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Lane Asset Management Stock Market Commentary September 2013

Lane Asset Management Stock Market Commentary September 2013

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

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Categories:Types, Business/Law
Published by: Edward C Lane on Sep 08, 2013
Copyright:Attribution Non-commercial


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Economic and Market RecapAugust got off to a good start with the lowestreading of unemployment claims since Janu-ary 2008 and the ISM factory index rising toits highest level in 2 years. What followed,however, was a steady stream of uninspiredreports for the U.S.: non-farm payrolls risingless than expected and the weakest gain sincelast March, the Philly Fed Business ConditionsIndex falling below expectations, consumer sentiment falling unexpectedly, and the Chi-cago Fed National Activity Index remainingnegative. A flutter of positive news came inthe third week of the month with recovery in
the Euro Zone, mixed Fed speak to give hopeto those looking to postpone tapering as longas possible and a small increase in consumer confidence. The end of the month was allabout the growing tension with Syria(boosting oil prices) but ended on a high noteas U.S. GDP came in unexpectedly high (2.5%annualized vs. the previous 1.7%).Despite emerging good news, European equi-ties lost some of their recent luster, perhapsto adjust for the strong showing that took place last month.The first week of September was a positive
Stock Market Commentary
September 7, 2013
Lane Asset Management
Every cloud has a silver lining. In the case of theclouds, we have, in nospecial order: Syria, Fedtapering, a new Fedchairman, debt limit ne-gotiations, Obamacare,stretched market valua-tions, weakening corpo-rate profits and revenuegrowth, the lowest labor-force participation rate in35 years, declining in-creases in non-farm pay-rolls and technical weak-ness.For the silver lining, wehave, in part: ISM Busi-ness Activity Index andauto sale strength,Obamacare (!), EuroZone, U.K. and China re-covery, and absence of amajor stock market bub-ble on the horizon.My observation: The risksappear real and signifi-cant but they also appear to be rather short term.The silver lining is aglobal recovery, even if itis slower than we wouldlike.
one for everything but investment grade corpo-rate bonds as new auto sales advanced to prere-cession levels and the ISM Non-ManufacturingBusiness Activity Index (NMI), representing about90% of the U.S. economy, came in at its highestreading since its inception in January 2008 whileinterest rates continued to rise. The Manufactur-ing Index also had a good showing, rising to itshighest reading of the year. August non-farm pay-rolls came in below expectations, but the marketseems to be taking that as a sign of reduced incen-tive on the Fed to begin tapering in September, assome thought.Investment Outlook 
 While I’m concerned about the stretched valua-
tions for U.S. equities, the steady improvement inthe ISM reports and in corresponding reports inEurope have to be taken as a positive sign for theequity market. And, while an equity correction of 10-15% remains a possibility, maybe a certainty atsome point, the longer term horizon for equitiescontinues to look favorable. With that, I suggest:
Increase exposure to safer, stronger U.S. sec-tors like consumer goods and health care
Consider adding exposure to international.As for bonds and other income investments, I rec-ommend keeping durations short and consider high yield corporate bonds. 
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
August (and the first week of September) was another interesting period, technically speaking: SPY re-versed course at the beginning of August and broke back down through support at $167 and its 50-day mov-ing average. This is the second time the 50DMA has been pierced by the price since the beginning of theyear. Although this is generally considered to be a reversing signal, the last time (in April) turned out to be ahead fake when positive momentum quickly resumed. While the current breakdown may turn out to be an-
other head fake, until we see an increase in volume as occurred at the other reversals, I’m inclined to believe the risk to t
he downside is some- what greater than not.From a fundamental perspective, we have a bit of a tug of war going with strong ISM data, auto sales and GDP growth while at the same timemarket valuations seem stretched, the labor-force participation rate fell to its lowest level in 35 years and August non-farm payrolls came in be-
low expectations, including a downward revision for July. But it’s not those factors that seem to be having the most impact
now, but ratheSyria, Fed tapering and Washington gridlock.
S&P 500
SPY is an exchange-traded fund designed to match the experience of the S&P 500 indexadjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no guarantee of future results.Page 3
Lane Asset Management
Below we have two pictures of trend in SPY’s price. On the left, we have a shorter term, daily view with a
spread from the top of the channel to the bottom of about 7%. In this chart, SPY has broken below thechannel in a decidedly negative move while the 50DMA has all but turned over. This is the fifth time in thecurrent series that price has fallen to the bottom of the channel or beyond and, while a quick recovery can-not be ruled out, it would be only the second time this happened in the last two years (the first being this past June).On the right, we have a longer term, weekly view with a spread from the top of the channel to the bottom of about 17%. In this view, SPY isnear the top of the channel for the 5th time in over 4 years, with 2 out of 4 of the prior times resulting in a significant correction to the bottomof the channel. As we may be looking at a repeat of the pattern that occurred in the spring of 2011, this chart is even more worrisome whencombined with the knowledge of the stretch in the market valuation (S&P 500 PE ratios). With consideration to this chart alone, there is good
reason to keep exposure to equities below one’s long term strategic allocation. Should SPY reach back to the top of the chan
nel without an in-tervening correction, it may be a particularly good time to take additional exposure off the table.
S&P 500 Trend

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