Weekly Commentary
January 27, 2010
What a difference three weeks can make. After a strong first week, sideways second, the third week of 2010 was thoroughly bad in the markets. The last 4 trading days saw most of the major indices decline more than 4%: the Dow Jones Industrial Average dropped 4.93%, the Nasdaq Composite declined 4.72%, the S&P 500 was down 4.65%, and the Russell 2000 dropped 4.78%.
Wall Street does not like uncertainty, and that is what reigned last week. Anxiety towards Washington DC led the markets to break critical short term support levels. Growing fear about US bank restrictions, Fed Chief Bernanke's reappointment, monetary tightening in China, and disappointing corporate earnings announcements all added to the uncertainty for the week, and helped to push the markets even lower.
The combination of price deterioration with excessive down volume as compared to up volume caused the Stadion Model to signal a higher risk environment. Advance Decline measures are close to providing further negative indication. Where is the market headed? Nobody knows. The longer indecision reigns, the slimmer the chance of a run back to new recovery highs.
In conjunction with the market decline, several of our positions reached their sell criteria as determined by the Stadion Investment Model.
When the Stadion Model changes risk level (like moving to a higher risk level from its most bullish stance), we tighten up sell criteria on existing positions in accordance with the higher probability of more downside. Therefore, when we moved from Green to Yellow, our existing positions had tighter sell disciplines, which recently caused the liquidation of certain positions.
With the Stadion Investment Model giving us a signal for increased market risk, we will wait to see improvement in the model before purchasing back into the markets. Until then we will continue to monitor our remaining positions, and will move to more defensive positions if warranted.
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