Weekly Recap - December 19, 2008

Market Resistant, Volatility Declines!

Last week the market gained .9% on the S&P and 1.5% on the NASDAQ in a week that brought more layoffs and bad economic news. The market continues to show resiliency and volatility is declining. The resistance the market shows at current levels and the decreasing volatility is encouraging. Volatility ended the week at a level just under 45. That is still on the high side, but we view the decline very favorably particularly since Friday marked expiration of a quadruple witching hour, typically a period of high volatility with the all at once expiration of four types of futures and options contracts. We remain hopeful that the current market strength is a sign of a market that has already reached bottom.

Recession Continues, Bailout For Automakers!

No real economic surprises from the recession watch last week. Industrial production declined in November, as did housing starts. Jobless claims remain at high levels and the parade of companies announcing layoffs continues. However, oil continued its promising trend towards lower prices after falling for the sixth day in a row despite the announcement of aggressive OPEC production cuts. The other big news was the auto industry bailout with the Bush Administration offering to provide the initial relief from the TARP program. Congress could not reach agreement on an Auto package, so Bush stepped in to provide a bridge. The automakers will likely need much more than the $17.4 billion that Bush approved, and additional measures are likely from Congress and Obama next year. Rumors have also circulated that Obama has additional measures planned in an effort to help the overall economy, and that amount could be as high as $850 billion. The other big news was the action taken by the FED to lower the federal funds rate to 25 basis points or lower. Yields on treasuries reacted by dropping again to levels not seen in many years, and mortgage rates have also followed suit. The government interventions to date have truly been remarkable which should help the economy recover more quickly. However, the extent of those interventions can also be viewed as a sign of just how bad economic conditions really are.

Market Beating Foresight

The market continues to show resistance at current pricing levels, along with a lower downward trend in volatility. Both trends are encouraging despite a very difficult economy. Next week will bring reports on new and existing home sales and readings on consumer sentiment. Another round of jobless claims will be released and we will likely get progress reports from retailers on the holiday shopping season. There is also the Santa Claus effect that if it holds true, will begin this week. Quantitative research suggests that the Santa Claus effect has been responsible for an average market increase of 1.5% between the last five trading days of the year through the first two trading days of the new-year. Hopefully, Santa will show again this year! We continue to believe the market is starting to show signs of stabilizing, although it could remain very bumpy or even rocky over the next few months.

For short-term investors, a bumpy market will provide many profitable opportunities on both short and long positions as the market swings back and forth, within a 100 point trading range. Our stock tips for investors, would include sticking to defensive industries such as utilities, healthcare, food, and consumer staples. Focus on value stocks that have strong balance sheets, are well capitalized, and have high cash levels, as those are the companies that will survive and even prosper in difficult economic times. For speculative investors, we still think a play in oil is interesting, as prices keep dropping to new multiyear lows. No doubt oil demand will be pressured in the coming year with the global slowdown, but it seems oil price levels are currently on the low end of their long term trend. A reversion back to that trend and mean assumes a price rise is probably more likely over the long term. Buying an Exchange Traded Fund focused on Oil would be one way to play the market, but investors should be prepared to hold for a longer period until the economy and oil demand begin to stabilize. Overall, equities remain at very compelling price levels despite an economy that has a long way to go before it gets better. We have begun to invest some of our cash into growth stocks and will gradually increase our stock allocations over the coming months. Patience will reward the long term investor as positive momentum and confidence will eventually return. Investors buying stocks at these levels will be rewarded in 2-3 years even if they are early in calling the market bottom. Despite a difficult year, all of our portfolios still show positive returns since their inception, which is truly exceptional given that corresponding market returns all show significant losses.

Remember, our complete list of stocks is Available Online At: http://www.marketbeatingstocks.com