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GregCorneille
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Gregory is the President and Senior Investment Advisor of Axcel Capital Management, LLC. He directs all research, analysis, and corporate strategy for the ACM Managed Account Programs. He is a former U.S. Army officer and a graduate of Hampton University. He began his career in investments in... More
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Axcel Capital Management Market Commentary
  • April 2013 Market Update: Markets Have Topped All-Time Highs, Now What?  0 comments
    Mar 29, 2013 4:21 PM

    For the fourth straight year, the equity markets have enjoyed a good rally during the first quarter of the calendar year. Both the Dow Jones Industrial Average and the S&P 500 closed the quarter at all-time highs, surpassing those previously established in June of 2007. Both indices have reeled off four straight months of positive returns. The obvious question is whether the run will continue and to what extent. Moreover, should a market retracement occur, would it be significant enough to confirm that we are still in the latter stages of the secular bear market (which began in 2000) as oppose to the beginning stages of a new secular bull market? The latter is a question that will be discussed in greater detail in future writings, but for now I will address the former.

    The evidence suggests that there will be some headwinds in the near future. For starters, we have seen the equity markets respond very closely to seasonal market trends since 2009 - this is what's known as market seasonality. In general, the winter months tend to be better than the summer months. The S&P, if you recall, was up about 12% during the first quarter of last year, nearly 6% in 2011 and 5% in 2010. The 2nd quarters of the previous three years have looked roughly as follows: -12% in 2010, -1% in 2011, and -4% in 2012. In 2011, the markets experienced a more significant correction later in the summer.

    Secondly, we must keep a close eye on volatility of the S&P 500, which is generally used as a contrarian gauge to the market - it rises as the market falls and falls as the market rises.. Last week, the volatility index (VIX) fell below 13 for the second time in 2013. Prior to this year, the last time we saw volatility was this low was May of 2007, obviously near the time of the previous market highs.

    In addition, the leading performers during this first quarter rally have been traditionally defensive sectors such as consumer discretionary, transportation, and utilities. Typically, these sectors tend to outperform towards the highest points in a stock market cycle.

    Finally, the financial markets are still dealing with the threats posed by the sovereign debt issues abroad - namely Europe - and at home.

    Let's start with Europe. The major story of recent has involved the European Union's (NYSEARCA:EU) bailout of the country of Cyprus, a small Mediterranean island country with a GDP of only 23 billion. Why was this bailout a big deal? The problem was the way the bailout was done - in short the terms allowed the Cypriot government to seize and use personal bank deposits in order to meet the terms specified. This is the basically the equivalent of the Fed taking money - up to 40% in some cases - directly from your savings account in order to pay down the national debt.

    The fear here is that this could have set the stage for panic in the future. In the next European financial crisis requiring an EU bailout - Spain will likely apply for bailout assistance later this year should interest rates on Spanish bonds return to their previous levels - citizens may be inclined to pull their money from the banks at the first sign of trouble; which could result in a run on the banks. The fear is, and had been contagion: that the outright default of one country would create a domino effect which could in turn end in the collapse of the Euro.

    At home, we have the issues of rising interest rates and taxes that threaten to derail the economic recovery. With the 10-year U.S. Treasury yield up nearly 25% from its lows of last year, the question of the resolve of the Fed to continue its quantitative easing programs - essentially, printing money in order to ease monetary flow and thus keep interest rates low - has come into play. The Fed has already vowed not to touch the Fed Funds rate, and its commitment to quantitative easing was a big reason the markets rallied the way they did in the second half of last year.

    So, what do we make of all of this? We certainly will continue to monitor the development of these factors. However, from a technical perspective, the relative strength of domestic equities remains strong and the markets are well above their major moving averages. Therefore, as a long-term tactical asset manager we will remain invested in domestic equities for equity components of our portfolios. We may experience some volatility, and will probably not see the type of performance seen in the last three months over the next quarter. Nonetheless, we believe that without more technical data to the contrary, it may be premature to exit equities at this point.

    Disclosure: I am long IVV, IWM.

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