Can you believe it? Another month has passed and summer is here. Here’s another shocker for you; May marked the second month in a row we saw the S&P 500 index increase in value, something that has not happened since fall of last year. While it was a modest 1% increase it was an increase none the less bringing the Dow, Nasdaq and S&P to single digit losses for the year.
With that said, I would encourage you to review the value of your accounts. For our clients reading this letter you will be presently surprised to see that most of your accounts have positive gains for the year. As of May 31st only one of our account providers was at breakeven for the year as all others were in positive territory. While this market beating performance makes us pleased we continue to look for ways to build upon this good performance. Looking forward there is a continuance of important factors that require our attention.
First and foremost is oil prices gushing over $125 a barrel, while this is good for the energy and natural gas holdings within our accounts it raises greater concerns about the future of our economy and the overall potential for equity markets to continue to increase. There are always 2 things to watch when you see a market increase in price. The first is the price and second is the speed in which the price rises. In the case of Oil both have become parabolic which has prompted us to begin to trim some of our winnings in this sector. While I feel the long term trend for oil will continue higher the risk of a short term correction in these markets has increased significantly. Because you’ll never go broke taking a profit we began reducing our energy positions in Mid May and currently hold approximately 50% of our original allocation and will be watching for the right opportunities to put that money back to work.
We continue to see a bifurcated market with energy, commodity, natural resource, infrastructure and technology stocks showing strength as housing, financial, retail and luxury stocks struggle to find some traction. In response to this we continue to keep our accounts weighted in energy, basic materials and natural resources as well as some strategic repositioning between a bull and bear market fund where available.
I must admit that the feeling of relief I described in last month’s letter has been replaced with concerns as we are at a fulcrum where the next move in the market is most likely going to dictate whether the equities markets will move higher or lower between now and September. Since the lows of the equity markets in March we have seen a handsome return as Wall Street has decided the economy and companies earnings may not be as bad as they were originally thinking when the “credit crises” sell off hit in January. Moving forward we will no longer have a “technical” trade off the bottom, rather we will see the market paste together a fundamental story with the pieces of economic information that will come out this week. Most likely we will see an increase in market volatility as Wall Street puts the fundamental pieces together like a puzzle. My best guess is we will see the Dow stuck in a range between 12,400 and 13,000 with a multitude of days where the market moves more than 100 points. My concerns would turn into anxiety if we saw the Dow move below 12,200 as that would indicate the increased potential that the markets would test their March lows. On the flip side I would become excited and bullish if the Dow were to move above 13,200. Regardless we will continue to adjust your accounts accordingly.
Currently one of the main indicators we are watching closely at Quiver Asset Management is the strength of the US Dollar as we believe it will hold the key to the next long term move in this market. In our opinion the best case scenario would be a slow strengthening in the dollar which would in turn help reduce commodity and oil prices. If this were to occur then you will see a continuance of a process we have recently began with a reduction in our energy and commodity holdings and additions to financial and technology holdings.
In addition to the US Dollar we are watching the financial sector very closely as it is now trading near the March lows where we made our first purchases in this sector. A breach of the March lows would indicate the likelihood that financial stocks may make another leg down in value putting pressure on the overall market. A bounce off these lows would indicate a reversal increasing the potential of financials to rally towards the top of their current trading range. Either way we will be monitoring this and making any necessary changes.
In closing we would like to wish you and your family a happy and warm June and we hope to see you at our upcoming seminar on June 21st.
*The opinions expressed are those of Colby McFadden as of 6/1/2008 and are subject to change based on market and other conditions