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Tuesday, September 26, 2006

How About a Rough Landing?

For those struggling to come to grips with the economic “conundrum” we’re facing, I’d like to share with you a report prepared by Rod Smyth, Bill Ryder and Ken Liu of the Wachovia Securities Investment Strategy Department. These guys, along with their peers in the department, provide weekly commentaries of the economy and investing environment that I find to be very useful. Click here for the entire report in PDF format.

What they’ve done is break down four possible scenarios with regards to either a hard or soft landing and what the implications are for investors. Here is an excerpt of the “Rough Landing” scenario, which I’m fairly certain is the camp that I belong to.
“…growth could fall below 2% over the next few quarters if the housing slowdown affects consumers more adversely than we currently anticipate. This would constitute year-over-year home price declines in many markets and difficulty making interest payments leading to higher default rates...”

“…mounting evidence that this scenario was unfolding would ultimately lead to Fed easing and short-duration bonds would initially outperform at the expense of stocks as investors fretted about a recession. However, as soon as it looked as if rate cuts were going to have a positive effect on the economy, stocks would begin outperforming again…”

Short-Term Technical Indicators – Well, the S&P 500 reached a new five and a half year high yesterday…were you pleasantly surprised too? The problem, however, is that based on one of my short-term technical indicators, yesterday’s high is not technically supported.

What we need to see is not only the S&P 500 closer to its upper band (21-Day, 3.5%) but we need a new On-Balance Volume % high. A recent example of this occurred in late-November 2005. Unfortunately, the technical’s are currently more in line with that of mid-May, and as you can tell from the graph, that’s not very good news over the short-term.

(Click on Graph to Magnify)


Long-Term Market Model – Bullish since August 23rd

Investor Sentiment – On the volatility and investor sentiment front, there was a decrease in the VIX, VXN and Total Put / Call ratios overnight. Conversely, we saw an increase in both the Total and Equity Put / Call ratios. All five indicators are still closer to their 52-week lows than to their high, which indicates not only a bit of complacency, but also a reluctance to make big bets in either direction.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – NASDAQ 100 (QQQQ)

Top Rated Style-Box Derivative – Morningstar Large Cap Core (JKD)

Top Rated Sector Derivative – iShares Dow Jones Software (IGV)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • CPI Corp. (CPY)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • American Eagle Outfitters Inc. (AEOS)
Today’s Top “Buy” Recommended Rydex Mutual Funds

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