets be-

come (seemingly) overbought/oversold, respec-

tively.

On the economic front, at the risk of oversimpli-

fying, there have been two competing messages:

A deteriorating economy in the U.S. with per-

sistently high unemployment and a growing

fear of deflation (which would exacerbate un-

employment if it were to occur); and

Corporate earnings and revenue reports that,

on average, have been beating expectations

along with pronouncements by the Fed that

they will aggressively address further setbacks

in the economy, especially deflation.

Whats important to remember here is that the

stock market and the U.S. economy, while related,

are two different things. First, although the im-

pact of the U.S. economy is felt throughout the

world, it represents only about 25% of the

worlds economy. Second, some 40% of profits of

S&P 500 companies derives from overseas.

So, from an equity investing standpoint, a focus on

market segments that are expected to benefit

from above average growth are going to be the

most successful. Geographically speaking, there is

wide-spread agreement at the moment that that

means the emerging markets of Latin America

and Asia/Pacific (excluding Japan).

Second, its hard to say exactly when fear or

greed will take control of the market and to what

extent. The degree with which it takes control is

usually a function of the length of time the oppo-

site influence was in control (see page 3 for visual

evidence).

Lets back up a few steps. The worlds economy is

a big ship. It takes a lot to change its pace of

growth and the rate of change in the underlying

economy is usually slow. So, when the marketmoves faster than the underlying economy, fear

and greed take over. At that point, the market

becomes less rational (that is, less based on the

fundamentals) and is brought back to its longer

term trend or, more likely, overshoots that trend

by emotional forces triggered by fear or greed.

So, where does this leave us with regard to in-

Stock Market Commentary

August 4, 2010 Lane Asset Management

Many investment profes-

sionals and economists,

not to mention the Fed-

eral Reserve, are predict-

ing slow growth for the

next 6-36 months, if not a

downright double-dip re-

cession. Leading econo-

mists are now discussing

an increasing potential for

deflation. Yet, the S&P

had its best month in a

year during July.

Investing in such an envi-

ronment can be nerve

racking, to say the least.

In this Commentary, I of-

fer one way to try to meet

this challenge.

As always, I welcome your

comments and sugges-

tions.

Ed Lane

vestment strategy. Here are my thoughts:

It is important to have a perspective on the

fundamental direction of the worlds major

economies in order to have a framework to

inform investment decisions. While analysts

can disagree on what that direction is. My

own view is that the U.S. economy is going to

struggle as long as the political environment

remains so deadlocked. Emerging economies

in Latin America and Asia/Pacific (ex Japan) will

drive global growth. Candidly, I am less clear

about the relative contribution from Europe.

Technical analysis of markets, expressed

through momentum indicators, offers one of

the best opportunities to obtain relative out-

performance by reacting. Technical analysis

must be considered within the context of an

investors risk tolerance and investment time

frame. Assuming an allocation to large cap eq-

uities represented by the S&P 500, the charts

on pages 2 and 3 suggest the potential for

short term gains and a more clouded picture

for the longer term. The flat lining of the

moving averages in each chart present a more

difficult picture to interpret.

Technical analysis is not perfect and provides

no guarantee of performance. Nor does one

who follows this investment strategy as, in all

honesty, I can attest.


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The S&P 500 and the MSCI Emerging Markets indexes are unmanaged indexes which cannot be invested into directly. Past performance is no guarantee of future results.

Page 2Lane Asset Management

With both the 75and 150-day moving averages flattening out from a downward direction, the hint is to the upside. This is

confirmed by the MACD which has been positive since early July. At this point, the index has been basically flat for the year

and within a 20% trading range for 10 months. With the moving averages showing a lack of direction and a positive tilt from

the MACD (which has done a good job exposing short term investing opportunities), those with risk asset exposure should

remain invested but be sensitive to a potential pull-back. The yellow flag is out.

S&P 500 Index


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Contrary to the short term daily chart of the S&P index on the preceding page, the longer term moving averages in this 15-

year weekly chart show both a loss of upward momentum and a confirming signal by the MACD. Investors that rely on the

longer term chart should see this as a yellow flag. In light of the somewhat more positive short term momentum, the longer

term chart should not be seen as a signal to exit the market. Rather, new risk positions should be avoided or entered into ona selective basis. While no system is perfect, from a technical perspective, the longer term view of the S&P is in a precari-

ous position. Couple that with wide spread opinion about a slowing U.S. economy in the second half of 2010 and aggressive

risk management is advised.

S&P 500 Index


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The S&P 500 and the MSCI Emerging Markets indexes are unmanaged indexes which cannot be invested into directly. Past performance is no guarantee of future

results.


Like the comparable daily chart of the S&P 500 index, moving averages for the emerging markets (EM) index have flattened

out from a (slight) downward direction, while the MACD continues the upward momentum begun in mid-June. Here again,

the index has been traveling in a relatively narrow band for almost a year. As with the S&P 500, the weakness of the moving

averages mixed with the positive tilt from the MACD, should leave investors comfortable holding current investments but

prepared for a downdraft as the index gets closer to the resistance line at 1000. Selectivity with EM investments is advised

and the yellow flag is out.

Morgan Stanley Emerging Market Index


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This 15-year chart for the EM index shows a pattern similar to the comparable chart for the S&P 500 on page 3, and the inter-

pretation is basically the same. In this case, the moving averages are slightly positive while the MACD is clearly negative.

One notable difference between the two is the economic environment in emerging markets which also informs the invest-

ment decision. In the case of EM, the economic outlook is considerably more positive than for the U.S. As a consequence,

while the short term outlook remains neutral to positive, I would suggest treating the message of this chart as a cautionary

note to hold status quo until a more clear signal emerges.

Morgan Stanley Emerging Market Index


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The gold and U.S. dollar indexes are unmanaged indexes which cannot be invested into directly. Past performance is no guarantee of future results.


For the last 20 years, the price of gold has been closely inversely correlated with the value of the dollar (measured in this in-

dex against currencies of selected developed economies). In 2010, that pattern seemed to break as both gold and the dollar

have advanced. Since March 2009, the dollar has been quite volatile and has now resumed a downward trajectory while gold

has resumed advancing after a recent short term decline. Investors in gold should be prepared for pullbacks, such as oc-

curred in 2008, if for no other reason than profit-taking. Depending on conditions at the time, any pullback over 10% could

represent a wonderful buying opportunity, especially if gold resumes its positive momentum while the dollar continues to

fall.

Gold


7/8

The iShares Barclays 7-10 Year Treasury bond ETF prospectus can be found at www.us.ishares.com.


Reflecting the flight to safety as investors seek the safety of U.S. Treasury bonds, and also reflecting the corresponding de-

cline in U.S. Treasury bond rates over, at least, the last 20 years, this exchange-traded fund holding 7-10 year Treasury bonds

has been on a slow but steady upward climb as indicated by both the moving average and the MACD. Recent Fed announce-

ments support the prospect of low or lower interest rates for at least the balance of the year.

Funds of this type appear to be a safe haven for now, but will be damaged if and when U.S. Treasury rates reverse their down-

ward trend as they did sharply in the first half of 2009 (and are expected to do so again when the U.S. embarks on a path of

monetary tightening).

7-10 Year Treasury Bond


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Lane Asset Management is a Registered Investment Advisor with the

States of NY, CT and NJ. Advisory services are only offered to clients

or prospective clients where Lane Asset Management and its represen-

tatives are properly licensed or exempted.

No advice may be rendered by Lane Asset Management unless a client

service agreement is in place.

Investing involves risk including loss of principal. Investing in interna-

tional and Emerging Markets may entail additional risks such as cur-

rency fluctuation and political instability. Investing in small-cap stocks

includes specific risks such as greater volatility and potentially less li-

quidity. Small-cap stocks may be subject to higher degree of risk than

more established companies securities. The illiquidity of the small-cap

market may adversely affect the value of these investments.

Investors should consider the investment objectives, risks, and charges

and expenses of mutual funds and exchange-traded funds carefully for a

full background on the possibility that a more suitable securities trans-

action may exist. The prospectus contains this and other information. A

prospectus for all funds is available from Lane Asset Management or

your financial advisor and should be read carefully before investing.

Note that indexes cannot be invested in directly and their performance

may or may not correspond to securities intended to represent these

sectors.

Investors should carefully review their financial situation, making sure

their cash flow needs for the next 3-5 years are secure with a margin

for error. Beyond that, the degree of risk taken in a portfolio should be

commensurate with ones overall risk tolerance and financial objectives.

The charts and comments are only the authors view of market activity

and arent recommendations to buy or sell any security. Market sectors

Page 8 Lane Asset Management

Disclosures

Periodically, I will prepare a Commentary focusing on a specific investment issue.

Please let me know if there is one of interest to you. As always, I appreciate your feed-

back and look forward to addressing any questions you may have. You can find me at:www.LaneAssetManagement.com

[email protected]

Edward Lane

Lane Asset Management

P.O. Box 666

Stone Ridge, NY 12484

and related exchanged-traded and closed-end funds are selected based on his opinion

as to their usefulness in providing the viewer a comprehensive summary of market

conditions for the featured period. Chart annotations arent predictive of any future

market action rather they only demonstrate the authors opinion as to a range of pos-

sibilities going forward. All material presented herein is believed to be reliable but its

accuracy cannot be guaranteed. The information contained herein (including historical

prices or values) has been obtained from sources that Lane Asset Management (LAM)considers to be reliable; however, LAM makes no representation as to, or accepts any

responsibility or liability for, the accuracy or completeness of the information con-

tained herein or any decision made or action taken by you or any third party in reli-

ance upon the data. Some results are derived using historical estimations from available

data. Investment recommendations may change without notice and readers are urged

to check with tax advisors before making any investment decisions. Opinions ex-

pressed in these reports may change without prior notice. This memorandum is based

on information available to the public. No representation is made that it is accurate or

complete. This memorandum is not an offer to buy or sell or a solicitation of an offer

to buy or sell the securities mentioned. The investments discussed or recommended in

this report may be unsuitable for investors depending on their specific investment ob-

jectives and financial position. The price or value of the investments to which this re-

port relates, either directly or indirectly, may fall or rise against the interest of inves-

tors. All prices and yields contained in this report are subject to change without notice.

This information is intended for illustrative purposes only. PAST PERFORMANCE

DOES NOT GUARANTEE FUTURE RESULTS.
http://www.lanefinancialmanagement.com/http://www.lanefinancialmanagement.com/mailto:[email protected]:[email protected]:[email protected]://www.lanefinancialmanagement.com/

Lane Asset Management Stock Market Commentary August 2010

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