du Pasquier Asset Management

Arlington Econometrics Weekly Market Commentary for the week of August 3, 2009

Politics and sheer willpower combined to inch the markets higher last week.  The absence of something negative was simply enough to get “sideliners” interested in value hunting, and for once (and a little bit) it paid off.

The most combustible elements of the equities markets took a short hiatus, and could best be described as resting at arm’s length from it all.

What’s going on?  In short, earnings weren’t as poor as expected, politics took a break from occupying the news cycle, and most global investors hunkered down to assess the successful first month of the new quarter.

As a cessation of negative news might now be interpreted as the underpinnings of a cycle reversal, the only question is whether any negative news might throw cold water on the gains thus far grudgingly won.

For example, the Federal Reserve Chairman commented that he sees “positives” emanating from the bailout activity, as well as a slowdown in the magnitude of cycle decline from the bear market and the economy.  His assessment is made (hopefully) from an unbiased point of view, but served to attract investors to the market, capital expenditures from corporations, and some stimulus to the housing market.  All this as investors gain a modicum of confidence in the potential for an economic turnaround later in the year. 

Certain barometers in my work are offering corresponding conclusions, but with a note of caution.  While the short-term relative strength (RSI) numbers are moving higher, they are coalescing around upside resistance points which might be problematic in the near-term.  Indeed, before I am willing to anoint the new bull phase, I expect to see some profit-taking from the June-July rally, bringing RSI calculations down to a more manageable level.  Recall, that most linear upside rallies (like the kind we are in) are usually met with mirror-like linear capitulations.  Buy and hold is definitely not the prudent strategy today.

The effectiveness of one’s portfolio strategy in the near-term will depend upon nimble equity-picking and short-term, high yield fixed income opportunity.  At least, that is, until a real bull market takes hold and sector weightings take on a new significance.

I mention this because new clients, as well as existing ones, might be noticing more volatility and “exchanges” in their accounts.  Traction, these days, means a short-term head start.

While my methodology always focuses upon long-term, top-down oriented themes, many of those data lay dormant in the short-term.  The underpinnings of my long-term analysis remain as I have previously written:  the depletion of natural resources, an age of technological discovery and interconnectedness, healthcare and related demographics, as well as social and moral governance of institutions such as financial, educational and infrastructure.  Unfortunately, the consumer-led paradigm of traditional “front-end” bull cycles is nowhere on my radar, thus forcing me to underweight Cyclicals, Non-Cyclicals, and Financials.

There is no “truth” to investment strategies, only points-of-view.  During tumultuous times it is imperative to modulate one’s investment methodology to reflect the changes in data, not simply to try to place square pegs in round holes.

Last week offered a little something for everyone, but be mindful of the cyclicality in financial markets.  Try not to ride the downdrafts as vigorously as you search for the upswing.

Wall Street is coming at you again, with extreme prejudice.  Have you noticed that recent television commercials for financial services (banks, brokerage, insurance) contain one or more of the following:  a young child (most likely a daughter); an elderly couple walking arm-in-arm; a beach scene; a skyscraper.  These subliminal tugs at your heart are designed to convey trustworthiness, strength, compassion….this from the same firms that almost broke your retirement one year ago.  Just asking?

Scotty C. George

(212) 624-1147

www.dupasco.com

Arlington Econometrics is a quantitative market tool.  Utilizing proprietary algorithmic equations, Arlington offers solutions for market-timing, asset allocation, and macro economic analysis.  Arlington Econometrics’ database spans over forty market bourses, and includes over 70,000 financial and statistical instruments.  Using historical time-series measurements, Arlington Econometrics optimizes the analytical process and forecasting coefficients to make economic forecasting more objective. 

The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and it accuracy cannot be guaranteed. It is intended for private informational purposes only. Any opinions expressed are subject to change without notice. Du Pasquier Asset Management and its affiliated companies and/or individuals may from time to time own or have positions in the securities or contrary to the recommendation discussed herein.

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