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Lane Asset Management Stock Market Commentary July 2013

Lane Asset Management Stock Market Commentary July 2013

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Published by Edward C Lane
Economic and stock market commentary for July 2013
Economic and stock market commentary for July 2013

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Categories:Business/Law
Published by: Edward C Lane on Jul 07, 2013
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10/03/2013

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Economic and Market Recap
 June wasn’t a good month for stocks, bonds,
gold...just about anything. The month startedoff well enough when the Atlanta Federal Re-serve Bank President and FOMC member 
said the Fed “was committed to a high levelof accommodation.” Then, on the very next
day, the Kansas City Fed President spoke outagainst QE and the San Francisco chief indi-cated bond purchases may be tapered in thesummer. The market slumped.For the next two weeks, the economic news
 
 was mixed. On the plus side, in the U.S., non-farm payrolls beat expectations, home pricessurged, small business optimism rose to a 12month high, retail sales had a surprising gain,and the Philly Fed manufacturing index hadits highest reading since April 2011. InEurope, UK manufacturing expanded at itsfastest pace since March 2012 and a number of EU countries had PMIs (Purchasing Man-ager Indexes) come in much stronger thanexpected. The market rebounded, sort of.Then, around the middle of the month, the
Stock Market Commentary
 July 6, 2013
Lane Asset Management
“Fragile” comes to mind
 when I think about thecurrent market. Readersknow that I focus moreon technical analysis thanfundamental. That is,price movement patternsguide my investmentviews. But fundamentalanalysis, the awareness of the relationship betweencorporate earnings (andthose things that influ-ence earnings) and stock prices, is extremely im-portant. Today, a num-ber of analysts havesliced and diced the rela-tionship between currentand projected earningsand the S&P 500 (or SPY) and have producedreports that make astrong case that the mar-ket is richly valued and asignificant correction ispossible in a 3-12 monthtimeframe. Accordingly,my analyses should betaking as a point in timeview and subject tochange as new patternsdevelop.
 picture began to change again with new talk fromthe Fed of diminished risks to the economy and
potential “tapering” in bond purchases. This was
enough to touch off a spike in interest rates and adive in bond values as investors withdrew a recordamount from bond funds. Gold plummeted as thedollar strengthened.As June concluded with a number of upbeat eco-nomic reports
 — 
rising home prices and sales andincreasing consumer confidence and durablegoods orders
 — 
July kicked off with better-thanexpected nonfarm payrolls and market gains wereextended.Investment Outlook In no change from my outlook in recent months, Icontinue to think the prudent thing to do is keep
risk exposure in check, at or below one’s long
term strategic allocation:
Lessen exposure to international sectors (I pre-fer the indirect exposure through U.S. multina-tionals)
Increase exposure to safer, stronger U.S. sec-tors like consumer goods and health care
Increase exposure to strong dividend payers.As for bonds and other income investments, yields
are becoming more attractive, but I’d keep expo-
sure low and narrowly focused for now.
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 noguarantee of future results.Page 2
Lane Asset Management
 June was an interesting month, technically speaking. Here’s why:
 
SPY failed twice in trying to break through its previous high at $116.29. This kind of failure has occurredseveral times in recent years and, when it has occurred, it has generally been followed by a correction of about 7% or more. The current correction is about 5.5%, so far.
The price of SPY is hovering around the 50-day moving average (50DMA), with one penetration below fol-lowed by a quick recovery. The 50DMA is a closely watched indicator by technical traders and a breach, especially if confirmed by a reversal inthe slope of the moving average, often portends a reversal in price direction. Sometimes this becomes a self-fulfilling prophecy with tradersacting on the price action and pushing it further in the new direction. Presently, the slope of the 50DMA remains positive.
The MACD and Full STO momentum indicators at the bottom of the chart turned south in June and are not yet in reversal mode.All this adds up to a mixed technical outlook with the good news that SPY has returned to just above the 50DMA and the trend remains posi-tive. From a technical perspective, I expect no worse than a short term correction followed by a continuation of the more dominant uptrend.
As second quarter earnings start to come in, we’ll have a better idea about the direction of the market for the balance of th
e year.
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 chart below shows a trend depicted by the “Raff RegressionChannel.” The center line is the least
-squares line (LSL) of best fit for the period covered by the channel.The outer lines are equidistant from the center line at the distance of the most extreme move during theperiod. The red line is the 50-day moving average (50DMA) discussed on the previous page.This chart is a little more ominous than the one on the preceding page in that price has broken below thebottom of the channel and this was preceded by a negative turn in the MACD at the bottom of the chart. This is the same pattern that hap-pened in the Spring and Fall of 2012. In the preceding two events, SPY dropped 9.4% and 7.3%, respectively, from the preceding peak. In the
current situation, the correction was 5.5% before price recovered. It’s for this reason, along with the length of the curren
t advance, that I think there may be another decline of at least shallow proportions.
S&P 500

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