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TAM's Morning Cup Of Jo: April 2, 2011

|Includes: Apple Inc. (AAPL), BKNG, SPY

"What has not been examined impartially has not been well examined." - Denis Diderot

For the past few weeks the talk of the town has been Apple Inc. (AAPL: NASDAQ). It's been in most every financial paper, TV show and, believe it or not, a topic on a sitcom from the Disney Channel my 13 year old son watches as kids (teens) discussed investing their allowance. Crazy? This exuberance, for lack of a better word, sends me back to the late 90's when everyone was talking about which stock could go the farthest in the shortest period. These discussions were never about risk; it was always about return. When this becomes the norm, it's where someone gets hurt. And now we're here again? Seriously? Truthfully told, we doubt it; at least not on a grand scale. Just because one stock becomes a runaway, doesn't mean the whole team's going to follow suit.

Conversely, even though related to topic, this is not the focus of our piece today. Today we focus on market health and money flow; more aptly put, allocation shifts by institutional investors. As you, our stakeholder followers already know; we believe once the SPX surpassed the May 2nd high of 1,370 it was a new ballgame in consideration of risk/reward. Technically it was a line in the sand where investors would know the precise amount of risk to take - what was once a ceiling, now becomes a floor - sort of speak. Nevertheless, what pushed the market above the bear market trend, back in late December/early January, was mostly due to equities reversion to the mean; not expanding. Hence, risk remained high. This is not to say some stocks (AAPL & PCLN) didn't lead the way. However, when the markets broke above the '2011 Channel of Indecision' (March 13th), it became a game changer for investors. (Read MCoJ March 12th 2012)

When the market shifts, on a cyclical basis (1 - 4 year cycle), there are a few occurrences which typically come in order. As stated, the first move is typically a reversion to the mean with some stocks beginning to technically break out. The risk at this point is whether or not the majority will follow. If they don't, it has the potential to become something akin to the 2003 or 2007 break down, retest, breakout and then collapse. Looking even further into the past, this occurred several times within the 1966 - 1982 Secular channel (5 - times to be exact).

The second move, above resistance, is the more domineering and is where investors find not only a few equities looking similar, but now the majority. In such, the move becomes two fold; a reallocation of assets and new money flow. This shift brings more than just traders looking for quick profits; it brings the longer-term investors. Oddly enough, at this level the risk is actually reduced, not increased. It is a complete shift in market sentiment. {Disclosure: This is not to say the market will lessen daily volatility or independent downtroddens by certain equities, but merely to state the sheer buoyancy is greater due to investors' desire and more clearly understanding where the exit door resides.}

When the new trend begins there is much doubt to its validity. But as time passes this doubt becomes anticipation and belief, which leads to longevity. Understanding this portrayal of psychology it now becomes up to the investor (money manager, advisor, etc.) to decide where to reallocate in order to maintain semblance of portfolio risk while understanding the opportunity.

Typically, once a week, TAM runs one of our quantitative screens which depict major shifts (well above weekly average) in money flow between sectors and industry groups to help determine sentiment and direction. These screens help ascertain large allocation shifts by institutions for both, exiting and entering strategies. Today we thought to share last week's (Friday's) results.

What we found, among many others and taking out the anomalies, is …

Positive Money Flow for the week of 3/26:

Commercial Services - Healthcare

Medical - Managed Care

Negative Money Flow for the week of 3/26:

Finance - Bonds

Oil & Gas - Field Services & Equipment

Energy - Coal


Consumer Services - Education

These findings are not to say this is where the money will be made over the next few months, or even year; but more to help understand where the large allocations are being placed. As you all know, you can have the best stock (by whichever metric and/or yardstick you decide to evaluate with), but if it is not adored by the major players… well, you know the rest of the story. (and vice-versa) The key to investment longevity is not only the ascertainment of risk, but in times of expansion it's all about which cards to hold in your hand.

On a side note: The Supreme Court is expected to release their decision today (possibly) which could further effect the aforementioned Healthcare sector.

We truly hope this helps.