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Lane Asset Management Stock Market Commentary for October 2013

Lane Asset Management Stock Market Commentary for October 2013

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Published by Edward C Lane
September was a busy month for the market, especially on account of external factors: Likelihood of an American strike on Syria; followed by a reprieve as Syria has apparently agreed to dispose of its chemical weapons; followed by reaction to reports that Larry Summers was going to be named Fed chief (suggesting a faster end to QE); followed by Summers’ withdrawal from consideration and a new focus on Janet Yellen (suggesting a slower end to QE); followed by a surprise Fed move not to begin the so-called taper; followed by concerns about a government shutdown (then the reality as October began). The next shoe to drop will be the debt ceiling debate – for which I think the odds right now favor more impasse.

On the economic front, good news seemed to be driven internationally as Eurozone manufacturing activity hit a 26-month high; Chinese factory activity rebounded and returned to a growth mode; U.K. Purchasing Managers’ Index (PMI) hit a 2 ½-year high and construction activity hit a 6-year high; the ECB raised 2013’s GDP forecast and promised to keep interest rates low; Japan reported a sharp upward revision to its second quarter GDP; and emerging markets posted big gains as dependency on low U.S. rates was reinforced by the Fed’s no-taper decision. In the U.S, the news was positive on balance as the Fed’s Beige Book reported that economic activity continued to expand at a “modest to moderate” pace; unemployment for August came in at 7.3%, that lowest rate since December 2008; the Institute of Supply Managers’ (ISM) Manufacturing index rose to its highest level since June 2011; and the Philly Fed manufacturing index rose to its best level since March 2011 with the outlook at its highest level since 2003.

The third quarter corporate earnings reports are due out soon. How is the market prepared from a technical point of view?
September was a busy month for the market, especially on account of external factors: Likelihood of an American strike on Syria; followed by a reprieve as Syria has apparently agreed to dispose of its chemical weapons; followed by reaction to reports that Larry Summers was going to be named Fed chief (suggesting a faster end to QE); followed by Summers’ withdrawal from consideration and a new focus on Janet Yellen (suggesting a slower end to QE); followed by a surprise Fed move not to begin the so-called taper; followed by concerns about a government shutdown (then the reality as October began). The next shoe to drop will be the debt ceiling debate – for which I think the odds right now favor more impasse.

On the economic front, good news seemed to be driven internationally as Eurozone manufacturing activity hit a 26-month high; Chinese factory activity rebounded and returned to a growth mode; U.K. Purchasing Managers’ Index (PMI) hit a 2 ½-year high and construction activity hit a 6-year high; the ECB raised 2013’s GDP forecast and promised to keep interest rates low; Japan reported a sharp upward revision to its second quarter GDP; and emerging markets posted big gains as dependency on low U.S. rates was reinforced by the Fed’s no-taper decision. In the U.S, the news was positive on balance as the Fed’s Beige Book reported that economic activity continued to expand at a “modest to moderate” pace; unemployment for August came in at 7.3%, that lowest rate since December 2008; the Institute of Supply Managers’ (ISM) Manufacturing index rose to its highest level since June 2011; and the Philly Fed manufacturing index rose to its best level since March 2011 with the outlook at its highest level since 2003.

The third quarter corporate earnings reports are due out soon. How is the market prepared from a technical point of view?

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Published by: Edward C Lane on Oct 06, 2013
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Economic and Market RecapEverything seemed to come together in Sep-tember. The month kicked off with strongfundamental news in the U.S. with manufac-turing sector activity keeping pace with itshighest level since June 2011 and in Europe assimilar manufacturing indices hit a 26-monthhigh. This was followed by reported growthin Chinese factory activity, U.K. factory indi-ces hitting a 30-month high, and U.S. non-manufacturing indices hitting their highestlevel since 2005. Then, despite, or perhaps asa result of, a weaker-than-expected jobs re-
port, and the Fed’s Beige Book reporting
 
“modest to moderate” economic growth, the
U.S. market continued to gain while the Euro-
pean and emerging markets couldn’t contain
themselves as the good economic news con-tinued to pore forth.Then came the triple whammy of a possibleavoidance of a Syrian strike by the U.S., Larry
Summers’ withdrawal from consideration as
Fed chief, and the Fed deferment of QE ta-
pering (it doesn’t get much better than this).
 Then enthusiasm waned (or profit-taking setin), taking some steam off the markets for the
rest of the month. This “relief” was then re-
Stock Market Commentary
October 6, 2013
Lane Asset Management
Last month, we talkedabout the clouds on thehorizon. This month, wecan talk about the bulletsthat were dodged duringSeptember: no attack onSyria, Larry Summerspulling out of contentionas Fed chairman, and theFed postponing the wind-down on QE. Interest-ingly, even the govern-ment shutdown seemedto have even less effectthan might have beenimagined. While short-term exoge-nous risks remain, e.g.,an extended governmentshutdown and/or unre-solved impasse on thedebt limit, my larger con-cern now is whether themarket has gotten aheadof itself in the event of slower than expectedcorporate earningsgrowth when third quar-ter results start appear-ing. With above averagemarket valuations, weak earnings could turn outto be the next bullet.
inforced by weak U.S. retail sales figures andgrowing concern about a U.S. government shut-down (later realized). Interestingly, the marketseems to be taking the shutdown in stride, at
least, so far. We’ll see what happens as the debt
ceiling date comes closer.Investment Outlook As valuations remain stretched and the marketcurrently looks overbought, despite all the goodnews in September, I think there is still reason tobe cautious heading into the balance of the year.If a 5-15% correction concerns you, I would takesome equity exposure off the table.That said, as of this writing, there are still areas of good relative performance, including:
Healthcare, especially biotech
Consumer discretionary
Industrials
Large cap value
International developed markets, especiallyEurope
Emerging markets (longer term)
Short term high yield bonds and floating rateloan funds.** *** **
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
Last month, I evaluated the risk as being greater to the downside on account of price having broken belowthe 50-day moving average (50DMA) while there was no increase in volume to support a reversal and also weakness in the MACD. Going by what happened next, perhaps on account of the bullets we dodged (seefirst page side bar), the first couple of weeks of September defied my expectations. Then, Washington cameto my rescue by entering into what looks like a long government shutdown. With that, the market slumpedagain.
Although, as of this writing, price is still above the 50DMA (just) and the trend line is positive, we still don’t have the s
pike in volume I am look-
ing for to support a reversal and the MACD momentum indicator is weakening again. Therefore, I’m going to stick to my guns f 
or now and saythat the risk remains to the downside. Of course, a settlement on the Federal budget could change things in an instant.
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
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 11.5%. Movement within this channel and in thisperspective remains positive but weakening. This is seen in the facts that a) the 50DMA up slope is decreas-ing, b) new highs since May are barely occurring, c) the MACD is achieving lower highs since May, and d)
 we’re not getting the “normal” volume action that has been supportive of a rebound in price.
 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 6th time in over 4 years, (and 3 times since April) with 2 out of 6 of the prior times resulting in a significantcorrection to the bottom of the channel. As we may be looking at a repeat of the pattern that occurred in the spring of 2011, this chart is evenmore worrisome when combined 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. Since SPY has rea
ched back to thetop of the channel without an intervening correction, it may be a particularly good time to take some equity exposure off the table.
S&P 500 Trend

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