February 2010 Market Commentary
February 1, 2010
By Will McGough
Uncertainty Breeds Risk
What a difference a couple weeks can make! After a strong start in the first week of the New Year, we saw a sideways second week, and then watched the third week descend into uncertainty. Growing concerns about U.S. bank restrictions, Fed Chief Bernanke's reappointment, the upcoming FOMC announcement, monetary tightening in China, and disappointing corporate earnings announcements made for a week of increasing uncertainty, helping push the markets even lower. This created an unnecessarily high risk environment, causing Stadion's indicators to react to protect client assets.
As stock prices fell Stadion's Investment Model indicators picked up troubling signals that we had entered a higher risk environment. A reversal like this can produce what we call a transitional environment in which the market is changing direction. In January, this meant our attention became focused on the possibility that risk levels were becoming higher than we like to see them and that our concentration shifted from growing your money to protecting it. As our model indicators continued to confirm earlier negatives, we ultimately reached our most bearish model levels by the end of the month. In other words, our concentration shifted from 'making' money to 'keeping' it.
Where is the market headed now? We don't know. And neither does anyone else. This is not of particular concern at Stadion. Our model is designed to react rather than predict, and over time does what it is designed to do very effectively. For the moment, what we do know is that indecision reduces the chances of a stocks running back up to new highs, so we are cautious. It is interesting to note that in the final week of January, news that should have been welcomed by the markets didn't prevent stocks from falling further. Such failure to rally despite good economic news (such as favorable reports on 2009 Q4 GDP) confirms Stadion's commitment to "playing it safe."
Like Ben Hogan, we know when to lay up. When the Stadion Investment Model changes risk level (for instance, moving to a higher risk level from its most bullish stance or vice versa), we adjust sell criteria accordingly. Therefore, when we move from a stronger market environment to a weaker one, we become less tolerant of stock prices dropping. In other words, we sell positions more quickly as they decline in value. We do this to protect your assets. In January, this caused certain holdings to be sold. When market conditions are risky, we will keep the money safely out of equities until our model sees the market improving. Stadion's Investment Model continually signals increased or decreased market risk so that we can react accordingly to grow your money or to protect it. Like Mr. Hogan, we put our efforts into winning the tournament. This means not risking our goal on just one hole of it.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money. Investment return and principal value of an investment will fluctuate so that an investor's portfolio may be worth more or less than their original investment. The investment strategy presented is not appropriate for every investor and individual clients should review with their financial advisors the terms and conditions and risk involved with specific products or services. Stadion's actively managed portfolios may underperform during bull markets.