Market Update - August 19, 2010

Home Depot and Wal-Mart both beat expectations today, and Hewlett-Packard announces after the bell and will not doubt beat estimates as well. However, the economic data trumped the earnings reports.

Initial Jobless Claims came out-22k worse than expected at -500k, estimates were for -478. Also, the Philly Fed Business Outlook report (Diffusion Index) came out at -7.7. The Survey was for +7, and the prior number was +5.1. The clearly shows the Northeast is slowing down much faster than analyst had expected.

It was a tough day in the markets today as all 3 major indices sold off. But actually the markets came off of their lows and held up pretty well considering how the negative economic data out. Europe did even worse and their economic woes are worse than ours. It is good right now to be short Europe as a hedge to the American stocks we do own.

Right now It is also prudent to be holding some cash and gold. Bonds are helping right now, but investors are beginning to worry about the "bond bubble" as interest rates are at historical lows.

Even the media is now finally talking about this issue. I intend to begin to carefully prune our bond portfolio from the lesser grade bonds first, keeping the high grade, intermediate corporate. This will should not be a surprise to any of you.

As the government talks of more bailouts, bonds will be hurt, inflation worries will come back, and commodities will look more appealing. However, this may be months away, you just need to keep watching for signs of inflation.

This will also change your stock allocation as you will want companies that own hard assets, metals, and commodities. Mining companies would be an example. That is why BHP Billiton made a hostile takeover of Potash (POT) a few days ago.

Technically speaking, we have been in a trading range for months now and the DOW has oscillated up and down. In fact, the past few months, the volatility has increased enormously.

The Mid Term trend, thus far, still seems to be in place as the Buying Strength has not waned much, and more importantly, there has been no significant increase in Selling Pressure. If Selling Pressure begins to increase, I will change my stance dramatically.

At this point, it is time to keep an eye on the technical indicators to see if they begin to agree with the fundamentals, which are deteriorating. At that point is will be time to raise even more cash, and possibly even go short (in the US, already short in Europe).

As I have said, one of the most accurate indicators of the mid & long term trend is Selling Pressure & Buying Strength. They are still positive, but if they reverse so the Selling is upward sloping and Buying is downward sloping, you will know to be more defensive and change your posture.

These are my thoughts for today.

For the Full Story click the link below:
http://noramassetmanagement.com/how-to-know-when-if-to-raise-more-cash/

Keep studying,
Dan Stewart CFA®
NorAm Asset Management
E-mail: dstewart@noramassetmanagement.com

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News & Politics

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• Market
• Update
• August
• 19
• 2010