July 6, 2013

Economic and Market Recap
“Fragile” comes to mind when I think about the current market. Readers know that I focus more on technical analysis than fundamental. That is, price movement patterns guide my investment views. But fundamental analysis, the awareness of the relationship between corporate earnings (and those things that influence earnings) and stock prices, is extremely important. Today, a number of analysts have sliced and diced the relationship between current and projected earnings and the S&P 500 (or SPY) and have produced reports that make a strong case that the market is richly valued and a significant correction is possible in a 3-12 month timeframe. Accordingly, my analyses should be taking as a point in time view and subject to change as new patterns develop.

L a n e A s s e t M a n age m e n t
Stock Market Commentary
was mixed. On the plus side, in the U.S., nonfarm payrolls beat expectations, home prices surged, small business optimism rose to a 12 month high, retail sales had a surprising gain, and the Philly Fed manufacturing index had its highest reading since April 2011. In Europe, UK manufacturing expanded at its fastest pace since March 2012 and a number of EU countries had PMIs (Purchasing Manager Indexes) come in much stronger than expected. The market rebounded, sort of. Then, around the middle of the month, the picture began to change again with new talk from the 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 a dive in bond values as investors withdrew a record amount from bond funds. Gold plummeted as the dollar strengthened. As June concluded with a number of upbeat economic reports — rising home prices and sales and increasing consumer confidence and durable goods orders — July kicked off with better-than expected nonfarm payrolls and market gains were extended. Investment Outlook In no change from my outlook in recent months, I continue to think the prudent thing to do is keep risk exposure in check, at or below one’s long term strategic allocation:

June wasn’t a good month for stocks, bonds, gold...just about anything. The month started off well enough when the Atlanta Federal Reserve Bank President and FOMC member said the Fed “was committed to a high level of accommodation.” Then, on the very next day, the Kansas City Fed President spoke out against QE and the San Francisco chief indicated bond purchases may be tapered in the summer. The market slumped. For the next two weeks, the economic news

Lessen exposure to international sectors (I prefer the indirect exposure through U.S. multinationals) Increase exposure to safer, stronger U.S. sectors 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 exposure 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 ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses for these ETFs can be found with an internet search on their symbol. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t
S&P 500
June was an interesting month, technically speaking. Here’s why:

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SPY failed twice in trying to break through its previous high at $116.29. This kind of failure has occurred

several 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 in the slope of the moving average, often portends a reversal in price direction. Sometimes this becomes a self-fulfilling prophecy with traders acting 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 positive. 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.

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 no guarantee of future results.

L a n e A s s e t M a n age m e n t
S&P 500
In a new focus for my technical analysis, the chart below shows a trend depicted by the “Raff Regression Channel.” 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 the period. 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 the

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bottom 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 happened 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.

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 no guarantee of future results.

L a n e A s s e t M a n age m e n t
All-world (ex U.S.)
International equities, represented here by VEU, broke through the line of resistance at $46.35 in April only to be turned back at the next line at $48.35 in May. In June, price failed to hold at what became the new line of support at $46.35 and which has now become a line of resistance once again. The pattern I see for VEU today is similar to the one that occurred about a year ago. On the negative side, we have a price below the 50-day moving average (50DMA) and the slope of the 50DMA is turning

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negative. In addition, both bottom momentum indicators continued their negative push begun in late May. On the other hand, those bottom indicators look like they could be about to turn positive while a close examination of these indicators last year showed a similar pattern only to have the decline extended a few more weeks. My bottom line about international is that I think the fundamental risks (recession in Europe, market turmoil in Latin America, China and India), the continuing relative outperformance by SPY (see next page), and the above technical outlook, add up to providing little motivation for me to have more than a small allocation to international equities. Don’t forget that indirect allocation is achieved through U.S. equities.

VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t
Asset Allocation and Relative Performance
Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. Commonly, investors

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choose an allocation that reflects their risk tolerance and reallocate at prescribed times, say, semi-annually, or when the actual percentage allocation deviates from the longer-term strategic plan. One useful tool I’ve found for establishing and revising asset allocation comes from observing the relative performance of major asset sectors (and within sectors, as well). The charts below show the relative performance of the S&P 500 (SPY) to an investment grade corporate bond index (LQD) on the left, and SPY to a Vanguard Allworld (ex U.S.) index fund (VEU) on the right. Domestic equities continue to outperform investment grade corporate bonds on a relative basis. Given the “threat” from the potential of QE easing and the resulting expectation of rising interest rates, it appears this trend remains on solid ground. On the right, we see that domestic equities briefly fell behind international during April but took the upper hand again in May after hitting the upward trend line (resistance). While the bottom momentum indicators might be showing exhaustion, I still don’t see a compelling reason to go beyond a small allocation to international equities except on a very short term basis to take advantage of a potential overbought situation for U.S. equities.

SPY, VEU, and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends), the FTSE All-world (ex US) index, and the iBoxx Investment Grade Corporate Bond Index, respectively. Their prospectuses can be found online. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t
U.S. Corporate Bonds and Preferred Stocks
LQD represents the total return (capital gains and interest income) for investment grade corporate bonds; PFF represents the total return of the S&P U.S. Preferred Stock index. Regular readers know that I have been very positive toward investment grade corporate bonds for a long time as even hiccups have turned out to be brief interruptions to a continuing upward trend. In the past, I have not been concerned about the prospect of slowly increasing interest rates since I expected

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the turnover of bonds to those with higher yields to offset, at least somewhat, the impact of rising rates on the portfolio. Well, that was then and this is now...and “slowly” increasing interest rates are not what we’ve experienced with the 10-year Treasury rate increasing over 50% in the last two months, as of this writing. While this increase may turn out to be an overreaction to the concerns about Fed tapering, I do believe that rates are now destined higher over the next 6-12 months and the market reaction could be as volatile as we’ve witnessed the last few weeks. Accordingly, I’ve become much more selective with regard to income-oriented investments. Given the uncertainty regarding future investor reaction to rising rates, I would look for other income-oriented opportunities rather than conventional bonds at this time. One of those areas is preferred stocks and the chart on the right below shows a continuing underperformance of LQD relative to PFF. There are other alternatives, including so-called senior bank loans with floating rates. The choices are complex and thorough research is recommended.

PFF is an exchange-traded fund (ETF) designed to match the experience of the S&P U.S. Preferred Stock index. LQD is an ETF designed to match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t
12-Month Performance

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The chart below shows the last 12-month performance of the indicated ETFs, the same ones that are on page 1. The performance speaks for itself, but a few observations may be useful:

Large cap domestic equities (SPY) weakened a bit in June but not nearly so much as the other sectors (oil excepted). The 23% gain for the last 12 months is down from the 30% 12-month gain we saw last month. European equities (EZU) weakened in June and, although they’ve gained over 25% in the last 12 months, they’ve been flat on a year-to-date basis. As time goes on, I expect to see SPY overtake EZU as the first two months of the current period disappear from the chart. Gold (GLD) hit an air pocket in early April and, following a brief recovery, have slid ever since. Since gold is largely an emotional trade,(in my view) and not based on inherent earnings, I think this reflects a growing opinion that inflation will remain low and that the dollar will hold its value, at least on a relative basis. Oil (DBO) remained stable in June, perhaps as a reflection of the difficulties in global economic conditions. Not shown is the spike that has occurred in the first few days of July on account of the events in Egypt (interesting, since relatively little oil flows through the Suez Canal). Emerging market equities (EEM) slumped again in June and are essentially flat for the last 3 years while SPY has gained over 60%. Some see this as a buying opportunity. My view is that it still looks a little early to make that call. Investment grade corporate bonds (LQD) lost more traction in June as concern about Fed tapering resulted in a strong reaction from investors and an unprecedented selloff in bonds. Some say this was an overreaction, but that remains to be seen.

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L an e A ss et M an ag em ent
Disclosures Edward Lane is a CERTIFIED FINANCIAL PLANNER™. Lane Asset Management is a Registered Investment Advisor with the States of NY, CT and NJ. Advisory services are only offered to clients or prospective clients where Lane Asset Management and its representatives are properly licensed or exempted. No advice may be rendered by Lane Asset Management unless a client service agreement is in place. Investing involves risk including loss of principal. Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity. Small-cap stocks may be subject to higher degree of risk than more established companies’ securities. The illiquidity of the small -cap market may adversely affect the value of these investments. Investors should consider the investment objectives, risks, and charges and expenses of mutual funds and exchange-traded funds carefully for a full background on the possibility that a more suitable securities transaction may exist. The prospectus contains this and other information. A prospectus for all funds is available from Lane Asset Management or your financial advisor and should be read carefully before investing. Note that indexes cannot be invested in directly and their performance may or may not correspond to securities intended to represent these sectors. Investors should carefully review their financial situation, making sure their cash flow needs for the next 3-5 years are secure with a margin for error. Beyond that, the degree of risk taken in a portfolio should be commensurate with one’s overall risk tolerance and financial objectives. The charts and comments are only the author’s view of market activity and aren’t recommendations to buy or sell any security. Market sectors

and related exchanged-traded and closed-end funds are selected based on his opinion as to their usefulness in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations aren’t predictive of any future market action rather they only demonstrate the author’s opinion as to a range of possibilities going forward. All material presented herein is believed to be reliable but its accuracy cannot be guaranteed. The information contained herein (including historical prices or values) has been obtained from sources that Lane Asset Management (LAM) considers to be reliable; however, LAM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change without notice and readers are urged to check with tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Periodically, I will prepare a Commentary focusing on a specific investment issue. Please let me know if there is one of interest to you. As always, I appreciate your feedback and look forward to addressing any questions you may have. You can find me at : www.LaneAssetManagement.com Edward.Lane@LaneAssetManagement.com Edward Lane, CFP® Lane Asset Management Stone Ridge, NY Reprints and quotations are encouraged with attribution.

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