April 2011 Notes

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Burke-Leslie Professional Asset Management April newsletter

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April 2011 Notes

  1. 1. Burke-Leslie Professional 407-562-1861Asset Management, LLC. jleslie@burke-leslie.com801 International Parkway wburke@burke-leslie.comLake Mary, FL 32746 A PRIL M ARKET N OTESJOHN LESLIE’S BRIEF MARKET ANALYSIS April 2011 U.S. Economy and Markets Move Ahead I NSIDE THIS ISSUE : After a rough start, March prices. U.S. Consumer Confi- B ULL —B EAR 2Madness prevailed as the major dence fell slightly in March ac- M ARKET D ATA 4indexes closed the quarter with cording to the Conference Boardthe strongest gains in more than as did the Michigan Sentiment C ALENDAR 510 years. The economy contin- index. Housing continues to lagues to show steady improve- other sectors as Construction M AJOR M KTS 6ment with the notable exception spending fell again in February S ECTOR P ERF 11of housing. Nonfarm payrolls to the lowest level since 1999.came in above expectations at New Home sales fell 16.9% to F IXED I NCOME 14216,000. The unemployment the lowest level on recordrate fell again for the fourth (1963) while sales of existing C OMMODITIES 17straight month to 8.8%. That’s homes showed a similar declinethe lowest level in two years. (9.6%). But both of these indi-These numbers can be a little cators can be quite volatile andconfusing as fewer workers are subject to revision. Market Trendsreentering the job market sug- Short Term MTI Global markets rebounded ingesting they don’t see much Bearishpromise of jobs. But the trend March suggesting a continuation Intermediate Trendis clearly positive. The manu- of the global recovery. April and Bullishfacturing sector continued to May are seasonally favorable Long Term Trendshow strength as the Institute months for the equities markets. Bullishof Supply Management (ISM) There are still clouds on the ho-index declined in March to 61.4. rizon, but the market has been(A reading above 50 indicates climbing the wall of worry thusexpansion, below 42 reces-sions). Manufactures drew far. Both the Bulls and thedown inventories as all 18 in- Bears state their case on pagedustries reported paying higher 2. And yes, it is Tax Time! April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  2. 2. THE BULL AND BEAR STORYEvery time someone buys a stock, someone else is selling it. It’s safe to assume thatwhat one investor views as an new opportunity, another views as quiet differently. Thisis what makes an auction market. Viewing the same economic data, analysts and inves-tors often come to very different conclusions. That’s never more apparent than nowwhen the major market averages have essentially doubled from the March 2009 low.So where are you, bullish or bearish? The Bulls view the economic environment as very positive. Af- ter all, interest rates are still very low. The 2 year T-Notes are yielding only .8%, the 10 year is 3.45% and the 30 year T- Bond is 4.48%. The unemployment rate is falling, now 8.8% and the econ- omy is finally creating new jobs. The Purchasing Manager’s Index (PMI) points to an expansion of manufacturing. And retail sales continue to improve.Corporate earnings are expected to come in strong for 2011. The estimated priceearnings ratio (P/E) for stocks are estimated (by Bank of America analysts) to come inat 14 for 2011 and 13 for 2012. From a historical perspective, the market is not over-valued.The Federal Reserve is clearly in an accommodative mood. Even though QE II ends inJune, the FED is committed to economic growth and a higher inflation rate.The bulls view this data as very encouraging, and believe the stock market has lots ofroom to go higher from here. Cash then, is trash. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  3. 3. THE BULL AND BEAR STORY —P ART 2The Bears have a different take on the data. The unem-ployment trend is down, but the real unemploymentrate is much higher than 8.8%. According to the WallSt. Journal, “There are still 13.5 million people whowould like to work, but can’t get a job.” The broader U-6 unemployment rate includes those who are marginallyattached to the labor force. That number continued todecline but still remains at 15.7%.They question what will happen when the FED stopsflooding the economy with money (quantitative easing)in June.Bears worry about the current political unrest in the Mid-dle East and North Africa (MENA), the sovereign debt cri-sis in European Union, and the fallout from the natural disasters in Japan.They are concerned about the growing federal debt service obligation, and the currentfocus on cutting government spending. What will the fallout be on the economy?They are concerned about the ramifications of the large budget deficits, and the slidingU.S. dollar. If the dollar falls so low that it is no longer the global currency, what hap-pens to the cost of doing business in the global economy?Commodity prices continue to climb, in part because of the falling dollar. Will higherprices be inflationary pushing up the cost of retail goods? Will the FED be forced toraise interest rates? How will the housing market respond to higher interest rates? Isthere a possibility of a double dip in housing prices?“The Bears acknowledge that Bull markets climb a wall of worry … but today’s wall ofworry is one of the highest and most daunting in years” according to Mark Huard. TheBears conclude that lower prices are around the corner. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  4. 4. Market DataApril Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  5. 5. Economic Calendar______________________________________________________________________________________ SEASONALITY For the past 10 years, April has been a sea- sonally favorable month for the Dow Jones Industrial average. The index has been up almost 67% of the time with an average gain of 2.1%. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  6. 6. Major Market IndexesThe S&P and DJI indexes remain in bullish main in positive longer term trends.trends, albeit bearish wedge patterns. Last Given the strong price performance since lastweek’s Mid-East turmoil pushed energy prices August, a pull-back or “correction” would behigher, and the indexes lower but they did both expected and healthy. In our opinion,NOT break below support. we have completed two of an anticipatedThe NASDAQ Composite and Transportation three wave cyclical bull market.Indexes have broken below the prior pivot Given the current geopolitical events, we arelow, so price is below the Trend Bar (black alert to the possibility of increased volatility.line) and now negative on an intermediate However, news does not normal affect theterm. The Transportation companies have longer term price trends. Ultimately, price isbeen hurt by rising energy and commodity the best “indicator” and we monitor thoseprices. Both of these indexes, however, re- trends daily. Don’t ever panic. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  7. 7. Major Market IndexesThe major indexes traded lower in early March in what appeared to be the beginning of acorrection. But price reversed mid month to rally an impressive 700 Dow points.The S&P has rallied to within a few points of its bull market high. Seasonality factors favor acontinuation of the positive trend. Momentum indicators are bullish on both daily andweekly time frames. Viewing 10 color coded technical indicators, green for positive/red fornegative signals, the index turned bullish the week of September 13th. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  8. 8. Major Market IndexesThe bearish “wedge” pattern broke down in February taking price to the 1250 area. The re-versal off 1250 created the support trend line. The Index is now in a positive channel withan up-side target above 1400. There is no assurance it will reach that technical target, butthe trend is clear.The same pattern is manifest in the Dow Jones Industrial Average. The trend line resistanceis in the range of 13000. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  9. 9. Major Market IndexesMarket Breadth Indicators are positive including: New York Stock Exchange Advance vs. Declining Issues. (More stocks are advancing than are declining.) New York Stock Exchange New Highs vs. New Low (There are many more stocks making new highs than are making new lows.) April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  10. 10. Major Market IndexesThe New York Stock Exchange Bullish Percent Index records the number of stocks with bull-ish “point and figure” buy signals. The indicator has confirmed the new bullish trend in Sep-tember, the correction in February, and the resurgence of positive price movement in lateMarch.The near term sentiment, momentum, and price patterns are in positive trends. But with themany unresolved global challenges, it’s important to avoid complacency. Negative crossing Positive crossing April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  11. 11. SECTOR PERFORMANCEApril Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  12. 12. SECTOR ETFsRelative strength is a measure of the relationship of price performance between astock/ETF and another stock/ETF in the same category, against an index or against thebroad market. For our Sector ETF analysis, we are measuring strength between theSector ETF and the S&P 500.Robert Colby’s long term relative strength ratings are listed in descending order ofstrength: Energy — Bullish: relative strength further above 2 year highs. Limited storage issues may push oil futures lower in the near term as trades can- not accept delivery. But the continued instability in MENA (Mid-east, north Af- rica), the global economic recovery and growing demand point to higher prices in the intermediate term. Industrials—Bullish: relative strength back above 12 year highs. Manufacturing is improving according to the latest ISM data, and growth could actually be stronger than anticipated. But the overall view is neutral due to fiscal restraints, Asian monetary policy, and a rollover of the orders/inventory ratio Materials— Bullish: relative strength rose above 6 week highs Materials continues to move with the overall market with a positive trend. Higher commodity prices can put a damper on growth however. Consumer Discretionary—Neutral: relative strength in trading range. As we enter the later stages of the economic expansion, this sector become more vulnerable to pricing pressure. With limited pricing power to offset costs, the sector remains a neutral. Technology—Bearish: 50 period moving average of relative strength crossed below the 200 moving average. Absolute price is neutral. Still recovering from the market correction, an improving economy will boost tech sales and bottom line. Financials are solid and the sector is rated neutral. Health Care— Neutral: relative strength back up to neutral This beaten down group has climbed back into the neutral area. There are still issues with health care reform which could limit profits. But low valuations re- main attractive. Financial—Bearish: relative strength fell below three month lows. Absolute price broke down below 10 week lows. Housing, the related mortgage market and new capital requirements will create a drag for this sector, while higher interest rates and the ability to begin or in- crease dividends point to stronger performance. Still a market performer, but an improving sector. Consumer Staples— Neutral: relative strength neutral but weakening While traditionally a defensive sector, prices are improving with the economic recovery. But rising commodity costs are putting a ceiling on margins. The sector remains a weak neutral rating. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  13. 13. Utilities— Bearish: relative strength fell below prior 2 week. Absolute price is neutral.While relative performance puts utilities at the lowest range of the sectors, low bond yieldsand high utility stock dividends have attracted buyers. The potential fallout from the Japa-nese nuclear incidents and the risk of additional regulatory response keeps a cloud over thissector. It’s neutral now, but vulnerable to a further downgrade. Absolute price performance for major sectors, for both 1 month and 3 months April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  14. 14. FIXED INCOMEBoth the 10 and 30 year Treasury’s rallied in February to challenge resistance. Both wereturned back. Inflation and interest rate fears are pushing yields higher and bond priceslower. There is great uncertainty on the horizon as Congress has yet to resolve the debtceiling. House Speaker Boehner is quoted as saying that “any increase in the debt ceilingcannot and should not pass without spending cuts and reforms.” According to JP Morgananalysts, “while it’s almost certain the Congress will eventually raise the debt ceiling intome for Treasury to avoid a default, a game of chicken that delays this decision in to Juneis a clear negative for Treasuries.”Walmart CEO Bill Simon recently announced that inflation “is going to be serious. We’reseeing cost increases starting to come through at a pretty rapid pace.” Because of theirfixed payouts, bond prices do not perform well in times of increased inflation.Bonds, like the U.S. equities markets, are at a critical point. If price breaks below the sup-port levels (below), it would suggest that the bond market has a growing anticipation ofhigher inflation (and interest rates). Both have negative implications for any fixed incomeinvestments. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  15. 15. INTERMARKET RELATIONSHIPS The relationship between bonds, commodities, the U.S. dollar and the stock market Intermarket relationships are key to understanding economic cycles. Generally speaking: Bond prices and commodities trend in opposite directions; Bonds usually trend in the same direction as stocks. Any significant divergence warns of a possible reversal in stocks. A falling dollar will eventually cause commodity prices to rally which in turn will have bearish implications for bonds and stocks. Falling interest rates pull the dollar lower. With the falling dollar, we initially have fal- ling commodity prices. As interest rates are falling, bond prices and later stock prices rally. [There are periods of time when these relationships are in transition, and even occasionally, reverse]. Eventually, the falling dollar pushes commodity prices higher. Rising commodity prices pull interest rates higher and bond prices lower. The lower bond market eventually pulls the stock prices lower. Rising interest rates start to pull the dollar higher, and the bullish cycle starts all over again.1Intermarket Technical Analysis, John J. Murphy, 1991 April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  16. 16. The U S Bond ETF ($USB) follows the U S dollar in the below chart.Stock and commodity prices are currently moving together. Here is a comparativeview of the Commodity Research Bureau (CRB) index and the S&P 500 ($SPX).Do you notice anything funny about the relationship between the CRB and the broadstock market?Remember our initial tenet: commodities and stocks should not be moving in thesame direction. This suggests an unhealthy market. It is impossible to know whichmarket will change to reestablish the normal relationships, or even when. But clearly,caution is advised.April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  17. 17. COMMODITY MARKETSThe dollar traded down to support at $76 and bounced briefly. Momentum indicators arestill negative suggesting the dollar might retest the 75.81 lows in the near term. There is agreat deal of technical support just beneath the current price. If that support is broken, thedollar is vulnerable to much lower prices. WEEKLY CHART DAILY CHART April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  18. 18. Gold remains in a bullish trend, but as yet unable to break through resistance at $1450.Support is the lower trend line. While the consensus is that gold will move up from thisrange and perhaps challenge the $ 2000 level. However, until the resistance level is vio-lated, gold may continue to consolidate around 1430Copper prices broke above resistance near the 4.70 target, but quickly fell back down intothe trading range. Price broke below the intermediate term trend line, and has made a se-ries of lower highs and lower lows. Trend is now negative in this economic bell weather. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  19. 19. Crude oil prices briefly dropped below the intermediate trend line, but quickly rallied toclose the week at 107.07. The trend remains bullish while crude oil inventories are quitehigh. The March 30th EIA (Energy Information Administration) inventory report showsCushing storage at a record 41.9 million barrels. The maximum capacity is 44 million. U.S.supplies overall rose to 355.7 million.There is an increased focus on Natural Gas as an alternative to nuclear energy. But largeinventories continue to hold price down. The trend is positive, but within a larger pricerange (consolidation). Until price moves above the prior price high (pivot), NG is neutral. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.
  20. 20. DEBT CLOCKBurke -Leslie, LLC, is a registered investment advisor (RIA) with the SEC. The information contained within is neither a solici-tation nor an advertisement for any investment. The articles and information provided are for the benefit of our clients and arenot an offer to purchase or solicit any mentioned investment. Opinions expressed about any security mentioned in this newslet-ter may change at any time and Burke-Leslie, LLC maintains no duty or obligation to update information as changes occur.While every effort is made to ensure accuracy of the articles published herein, we are not liable for any inaccuracies. April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.

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