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Lane Asset Management Stock Market Commentary June 2013

Lane Asset Management Stock Market Commentary June 2013

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Published by Edward C Lane
Comments on the economy and the stock market for June 2013 and technical outlook for the period ahead
Comments on the economy and the stock market for June 2013 and technical outlook for the period ahead

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Published by: Edward C Lane on Jun 07, 2013
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06/07/2013

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Economic and Market RecapAfter an initial gasp caused by the ADP em-ployment report falling below expectationsand a drop in construction spending, May re-covered strongly for U.S. and European equi-ties as unemployment claims in the U.S. werethe lowest since 2008 and the ECB cut inter-est rates as Europe remained in recession andmanufacturing languished. Following the un-employment claims report, nonfarm payrollgrowth in the U.S. exceeded expectations,prior month job reports were upgraded andthe unemployment rate fell to its lowest level
 
since December 2008. While Europe stutter-stepped through the rest of the month, U.S.equities continued to climb on the strength of consumer sentiment hitting a post-recession
high and expansion of the Conference Board’s
index of Leading Economic Indicators.The chart below reflects the positive May em-ployment report.
But here’s the interesting part. As the econ-
omy continues to make progress, albeitslowly, the FOMC April meeting minutes andsubsequent speeches by some of the boardmembers have begun to raise the specter of 
Stock Market Commentary
 June 7, 2013
Lane Asset Management
Is the bloom coming off the rose? The talk for the last couple of weeks
is all about “tapering,”
the word now beingused to describe the
Federal Reserve’s exit
strategy from QE Infin-
ity. When the FOMC’s
April meeting minutes were released on May22nd suggesting that ta-pering might begin later this year, interest ratesspiked and the S&P 500subsequently declinednearly 3% to-date. If nothing else, this dem-onstrates both the fra-gility of the market andconcern investors haveabout the loss of FederalReserve support.My own view is that thebloom is not yet off therose. That said, given
the market’s perform-
ance this year, I believethe risk remains to thedownside. Be carefulout there.
“tapering” or a slow down in Fed bond purchases
 which led a spike in interest rates in the last week of the month. This is interesting because earlier in the month, improving economic conditionsdrove the market higher. Now improving condi-
tions, possibly leading to the Fed’s easing off the
QE pedal, has led to the market weakening. Inother words, investors want to see the economyimproving, but not so much that it might lead toless support from the Fed.On other fronts, emerging markets took a tum-ble, oil lost all momentum and gold collapsed
again after a brief recovery from April’s collapse.
 Investment Outlook In no change from my outlook last month, as theeconomic headwinds have not subsided, I continueto think the prudent thing to do is keep risk expo-
sure below one’s long term strategic allocation:
 
Lessen exposure to international sectors
Increase exposure to safer, stronger U.S. sectorslike consumer goods, utilities and health care
Increase exposure to strong dividend payers.One change from last month is that, with the spikein interest rates, I would hold off commitments tothe multi-sector income arena until we have a bet-ter sense of interest rate movements and investor expectations.
The charts on this and the following pages use exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly. The ETFsare chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses for these ETFs canbe found with an internet search on their symbol. Past performance is no guarantee of future results.
 
SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is noPage 2
Lane Asset Management
Over the last couple of months, I’ve been observing the pattern of trend and momentum for SPY and relat-
ing that to the very similar pattern that occurred in the first quarter of last year with the thought that a cor-
rection was imminent. Now I’m wondering whether the current pattern is more closely related to the Fall
of 2010 where upward trend persisted for a more comparable 6 months while momentum stagnated. Since
 we’re a little over 6 months into the current trend, looking strictly at the technical indicators, I suspect thecurrent pace won’t go on much longer on technical considerations alone (see the next page). If we factor in the continuing r 
ecession in Europeand the weakening trend in corporate revenues, a correction may be only weeks or a few months away. Accordingly, rather than trying tosqueeze out the last drop of gain, I suggest taking some risk off the table and paying even closer attention to those few sectors offering highquality and strong relative performance.
S&P 500
 
SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is noguarantee of future results.Page 3
Lane Asset Management
In a new focus for my technical analysis, the charts below show a short term (on the left) and a long term
(on the right) “Raff Regression Channel.” The center line is the least
-squares line (LSL) of best fit for the pe-riod covered by the channel. The outer lines are equidistant from the center line at the distance of the mostextreme move during the period. (This may be more than you want to know.)The usefulness of this analysis, as I see it, is to have an additional mechanism to indicate the underlying pat-tern of price movement and also a mechanism to suggest when a technical correction bringing the price back to the LSL may be due to occur (as you can see, price does not seem to remain above or below the LSL for very long).Observing the charts below, I see the price breaking below the LSL in the short time period and coming off a high in the long timeframe. Tome, this suggests the potential for a 6-10% correction over the next month or so. While past performance is no guarantee of the future, it willbe interesting to see if history repeats itself here.
S&P 500

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