Rick's Ramblings

 3rd Quarter, 2010 
 
As I write this edition of “Rick’s Ramblings”, it is June 30th. 2010 is one-half year old. I am one full year older. So what has happened over the last year? Well, let’s limit it to what has happened so far this year. On one of my email notices yesterday, it said “The DOW plunges”. Plunges? Well, it did drop 268 points (2.65%) from the previous day. Is that a plunge? I’m not sure. The DOW ended the day at 9870. Was it the low for the year so far? No. It’s been lower than that 4 times this year going back to February 5th. And the DOW is back to where it was last November. With minor exceptions, going all the way back to last September (almost 10 months ago), it appears that the DOW is operating within a “trading range” between 9750 and 10,750. By now, I hope no one is surprised that the market does indeed go in two directions – up and down. As Gomer Pyle used to say - “Surprise!! Surprise!!!” 
 
As to our investment holdings, we continue to be in those areas of “relative strength” as determined with the help of Dorsey-Wright. In our “First Trust 5” program, we are at approximately 60% of our full allocation. It is very similar in our overall “Domestic Equity” allocation. And, although we have gotten close, very few of our “stops” have hit to sell us out of our allocated holdings.
 
So, what do we/I think is going on? Well, the markets seem to have braced for a calamity that really hasn’t happened. Although credit spreads in Europe have widened, no country has defaulted, and economic data hasn’t dropped off a cliff. With the US 10 year note closing at 2.97, the same rate it was at in May of 2009 (near the bottom of the previous market low), the returns on bonds look pretty measly to go into at the current time. US consumer sentiment, although not good, has remained relatively stable. So, at least for the present, the sky has not fallen, even though one might think so by what we read in the press.
 
I, for one, will truly be interested in this quarter’s “Earnings season”, which begins soon. That should tell us a lot more than a press headline espousing a markets one-day decline. Personally, I believe most of the “bad news” is priced into the market. For the most part, currently, we are under-allocated in our equity positions, with “stops” set to take effect should this market continue to move lower. If the market goes up, we will cautiously consider future additions.
 
What’s my recommendation for you? Go enjoy your summer, your kids and grandkids – whatever it is you like to do. This market will move up and down. Although we will continue to see volatility, be assured, we are actively watching on a daily basis and will act accordingly.
 
Happy Summer !!!!!!!!!!!!
 
2nd Quarter, 2010
 
After a good start to the year in the equity market, the turn of the calendar to May has brought about some rather unwelcome volatility causing the Dow Jones Industrial Average to fall about 10% since putting in a high of 11250 at the end of April. The road so far this year has been like a summer road trip. The trip started out with very little traffic and it was clear sailing. Then, about an hour or so into the trip (February) we hit some traffic and started to slow down. Now (June 1), we're stuck in the middle of rush hour traffic outside of a major city. A quick peek at the traffic scan just shows red along the route indicating heavy traffic. We've come to a standstill. As frustrating as this trip as been so far, we can't change the traffic no more than we can change what happens in the market. But we can choose how we react to it. We could say a few choice words, bang the steering wheel, in general get into a rage. Or, we could calmly handle the situation and make the best of it. We can use the time in the car to catch up on our favorite book on tape or make a few phone calls. When traffic conditions in the market change, the first feeling is often one of getting uptight or even feeling outright angry – how could the market do this to me? This is the situation we are facing today – heavy traffic. Fortunately, the disciplined investment philosophy that I adhere to allows me to remain calm and take necessary action when the traffic in the market becomes heavy.
 
The risk management indicators I track continue to shift to a defensive posture as they have since the beginning of May. As a result, certain client holdings have been sold and those proceeds are automatically raising higher cash positions as markets are pulling back. Also, bond holdings have been increased in mody portfolios and inverse programs have been initiated to hedge downside momentum.  This goes straight to the heart of my risk reduction philosophy as we are attempting to preserve wealth within a weakening market environment. While the volatility in the equity market continues to rise I will continue to seek out investments for the portfolio that I feel could help to reduce overall market volatility.
  • For those of you – or your friends – who are fully invested (for growth) or feeling bridled within a "buy-and-hold-no-matter-what" approach, I would urge caution at this time. In fact, you might want to think about a handful of questions if you're in a more stationary approach.
  • What tangible strategies are you employing to preserve capital within the constantly changing global marketplace?
  • How exposed do you feel if we're entering an extended correction period? Are you comfortable with that amount of exposure?
Weighing current conditions and risks, I'm being more selective on initiating new growth positions -- and am more interested in pullback opportunities that are stabilizing and exhibiting strong relative strength characteristics vs. their peer group and the overall market. Those are in shorter supply right now. Over the coming weeks (or maybe even months), we may have better opportunities to pick up solid values -- so I believe it's wise to be patient. I know the big question on your mind right now is, how does this market turmoil play out? And to that, there is no great answer as it is impossible, and in my opinion fruitless, to try and predict the future of the market. One possible scenario is that the market just hobbles along here, not losing a lot more ground or making much up ground either. Yet another possible scenario is the market indices continue to give back more ground and fall. We don't have a crystal ball to know exactly how this will play out. What we do know is that given the information we have at hand, risk is elevated right now and you may want to reduce your exposure.
 
In the meantime, I'm continuing to study the situation and will keep you posted as the indicators get more positive. Always feel free to call with any questions and pass this along to a colleague or friend who might like to look at this information. For my clients, this is about having a logical, disciplined and more nimble game plan vs. being casual or taking too much for granted.
 
*  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *
The views expressed are not necessarily the opinion of LPL Financial, and should not be construed directly or indirectly, as an offer to buy or sell securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss. Sector investing may involve a greater degree of risk than investments with broader diversification.  This is not intended to provide specific advice to anyone.  Please talk to a financial advisor prior to investing.  Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.