EquityMarketReview

2/7/2013

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SummaryComments S C t
Below we examine current market conditions. Majority opinion is calling for a correction or using the industrys most over used term, overbought. The current street banter seems to center on the theme equities are overbought, overbought speculation is rampant and its a stock love fest However our experience is that we have never seen a it s fest. However, significant correction when everyone is talking about how overbought the market is or how stocks are way too extended. We find it hard to believe that after hiding under a rock for nearly five years, that a few months of equity inflows means investors have gone from petrified to exuberant. That process in our opinion is a longer arc, not a singular event. While clearly markets can and will have pullbacks. We think the overbought chatter comes from many investors rationalizing aloud why they are under invested underinvested. As evidence to refute these claims of speculation, we look at historical mean allocations to equities. Currently equity allocations, are still below their 26 year mean of 60 %. If investors are giddy, and speculation is rampant we wonder, how can allocations to equities be below their mean ? A corrective wave will come at some point, maybe brought on by profit taking ahead U S deficit reductions battles or a flair up in Europe however when everyone is looking for it U.S. Europe, it, as is presently the case, it typically doesnt come. Hence the phrase the market rewards the minority and confounds the majority. Market internals remains strong, and robust fund flows into equities suggest the liquidity back drop will remain supportive to equities Additionally we expect the rotation away from fixed income into equities will keep a bid equities. equities, under the market for stocks, thus we remain constructive on the markets at present even if we are overbought !!

Quote of the Day The way we look at it if you are constantly prepared and reviewing your
risk management plan on a regular basis then obsessing about market direction should be less of a concern. Returnsfollowingseasonalpattern.TheMonthofMaycontinues tobesticky. b i k

Byfailingtoprepare,youare preparingtofail preparing to fail

BenFranklin kl

The Majority Crowd Opinion

The consensus is we are overbought and that everyone is overly bullish. Yet anecdotally I hear more comments like the ones below. This leads me to believe many are underinvested, talking their positioning, and attempting to rationalize their low equity commitment levels.

StocksAreExtended

Apullbackwouldbe A pullback would be healthy TheVIXistoolow Th VIX i t l

%PositiveReturnsDowJonesbyMonth (1900toPresent) y ( )
A minor corrective wave could come 71% this month as Returnsfollowingseasonalpattern.TheMonthofMaycontinues 65% February is hit or 62% 62% 62% 61% tobesticky. b i k miss historically 56% 56% 52% with only 50 % of 50% 49% Februarys being 42% positive. However as the saying goes, so goes January so goes the year. Thus, while corrective waves may occur, January typically sets the tone for positive 12 month returns. Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Source:Bloomberg/NedDavis/FusionIQ

SogoesJanuarysogoestheyear(1950 Present)
They reason they say so goes January so goes the year is because there is a high correlation between January being positive and the full year return being positive and vice versa. There have only been a handful of occasions when January was positive and the full year wasnt.
Source:DorseyWright

January Performance

FullYear Performance

AAIIAssetAllocationStocksvs.26Yearmean(MonthlyChart)
20.00%

1999/2000
15.00%

Veryoverowned
10.00%

SlightlyOverowned
5.00% 0.00% 5.00%

NOW
10.00%

SlightlyUnderowned
15.00%

1990
20.00% 25.00%

VeryUnderowned

2002

2008/2009

Iftheconsensus opinioncurrently isexcessive bullishness towardsequities, d thenwhyare todaysequity allocationsafew %pointsbelow p their26year meanof60%?

Nov1987 7 Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov July y

CBOEVolatilityIndex(VIX) DailyChart CBOE V l tilit I d (VIX) D il Ch t

Volatility for equities can stay low for a while and not be a problem, as evidenced by 2003 to 2007 period. Thus the cries that the VIX is too low in our opinion is just lazy analysis and something to say for the sake of saying something.

NYSEStocksOnlyCumulativeAdvanceDeclineLine DailyChart y y

NYSE Stocks only A/D line @ new highs is a good thing

BloombergEuropeanFinancialConditionsIndex(BFCIEU) DailyChart Bloomberg European Financial Conditions Index (BFCIEU) Daily Chart

For all the gloom and doom about Europe th Bl E the Bloomberg Fi b Financial i l Conditions Index recently hits is best levels since 2007 and move back above the zero line.

DowJonesTransportationIndex(TRAN) D il Ch t D J T t ti I d (TRAN) DailyChart

The transports have broken out to news high from a long base and of course people are squawking they are too extended ? However as the slide on the next page suggests its all a matter of perspective.

DowJonesTransportationIndex(TRAN) M thl Ch t D J T t ti I d (TRAN) MonthlyChart

On the monthly chart, the Transport breakout looks like it is just getting started .

S&P500Index(SPX) DailyChart S&P 500 I d (SPX) D il Ch t

10 Year Yields have to get over 4 % to change the secular trend

S&P 500 trend is up, minor support @ 1,495 big support 1 475 1 465 area 1,475 1,465

10YearTreasuryYields D il Ch t (2007 t 10 Y T Yi ld DailyChart(2007topresent) t)

10 Year Yields testing 2 % a breakout above this level may get people talking and could cause a minor corrective wave to equities, however as the longer term chart below shows we are a long way away from a secular change in rates.

10YearTreasuryYields M thl Ch t (1962 t 10 Y T Yi ld MonthlyChart(1962topresent) t)

10 Y Year Yi ld are still i a multidecade d Yields till in lti d d down trend. We think worrying about a significant rise in rates is a way off and could coincide with the 10 year taking out 3.75 %.