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May Investment Commentary

Below is the investment commentary that is being sent to clients with their April month-end statements. Those of you that are readers of the blog but not yet clients would not otherwise receive this, so I like to put in on the blog so you can see one of the value-added services we provide to clients.

Have a great weekend!

Invest What You See, Not The Dogma You Believe

The title of last month’s Investment Commentary was “Over-bought, Over-extended, Over-hyped” and in it I was giving you my thoughts on why the market was set to correct 6% to 8%. Little did I know that it and more would happen this past Thursday.

If you look at the chart at the end of this Investment Commentary, you will see that I have drawn two boxes on the chart of the S&P 500 Index. I drew the box at the top 10 days or so ago and discussed it on our blog (see the cover page for instructions on how to access the blog), saying that a market top is a process, and it sure looked like we were in the process of topping out. I also explained that if we broke out of the box in a downward direction, we would likley see the market correction begin.

I got a couple of emails from blog readers telling me that the market was just pausing before the next leg up and that I was not too smart for having been raising cash over the past six weeks because I was missing the greatest rally in the market since 1939. They told me that all of the analysts on the news were bullish and that I was wrong in my conclusion. By believing the dogma they heard on TV that the market rally would continue without correction, simply because a famous TV journalist said so, instead of believing what they could to see simply by looking inside the box on the chart, they made an all too common mistake. You always invest what you see, not the dogma you believe. It’s the same reason you never invest based upon your political belief – it juist never works out.

The second box on the chart is what I’ve been describing to the blog readers as the “buy zone.” My plan, which we’ve been executing, has been to redeploy the cash we’ve accumulated once the stock market made it back to that level in the market. Why is that box important? Because it represents the confluence of the 200-day moving average, the gap down during the January correction, and the cross cutting 50-day moving average through the January correction and February recovery. In the analysis of investor sentiment that we employ, moving averages are a key component to understanding where the market is going. Investor sentiment had gotten way to complacent and stock prices had moved too far away from the 200-day moving average. Whenever that happens, we always have some level of reversion to the mean – usually not all in one day, but we always have it. The further away market prices get from the 200-day moving average, the more complacent investors get and the more risk they are willing to assume in the belief that the market will go up forever.

In our 2010 Forecast, I wrote about the fact that we would likely be in a trading range this year after the huge rally off the March 2009 post-crash lows. I noted that the strategy to successfully manage a portfolio in a trading range market is to raise cash when you get to the top of the range and redeploy that cash when the market pulls back. In that way, you are protecting gains and reinvesting at lower prices. It gets hard to stick to the strategy when you hear all the hype on TV and see people increasing their stock market allocations as you get near the top of the range – while you are doing the exact opposite. However, ultimately it pays off.

During Thursday’s big drop and Friday’s further weakness, we were buyers during the times when the market moved into the buy zone. If the market rallies, we will feel good that we bought several million dollars of stock at those times. If the market falls through the buy zone to below the 200-day moving average, we will also feel good that we still have a signficant level of cash on hand that we can deploy in the next buy zone, which we will determine when we see it.

Statement Format Changes

We are in the process of updating our statement format to hopefully give you some additional insight into how we manage your portfolio.

We previously told you about our investment themes for 2010, just as we have for many years prior. Unfortunately, it was difficult for you to see those themes in action because our reports were not structured to communicate that information. That has changed! You will see following this Investment Commentary an Investment Theme Glossary that provides a very short explanation of each of our current themes. When you get to your holdings, you will see that the assets you own are now listed by the Asset Class (Equity/Fixed Income/Cash Equivalent), then by the Investment Type (Stock/Bond/ETF/Fund), and finally by the theme in which we believe the asset adds value to your portfolio.

This is the initial unveiling of this format, so if its not completely perfect, just give us a bit of time. We will be working out the kinks in coming statement cycles. Sorry 401k and Simple Plan clients, this change won’t be of any use to you.

As always, we thank you for your business! If you ever have questions, please do not hesitate to contact us as we always like your feedback.

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