Weekly Risk Report 10/22/2009
While the market recovery has been dramatic, it has not been linear. There's been a very steep wall of worry that investors have been climbing along the way. The first consolidation happened in the summer. With the Dow now at around 10,000 we may see yet another stall, consolidation or possibly a correction. Our market risk indicator rose slightly from a week ago and is now in the upper part of its Average Risk range. The four components continue to give us a mixed signals. Speculation remains the only bearish component. Historically the markets can tolerate very long periods with the Speculation component showing bearishness. If no other component is in confirmation, generally we can assume just very strong cash inflows are the cause.
It is important to note how bias the Speculation component is, however. It currently takes a gain of well over 100% in the last Quarter for a stock to make Value Line's Best Performers list. However, it only takes a price drop of about 10% for a stock to make their Worst Performers list. Normally there's better balance between the two indicators. One must remember that a 50% decline with a full recovery is the same as a 100% gain from the low point. Many, many stocks declined last year by 50% or more. So, if they've just returned to their original price, they could truly be up 100% - but effectively be "unchanged" over this time frame.
Sells in essentially all business sectors positions continued through the beginning of this week. This is true both domestically and in the ex-U.S. sectors. In most portfolios the cash reserve level continues to climb as sells are triggered, and are keeping pace with the portfolios' equity growth. Our Currency Point portfolio shows a cash reserve (in U.S. dollars) of about 31% with the remainder in ten non-U.S. denominated currencies. The cash component, which has risen slowly from 29% at the beginning of the year, continues to keep pace on a pro-rata basis with the invested positions of the portfolio which has moved ahead about 8% for the year. This portfolio is well situated to respond to changes in the U.S. dollar relative to foreign currencies going forward. Finally, the three pronged approach of our Income portfolios (Government, Corporate and Real Estate) has done well in the last 12 months. The Income portfolios now have higher cash levels than any time this year. While growth going forward may slow, the income for which these portfolios were designed continues to flow.
