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On The Edge

S&P 500 Index Annotated

As you can see on the chart above, the market has moved back to the edge of where we anticipate taking some profits. I have added two things to this graph that I wanted to point out:

(1) if you see the orange arrow at the bottom of the graph it is pointing to volume – the past two days when we had down days, the volume was below average, but today’s strong up day saw higher volume, a good sign that we are seeing some buying interest by investors that sold into the downdraft during September but missed the chance to participate in the recovery; and

(2) At the top, you see the overlayed gold and black histograms – these represent the percentage of stocks in the S&P 500 trading above their 50-day moving average (gold) and 200-day moving average (black) – in the green box I’ve drawn, you see that the gold has really taken off – this is a good sign that the market is getting healthier as more stocks have moved higher in price so that they are trading above their 50-day moving average.

Global Market Performance for October

This is the other thing I want to point out – for those of you who are clients, in your quarter-end statement I included an Investment Commentary discussing how having a diversified portfolio hurt you during the past quarter as the small and mid caps plus the foreign markets and alternative investments all performed significantly worse than the S&P 500 for the nine months ending 9/30/11 – most were down at least twice as much as the large cap index.

In the commentary I mentioned that this is a rare occurrence, and that usually the diversifying asset classes provide some protection to a down market plus additional incremental return in up markets.

In the graph above, you can see that this is starting to reverse itself with the diversifying classes beginning to recover faster than the S&P 500.

That is exactly what we would anticipate to happen and why we chose to hold onto those diversifying assets in spite of some panic selling we were seeing in the market.