Roman Chuyan, CFA's  Instablog

Roman Chuyan, CFA
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Frank Donovan, Vice President, Performance Analytics Inc. I am responsible for business development for Performance Analytics Inc., an independent firm based in Boston, which delivers actionable, results-driven asset allocation research to investment management clients. Our research reports are... More
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Active Equity Allocation - Latest Model Results
  • Short Term Rebound, But More Downside For Equities And Commodities  0 comments
    May 14, 2012 12:01 PM | about stocks: SPY, DIA, QQQ, IWM, JNK, SHY, TLT, GLD, OIL, CRUD

    As we started predicting in our March-31st report, equities are expected to decline in the next 4-6 months, by about 7% for the S&P 500, based on our latest model results (as of Apr 30th). The S&P 500 dropped by about 3.8% so far in May, so equities are likely to go down more from here. Several catalysts are triggering this drop - weaker than expected earnings in the US (JPM, CSCO are recent examples), the "resurfacing" of the European debt problems and their election results. It is important to understand that these and other macro and economic reasons existed for a while, and having a proper tool is required that allows one to account for most relevant factors and to calculate the expected equity index return - this is what our PAR model does.

    Also worth noting, this time, major commodities are following equities down - Gold, Oil - which tells us that a broad risk-off scenario is developing, rather than equity-only.

    It is nearly impossible to forecast short-term market movements because volatility dominates in the short run (which is why with our model, we use a 6-month horizon). But I will venture to say that in the short term, the markets may rebound slightly, because they became a bit oversold. If they do, we recommend that you use the opportunity to position your portfolios for more downside in equities, commodities and other risky assets.

    A note on JPM: the media will grab on whatever they can, but let's put the $2B trading loss in perspective. Due to the stock reacting violently (about 9% drop on Friday), ~$15B was erased from JPM's market cap - more than enough to account for the loss, and additional expenses the bank will have to incur to fix the issue. This is the largest US financial institution, with growing earnings, P/E ratio of about 8x. It is a fantastic buying opportunity, in our view.

    If you find this useful, FOLLOW us here on Seekingalpha!

    For more info or to subscribe to the full reports, please visit us at

    Disclosure: I am long JPM.

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