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Higher Highs & Higher Lows

S&P 500 Index

As I look at the above chart, I see a market that is recovering from a sell-off. The pattern that is being formed after the market bottom ( see our blog post at this link: \"I\'m A Buyer\" for discussion of the market bottoming ) is one of higher highs and higher lows.

Typically, when you see that pattern, and when it is accompanied by the Accumulation/Distribution Line indicator showing that there are more buyers than sellers, you have a constructive market situation where the buyers really want to be invested and come in whenever the market pulls back. On the graph above, you can see that yesterday we pulled back to the red 13-day moving average line and today are bouncing up again – a repeat of the pattern since the June 1st bottom.

Fundamentally, the market looks polarizing:

· the bearish case is that the world economy is slowing, US unemployment is high and not improving, Europe has significant financial issues, and there are significant tax increases and spending cuts schedule to automatically take effect on January 1, 2013, which will also likely cut US GDP numbers;

· the bullish case is that all of the world’s economies are providing significant levels of monetary stimulus in order to prevent a recession and that corporate earnings have been strong in spite of a slow-growth global economic situation.

Our stance that supports our fully invested position since June 1st is that the commitment to monetary stimulus and growing corporate earnings will be supportive of higher stock prices. However, if the monetary support of the various Central Banks around the world decreases or if corporate earnings begin to shrink, then we would move to a much more defensive position.

As it stands, within portfolios, we have made changes that make the equities held therein more defensive in their strategic positioning and the fixed income holdings less tied to variable rates:

· Core Equity Portfolios: we have positioned this strategy much more defensively, adding to defensive equity sectors like Consumer Staples, Health Care, and Telecommunications while reducing exposure to economically sensitive areas like Energy, Materials, and Industrials.
· Best Ideas Portfolios: we have positioned this strategy so that it is more focused on larger capitalization companies. We have added some new macro themes and dropped others that were not working. New themes include Legacy Technology companies that present extreme value trading at single digit P/E multiples, high growth rate Momentum Stocks that can continue to grow their earnings in the face of a slowing world economy, and an increase in exposure to the Agriculture industry.
· Fully Diversified Portfolios: contain both of these elements and will be impacted accordingly.
· Mutual Fund Portfolios: we have positioned this strategy to have more exposure to Large Cap Domestic Equity in recognition that the US economy is the strongest in the developed world and that our larger cap companies’ stock prices are less volatile.
· Fixed Income Portfolio Allocations: in all strategies that include fixed income in the asset allocation, we have reduced the floating rate/variable rate exposure in favor of fixed rate exposure.

So, anticipate that we will have a news-driven market for the foreseeable future, focused on the very short-term. This will make movements more volatile and people will be reading into the news reports many things that just aren’t true. However, as long as our higher highs and higher lows price pattern continues, corporate earnings continue to grow, and monetary stimulus stays in place, being fully invested is the right decision.


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Mark