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Gregory is the President and 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 2006 and... More
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Axcel Capital Management, LLC
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Axcel Capital Management Market Commentary
  • February 2014 Market Commentary: Time To Take Profits From Stock Market?  0 comments
    Feb 3, 2014 6:50 PM

    The first month of 2014 saw significant declines in the U.S. and global equity markets, with renewed concerns about slowing economic growth abroad and the effects of reducing central bank stimulus at home. For the month of January, the S&P 500 was down -3.6% and the Dow Jones Industrial Average (DJIA) down -5.3%. The DJIA decline marks the worst start to a calendar year since 2009. Given the healthy stock market returns from last year, a decline of some sort was rather expected. The question is: Is this the time to sell stock positions and lock in profits, or is it another buying opportunity?

    The fundamental factors behind the decline lay the groundwork for some concern. Volatility - a statistical measure of the range of price movement - has become a buzz word again, as the DJIA had triple digit moves in all but one trading day this month. Generally, volatility is synonymous with market declines.

    The catalyst may have been a January jobs report that showed a 74,000 increase in payrolls - well short of the previous month's gain of 241,000 and the worst month for job creation since 2011; leading to speculation of a slowing economic recovery. Earnings reports from U.S based companies have also been lackluster. As we noted in our January commentary, many companies have been revising 4th quarter earnings estimates down. About half of the S&P 500 companies have reported thus far; and while results have not been altogether bad, companies are continuing to cut their annual outlooks and sales forecasts. Finally, concerns over contracting manufacturing activity in China - the world's second largest economy - has placed pressure on emerging market stocks.

    Despite all of this, the Federal Reserve continued with its planned exit of quantitative easing fiscal stimulus - which seemed to have been a key ingredient for the market surge over the past couple of years. Although there was speculation that the stimulus reduction would be postponed due to the recent economic events, Fed Chairman Ben Bernanke (who handed the reins over to Vice Chair Janet Yellen at the end of the month) reiterated the plans to continue reducing the stimulus throughout the remainder of the year as long as the economy remained strong. The Fed reduced its stimulus (purchasing of Treasury bonds) from $75 million to $65 million, the second reduction in as many months. It also reiterated its pledge to keep interest rates low to continue to support economic recovery.

    And rates have unexpectedly declined in the wake of the Fed tapering. Interest rates on 10-year treasury notes retreated from the 3% range to close the month at 2.67%. A possible explanation for this is the sell-off in stocks and increased volatility has forced investors out of stocks and into bonds; and that volume and sentiment has outweighed the reduction in treasury purchases and any related concerns. Without any inflationary pressure, it is possible that interest rates could go lower - even as the Fed further reduces stimulus - if stocks continue to decline.

    Technical analysis also confirms some weakness in the trend of the stock market. The S&P 500 closed well below its 50 day moving average and dangerously close to crossing the 100 day. It should be noted that the S&P dipped just below its 100 day moving average three times in 2013, and obviously rebounded to allow for the stellar gains of last year to continue. However, due to the timeframe & speed of the decline - the S&P 500 was actually posting positive monthly returns until January 22nd - moving averages would not strongly confirm a trend reversal at this point. The relative strength of the S&P, however, did dip into negative territory. For this reason, we have eliminated our position in large cap stocks and taken a bullish position on long-term treasury bonds. A bearish crossover moving average crossover noted in our December commentary identified a possible downward trend developing in interest rates, which will serve well for bond investors. We will continue to hold our position in small cap stocks.

    Disclosure: I am long IVV, TLT.

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