Blog Post

“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we so not see the one which has opened for us.”

                                    -Alexander Graham Bell

If you have been able to sit down and watch television over the past couple of weeks I am sure that some of time was spent watching Michael Phelps win eight Gold medals, Nastia Liukin and Shawn Johnson take the top two medals in the Women’s Gymnastics for the US, and Usain Bolt, of Jamaica, win the Gold Medal in the 100 and 200 meter sprints in order to be declared the World’s Fastest Man. There is no doubt that there have been many great memories of the 2008 Olympic Games, and there is more action to come.

It’s been an interesting year in 2008 for the financial markets as well.  What worked for investors the first six months of the year stopped working in the following six weeks with a vengeance.  Not to mention the market this year has been extremely volatile. In fact, approximately 40% of the days have seen movements of 1% or greater in the Dow Jones Industrial Average. Since 1985 the only two years to perform better than this percentage is 2000 and 2002. In both 2000 and 2002, the volatility brought about sea changes with respect to sectors, currencies, commodities, as well as the international markets.

Are we seeing similar types of macro changes in the markets amidst the volatility in 2008, game changing as were 2000 & 2002?  Here are some market updates:

Market Thoughts

• Domestic equities gaining strength over International: The iShares MSCI EAFE Index (EFA) is a widely watched international benchmark, and for the first time since 2003 the EFA is showing weakness versus the domestic equities market. In addition, the domestic equities have moved up the ranks when compared to a number of international countries. Using relative strength we compare a US market index versus numerous other countries. After years of basically coming in last place in our rankings, we have seen the iShares Dow Jones US Total Market Index (IYY) move into the top half of the 38 countries we compare. This does not mean that we are going to completely get away from international exposure; rather, we are just not adding new money into this arena.


• Equity Indexes: We have seen strength from domestic equities relative to international equities however this strength may not have appeared on the surface. What I mean is that just looking at the S&P 500 or the Dow Jones Industrial Average it has been hard to make any headway, but there is quite a bit of rotation happening underneath the surface with the small and mid cap stocks carrying the baton.


• Healthcare: Healthcare, with Biotechs in particular, have been one of the bright spots of the market over the past couple of months. The Healthcare sector is moving into Favor while other sectors rotate out of favor. I am looking into the best way to gain exposure here, and if this going to continue – in light of a presidential election coming up, I tend to think this is a sign that the market believes the Republican candidate is going to win, which is something I was not expecting to happen.


• Small Cap Resurgence: One of the great examples of rotation over the year is the relationship between Large Cap stocks and Small Cap stocks. Many times advisers will take to clients about sector rotation; however, it is not often that investors hear about the importance of rotating in and out of market styles. For instance, in 1999 the relative strength chart of the Vanguard Small Cap ETF (VB) reversed into a column of X’s versus the Vanguard Large Cap ETF (VV) in order to suggest that small cap stocks were likely to outperform large caps. This chart suggested outperformance for more then seven years, and just about every January during this time there were magazine articles or headlines boasting “This is the Year for Large Stocks”. However, by looking at the relative strength relationship there is no need to trying to predict; rather, we simply listen to what the market is telling us. While this relative strength relationship was favoring small cap stocks, the VB was up 113% while the VV was up just 12.5%.


• US Dollar Update: Domestic equities are not the only positive thing we have been seeing from the US financial markets, the US Dollar has been showing some positive signs as well. We have already seen the most pronounced counter-trend rally in a couple of years from the US Dollar, setting up a test of it long term, downtrend line. We have now observed about 5 months of overall stability from the Dollar. We certainly don't know whether this test of trend for the US Dollar will result in a failure and ultimate re-test of the March lows, or if the March lows are truly THE lows and the Dollar will continue to be in favor. What we do know is that many of the themes that have been in play for much of the long-term move lower for the US Dollar are looking pretty shaky right now.


• Crude Oil: There is no doubt that, like Gold, Crude Oil has lost a little of its luster over the past month or so. This comes after an extremely strong run, another play that was in place while the US Dollar was in a long-term downtrend. However, the same tools that guided us in Energy over the past few years are the same tools that are suggesting we at least lighten, or reduce the exposure to this commodity.


• Offense or Defense: The bottom line here is that the main indicator I follow to guide offensive or defensive posture with respect to the overall market remains positive at this time. The NYSE Bullish Percent continues to suggest that demand has the upper hand on the equities market; therefore, we are going to focus on offensive plays here. This does not mean we are throwing a hail mary into triple coverage, but it does mean that we running offensive plays. With the volatility we have been seeing, we are approaching the markets with caution, carefully selecting appropriate plays.

We have no way of knowing whether the trends we are being to see emerge will catch stride or not, but what we do know is that we have soulless barometers that are unwavered by financial media. We will adhere to both the buy and sell side of our decision making process and let the discipline which has helped us successfully navigate this market continue to be our light in this stormy environment.

Enjoy the last week of summer,

Jim Huller
Maximum Wealth Advisors, LLC

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