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June Monthly Update

June 9, 2010

By Danny Mack

The bullish market trend that began in early February stalled in the middle of April.  The supporting market technicals and macroeconomic events that drove the two and a half month rally were replaced by dour market related news headlines: the S&P ratings cut on Greece's sovereign debt, the SEC sued Goldman Sachs, and the strife continued between North and South Korea. All of these occurrences weighed heavily on the markets.
 
Beginning April 15th, the markets entered a trading channel, failing to establish a positive or negative trend as the month of May started.  Declining market breadth data indicated that the sideways trend that developed would likely turn into a negative trend in the market.  As downside price action increased entering May, several tactical positions within the Stadion portfolios crossed their predetermined sell criteria.  Retail, mid-caps, and small-caps, which lead the rally for the previous few months, were the first of the portfolio positions to be sold.  Continued downside pressure throughout the first full week of May resulted in the remaining positions in the Stadion portfolios to reach their sell criteria, and they too were moved to defensive positions shortly thereafter.
 
Coinciding with the portfolio positions being sold, the market trend and underlying breadth indicators within the Stadion Investment Model began to cross into negative levels.  These indicators have been declining since mid April, but it took several days of declining market prices for the model to begin signaling a higher risk market environment.  This, of course, is why we have specific sell criteria on all tactical positions in our portfolios.  The model may take some time to identify long term market trends but will quickly assess current market conditions. We do not want to wait for market deterioration to have a large affect on our clients. Instead, we are defensively positioned for future negative market moves.
 
On May 6th, the market entered a period of severe volatility, distinguished by the so-called "flash crash," in which the market was down almost 10% intraday on the afternoon of May 6th.  It should be noted that while severe price declines have occurred in the past, we have never seen a reversal to the upside as quickly as occurred on that day.  Downside and upside volatility continued, with the market gapping up greater than 4% over the weekend of May 8th.  This too is of some historical note, as this was only the seventh time in history that the S&P futures gapped more than 4%.  Even with a few days of positive price movement in the markets, the Stadion Investment Model indicators continued to decline further.  As the month progressed, market price levels continued to deteriorate, and by May 20th the market had lost about 10% for the month.  Market breadth data confirmed that the negative trend was driven by large trading volumes in declining market issues and that sellers generally outweighed buyers in the predominantly uncertain market conditions.
 
In the short term, the markets are in a downtrend with support below that which was established by the February lows and overhead resistance.  As each day passes, the markets move up and down, but over time are not going anywhere.  For the cyclical bull end to be official, we need to break the higher lows pattern that has been progressing since March 2009.  Stadion clients can be assured that we are reading and reacting to the market data and balancing safety and return according to our rules-driven process.