du Pasquier Asset Management

Arlington Econometrics Market Commentary for the week of September 2, 2008

October (?)

Although not the official end of the quarter, the Labor Day holiday in America is nevertheless a psychological hurdle, as if the end of Summer has come to pass, irrespective of the calendar.  To that end, the markets seemed to be positioning themselves last week as if to rearrange like the end of a quarter.  Indeed, three day holidays in a bear market are not a comfortable time to be “long”.

I find it always helpful to step back and look at the big picture rather than the “rearranging” for psychological comfort.

It looks, still, as if a global bear market is firmly established, even though some sectors show indications of intermediate bottoming and upwards acceleration (Financials, Telecoms).  For the bear to end, we need closure on the root causes of price creep and inflation, and a longer period of downside deceleration within the bear.  In other words, too few equities are showing signs of stabilizing and too few global baskets are in a condition of upside momentum.

Rather, nearly three-quarters of measurable financial instruments within my database are in a bear phase that initiated in 2007, and show no signs currently of having reached their nadir.

This is not to suggest that the end might be elusive or far away.  I would argue that the magnitude and amplitude of the current bear indicate that we are closer to the end than the beginning of the contraction.  Think about it.  If the origin of the bear was immediately after the zenith in stock relative strength quotients in July of 2007, then today we find ourselves in the midst of a mess, to be sure, but farther from its original starting point and maximum potential for negative direction.

Calm down.

Is this comforting?  Not really.  Because like the long car-journey with kids in the backseat asking “are we there yet?”, it’s not going to be comfortable until we reach the end of the journey.  And unfortunately, quantitative science can only identify the inflection point of a turnaround after it has been achieved.  Whereas we can predict a range of time and values around which the reversal might occur (when relative strength empties to its maximum), the actual values are expressed only as a range of possible quotients.  The caution therefore is that one should never play at the margins when stocks are at their greatest strength (“it’ll never end”) or when despair seems its greatest (“I won’t buy any stocks here”).

One must follow the prevailing trend and play within it to maximize profit potential.

You know the score.

So much of this boils down to common sense, anyway.  Computer models and scientific methodology are only as good as the information given them, and the efficiency of their ability to produce results.

Sometimes, capital gains is not the only result sought, because later on imbalances might occur.  That is why different methodologies or mutual funds appear “hot” for certain time frames.

But ultimately, I believe the key to market analysis is consistency through all phases of economic travails.  Nobody can forecast the exact entry or exit inflection points of ownership of financial securities (real estate, gold, equities, bonds, etc.).  Therefore, intuition and balance should be considered desirable objectives.

There are enough negative influences today to dissuade anyone from taking a chance on the market.  I, instead, prefer to focus upon the search for potential positive outcomes.

The final quarter might be scary, if you let it be, or fertile soil for the next leg upwards.

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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