Last month, it was all good as investors seem to extrapolate the market’s gains into nothing but clear sailing ahead.  This month, investors aren’t so sure as the prior reporting period’s gains have vaporized.  But from this perspective, very little has changed fundamentally as the problems that were with us last month remain with us this month.  The only thing that has changed are the perceptions of investors.

In any case, my patience not to chase the market has paid off.  And guess what?  I will remain even more patient waiting for our next pitch.  We should get about 2-3 buying opportunities per year in equities, and we are nowhere near that juncture as these usually occur when investors are fearful and perceive the risks to be high.  Investors are only beginning to realize that these liquidity fueled rallies tend to vaporize rather quickly.  The all clear was sounded and oops!, it looks like the rug is going to pulled out from under them again.  The unemployment problem in the US is not solved and getting worse.  The sovereign debt problem in Europe is not solved and getting worse.  Fiscal issues in the US have not been addressed and there is little political will to do so.  Investors have put their faith in Ben Bernanke and the Federal Reserve.  “Don’t bet against the Fed” is market dogma that needs to be put in the rubbish can of market axioms that don’t work.  For whatever reason, investors seem to have forgotten 2010′s “flash crash” and 2011′s 20% down draft over a 4 week period.

There appears to be a disconnect between the economy and the markets. The economy is much weaker. The market is clearly dependent upon “cheap money” or the perception that “cheap money” is coming. But without market weakness, it is difficult to see how the Federal Reserve can justify new easing measures. I suspect this is Bernanke’s conundrum. How can we have more QE with equity prices near cyclical highs? The answer: make a case that new easing measures are to attack the unemployment problem.  This would be QE #4.  2 real QE’s plus a Twist have been tried already and have done little to solve the problem.  Why continue to do the same thing over and over again when it doesn’t work?  I am just asking!  The market wants more liquidity, and by all accounts, most market observers believe that Bernanke will continue with the pedal to the metal.  This is his grand experiment to avoid the mistakes of 1937.

Our Dollar model remains bearish and this will be supportive of equity prices. Our Treasury bond model has turned bullish.  Falling yields should be good for equity prices and some of the best multi-month rallies (1995, 1998, 2003, and 2009) coincided with falling Treasury yields. However, the Fed’s intervention in the markets has distorted market signals.  I believe strength in the bond model is a sign of economic weakness and in anticipation of more bond purchases by the Fed.  This is not a Fed being accommodative during an economic expansion like seen in periods past.  Last year’s economic weakness coincided with stagnating equity prices and falling yields. That was a market top that lasted nearly 6 months.  For the record, our models were bullish on equities up until 2 weeks ago; we are currently neutral and we will become bullish once again when the current price cycle unwinds.

What should we expect going forward? In equities, be patient and wait for our pitch.  In commodities, crude oil has broken down, and I would guess that this is a sign of future economic weakness and slack demand.  Gold will remain attractive as long as interest rate pressures persist.  Currency debasement is the only tool that central bankers have at their disposal, and with economies around the world crumbling, it is only a matter of when not if they will use these tools.

For the 4 week period from March 30, 2012 to May 4, 2012, the Conservative Portfolio loss (-0.05%). Over the same time period, the SP500 loss (-2.76%). For 2012, the Conservative Portfolio has gained 4.04% and the SP500 has gained 8.87%. The portfolio has positions in GLD, SPY (remember neutral rating), XLU and BND.  As an aside, I am looking to add a currency pair to this portfolio.

Since its inception on January 1, 2011, the Conservative Portfolio has returned 12.18%. Buy and hold S&P500 has returned 8.86%. Results are through May 4, 2012. The Conservative Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ since inception

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78%) annualized total return since 1871 of the SP500. Capital preservation is a hallmark of this strategy.

For the 4 week period from March 30, 2012 to May 4, 2012, the Broad Market Portfolio loss (-1..34%). Over the same time period, the SP500 loss (-2.76%). For 2012, the Broad Market Portfolio has gained 8.36% and the SP500 has gained 8.87%. Results are through May 4, 2012.  Owing to the sell signal in our equity model, we start the month with positions in the following sectors: XLU and BND.  This portfolio also has about a 40% cash position.

Since its inception on January 1, 2011, the Broad Market Portfolio has returned 2.03%. Buy and hold S&P500 has returned 8.87%. The Broad Market Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ since inception

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 4 week period from March 30, 2012 to May 4, 2012, the Aggressive Portfolio loss (-1.92%). Over the same time period, the SP500 loss (-2.76%). For 2012, the Aggressive Portfolio has gained 2.11% and the SP500 has gained 8.87%. Results are through May 4, 2012.  Like March, April seems to be a transition month for this portfolio. Equities were sold and positions in bonds and gold were initiated. As we start this reporting period, portfolio positions include: GLD, OIL, BND, and XLU.

Since its inception on January 1, 2011, the Aggressive Portfolio has returned 14.81%. Buy and hold S&P500 has returned 8.86%. Results are through May 4, 2012. The Aggressive Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ since inception

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.

Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs. Actual performance results will vary from these examples. Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product. ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

It’s all good!  The record quarter has investors extrapolating future gains, and whether this is appropriate or not is yet to be determined.  I am more of the ilk that the market isn’t as forward looking as others want to believe.  I always wonder what the market was thinking at the 2008 top before it went on to lose about 50%.   I tend to be a buyer on weakness – not strength – and I am bit uncomfortable chasing prices especially in a market that is overbought, overly bullish, and over valued and that has risen on poor volume and breadth.  When it comes to equities, we should get about 2 to 3 buying opportunities per year.  These usually occur when investors are fearful and perceive the risks to be high.  So, I will just have to be patient.

Over the past month, I was surprised by the market’s strength.  However, these liquidity induced rallies seem to have a way of going further than most of us believe is possible.  But there will be a limit, and I suspect when the music stops you will need a parachute to get out of this market safely.  2010′s liquidity induced rally ended in May’s “flash crash”, and the 2011 version ended with the SP500 losing 20% in 4 weeks.  Although the market should remain buoyant as long as investors embrace this rally, predicting the end is somewhat difficult.  Right now, investors are bullish, and this a good sign as it does take bulls to make a bull market.

Our Dollar model is bearish and this will be supportive of equity prices.  Our Treasury bond model has turned bullish again.  Falling yields should be good for equity prices as well, and some of the best multi-month rallies (1995, 1998, 2003, and 2009) coincided with falling Treasury yields.  Last year’s economic weakness coincided with stagnating equity prices and falling yields.  That was a market top that lasted nearly 6 months.  Will 2012 be a repeat of 2011?  Or will the Federal Reserve be able to keep the balls in the air for another 7 months leading up to the US Presidential election?  There appears to be a disconnect between the economy and the markets.  The economy is much weaker.  The market is clearly dependent upon “cheap money” or the perception that “cheap money” is coming.  But without market weakness, it is difficult to see how the Fed Reserve can justify new easing measures.  I suspect this is Bernanke’s conundrum.  How can we have more QE with equity prices at cyclical highs?  The answer: make a case that new easing measures are to attack the unemployment problem.

What should we expect going forward?  From this perspective it is rocks over paper.  Commodities have yet to take off and they generally do in these liquidity induced rallies.  Gold looks positive, and it now has the tailwinds of falling yield pressures.  Crude oil has pulled back to a prior break out point.  With Europe in recession and the Chinese economy looking glum, the US is going to have to go at it alone.  This will require further monetary intervention as demand and growth appear to be waning.  This will only flame inflation pressures.

For the 4 week period from March 2, 2012 to March 30, 2012, the Conservative Portfolio gained 0.02%. Over the same time period, the SP500 gained 2.83%. For 2012, the Conservative Portfolio has gained 4.09% and the SP500 has gained 12%. The portfolio had high cash levels (>50%)  this month. We end the reporting period with positions in: SPY and cash. As an aside, I am looking to add a currency pair to this portfolio.

Since its inception on January 1, 2011, the Conservative Portfolio has returned 12.24%. Buy and hold S&P500 has returned 11.99%. Results are through March 30, 2012. The Conservative Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ since inception

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78%) annualized total return since 1871 of the SP500. Capital preservation is a hallmark of this strategy.

For the 4 week period from March 2, 2012 to March 30, 2012, the Broad Market Portfolio gained 0.82%. Over the same time period, the SP500 gained 2.83%. For 2012, the Broad Market Portfolio has gained 9.83% and the SP500 has gained 12.00%. Results are through March 30, 2012.  The Broad Market Portfolio trailed the SP500 over the past month. Gains in the SP500 were concentrated primarily in the financial and technology sectors.  Emerging markets underperformed noticeably.  We start the month with positions in the following sectors: XLB, XLE, XLF, XLI, XLK, XLY, IYR, EEM, and EFA.

Since its inception on January 1, 2011, the Broad Market Portfolio has returned 3.41%. Buy and hold S&P500 has returned 11.99%. The Broad Market Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ since inception

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 4 week period from March 2, 2012 to March 30, 2012, the Aggressive Portfolio gained 0.06%. Over the same time period, the SP500 gained 2.83%. For 2012, the Aggressive Portfolio has gained 4.11% and the SP500 has gained 12.00%.  March seem to be a transition month for this portfolio.  Gains in equities were cancelled out by losses in crude oil, Treasury bonds and gold.  As we start this reporting period, portfolio positions include: GLD, OIL, SPY and QQQ.

Since its inception on January 1, 2011, the Aggressive Portfolio has returned 17.06%. Buy and hold S&P500 has returned 11.99%. Results are through March 30, 2012. The Aggressive Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ since inception

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.

Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs. Actual performance results will vary from these examples. Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product. ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The bang! that was January has led to a more milder but positive February.  The degree of incredulousness to the price action remains as the market just moves higher despite the news and despite the lack of volume and poor breadth.  Price pullbacks have been short in both depth and duration.  My interpretation is that this is not a sign of market strength but a sign of a liquidity induced rally.  Without backing and filling of price — as opposed to what we have now which is just one way up– the price structure of this rally is built on a poor foundation.  When the music stops, you will need a parachute not a chair to get out of this market safely.

Our Dollar and Treasury bond models remain on sell signals, and like QE2 in Q4, 2010, this has “opened the door” so to speak to “risk on” all of the time.  But there appears to be a limit to these liquidity induced rallies.  The combination of overly bullish, overly valued, and rising yield pressures generally is a headwind for equities.  Furthermore, we are starting to see a ratcheting down of economic forecasts.  It isn’t the economy, stupid.  It’s all about the next QE.   And the only way to get more QE or even talk about QE is to have weakness in the stock market.

So what can we expect going forward? I suspect the key to higher prices will be investor sentiment. If investors continue to embrace this rally, then we will have the scenario that I have dubbed “it takes bulls to make a bull market”. Increases in bullish sentiment won’t be a reason to run from the rally but to embrace it. This is what we saw in 1995, 2003, 2009, and Q4 2010/Q1 2011.  But now add an over valued market and increasing yield pressures to the overly bullish conditions, and we should see a modest pullback in price as one or more of these conditions are lessened.  This is what I am expecting over the next month.   I suspect the pullback will be bought vigorously, and after that, prices may even make new highs, but the rally will peter out by the end of Q2, 2012.  Equities will march higher, but due to inflationary headwinds, gains will occur begrudgingly. This is another liquidity fueled rally that in all likelihood won’t end well for investors. It should be noted that QE2′s price gains were all wiped out with 4 weeks of price action.

For the 4 week period from February 3, 2012 to March 2, 2012, the Conservative Portfolio gained 0.13%. Over the same time period, the SP500 gained 1.83%. For 2012, the Conservative Portfolio has gained 4.07% and the SP500 has gained 8.91%. The portfolio saw strong performance from all assets this month. We end the reporting period with positions in: GLD and SPY and cash.  As an aside, I am looking to add a currency pair to this portfolio.

Since its inception on January 1, 2011, the Conservative Portfolio has returned 12.22%. Buy and hold S&P500 has returned 8.90%. Results are through March 2, 2012. The Conservative Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ since inception

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78%) annualized total return since 1871 of the SP500. Capital preservation is a hallmark of this strategy.

For the 4 week period from February 3, 2012 to March 2, 2012, the Broad Market Portfolio gained 1.16%. Over the same time period, the SP500 gained 1.83%. For 2012, the Broad Market Portfolio has gained 8.93% and the SP500 has gained 8.93%. Results are through March 2, 2012. For the most part, the Broad Market Portfolio traded in line with the SP500. We start the month with positions in the following sectors: XLB, XLE, XLF, XLI, XLK, XLY, IYR, EEM, and EFA.

Since its inception on January 1, 2011, the Broad Market Portfolio has returned 2.56%. Buy and hold S&P500 has returned 8.90%. The Broad Market Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ since inception

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 4 week period from February 3, 2012 to March 2, 2012, the Aggressive Portfolio gained 3.45%. Over the same time period, the SP500 gained 1.83%.   For 2012, the Aggressive Portfolio has gained 4.05% and the SP500 has gained 8.93%.As stated above, it is my expectation for gains in equities to flatten out.  I would look for crude oil and like commodities to continue their out performance.   As we start this reporting period, portfolio positions include: GLD, OIL, and SPY.

Since its inception on January 1, 2011, the Aggressive Portfolio has returned 16.99%. Buy and hold S&P500 has returned 8.90%. Results are through March 2, 2012. The Aggressive Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ since inception

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.

Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs. Actual performance results will vary from these examples. Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product. ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

2012 has begun with a bang!

There is a degree of incredulousness to the price action, which has a persistence of just moving higher despite the news and despite the lack of volume.  This is but one of many similarities to Q4, 2010/Q1, 2011 when the Federal Reserve announced and implemented QE2.  However, this time around the balance sheet expansion is courtesy of the European Central Bank.  Last month I stated that “stocks won’t go higher until the bullish trends in these assets turn bearish.”  This month, what did we see?  Sell signals in our Dollar and Treasury bond models just like in Q4, 2010.  This has “opened the door” so to speak to “risk on” all of the time.  Another similarity to Q4, 2010 is the economic data.  A composite of widely followed leading economic indicators have been pointing towards a recession for about 6 months now.  These indicators were also warning of recession back in Q4, 2010.  It appears that this is another false signal as money printing/ balance sheet expansion/ quantitative easing/ extraordinary action has averted a recession.

So what can we expect going forward?  I suspect the key to higher prices will be investor sentiment.  If investors continue to embrace this rally, then we will have the scenario that I have dubbed “it takes bulls to make a bull market”.  Increases in bullish sentiment won’t be a reason to run from the rally but to embrace it.  This is what we saw in 1995, 2003, 2009, and Q4 2010/Q1 2011.  If higher prices do develop, inflation sensitive issues (i.e., commodities and gold) are likely to outperform.  Equities will march higher, but due to inflationary headwinds, gains may occur begrudgingly.  This is another liquidity fueled rally that in all likelihood won’t end well for investors.  It should be noted that QE2′s price gains were all wiped out with 4 weeks of price action.

The ball is in the bulls’ court.  Important resistance levels are looming nearby for the following widely watched indices: NASDAQ, Dow Jones Industrials, Russell 2000 and SP500.  The NASDAQ100 has broken to new cyclical highs.  The market will be bullish until it isn’t.  Making comments about resistance levels, extremes in investor sentiment, lack of trading volume or some other clue to market action has served little if any good.  The only thing that is necessary to know is that there is a buyer (i.e., central bank) out there with unlimited resources that has distorted markets.  There remains a disconnect from the economic data, the stock market, and what people see and feel on the ground.  The lack of volume seen in this rally is a manifestation of this as investors have one hand on the eject button already.  It is a liquidity induced rally similar to Q4, 2010/ Q1/2011, and that is about the best thing I can say.

For the 4 week period from December 30, 2011 to February 3, 2012, the Conservative Portfolio gained 3.94%. Over the same time period, the SP500 gained 6.77%.  For 2012, the Conservative Portfolio has gained 3.94% and the SP500 has gained 6.77%.  The portfolio saw strong performance from all assets this month.  We end the reporting period with positions in: GLD and SPY and cash.

Since its inception on January 1, 2011, the Conservative Portfolio has returned 12.08%. Buy and hold S&P500 has returned 6.94%. Results are through February 3, 2012. The  Conservative Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ since inception

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78%) annualized total return since 1871 of the SP500. Capital preservation is a hallmark of this strategy.

For the 4 week period from December 30, 2011 to February 3, 2012, the Broad Market Portfolio gained 7.68%. Over the same time period, the SP500 gained 6.77%.  For 2012, the Broad Market Portfolio has gained 7.68% and the SP500 has gained 6.77%.  Results are through February 3, 2012. For the most part, the Broad Market Portfolio traded in line with the SP500.  Over the month positions were added in the following sectors:  XLB, XLE, XLF, XLK, XLY, IYR, EEM, and EFA.

Since its inception on January 1, 2011, the Broad Market Portfolio has returned 1.39%.  Buy and hold S&P500 has returned 6.94%.  The Broad Market Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ since inception

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 4 week period from December 30, 2011 to February 3, 2012, the Aggressive Portfolio gained 0.58%. Over the same time period, the SP500 gained 6.77%. The portfolio spent the month short the SP500.  Obviously, this was the wrong play.  The basis for the short position was that economic weakness would prevail after the end of the year Santa Claus rally had fizzled.  Wrong!  As balance sheet expansion prevailed again.  Fortunately, our position in gold continues to pay dividends, and the precious metal even out performed equities.  As stated above, if the rally continues, I would look for crude oil and like commodities to start their outperformance.  I will be starting a position in equities.  As we start this reporting period, portfolio positions include: GLD, OIL, and SPY.

Since its inception on January 1, 2011, the Aggressive Portfolio has returned 13.09%. Buy and hold S&P500 has returned 6.94%. Results are through February 3, 2012. The Aggressive Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ since inception

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.

Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs. Actual performance results will vary from these examples. Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product. ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

So there you have it!  2011 is in the books.  There was a lot of nail biting and a lot of volatility, and in the end, investors got nothing for their efforts — a big fat goose egg.  A year like this highlights why having an active approach is preferable to buy and hold.  We use data to make decisions, which helps us to navigate the markets.  We invest in multiple asset classes.  Our strategic and balanced approach has served us well this year helping to weed out the noise.

Throughout the year, there were opportunities in Treasury bonds, gold, equities and crude oil.  Gold and crude oil outperformed Treasury bonds with equities picking up the rear.  We had a position in gold all year; a position in Treasury bonds since March; a position in crude oil at the beginning and end of the year.  To make money in equities, we had to be more opportunistic as the market was in a topping formation for the first 6 to 7 months of the year.

Looking ahead, the market remains on recession watch.  The ECRI’s leading economic indicator and the Chicago Fed’s National Activity Index continue to deteriorate.  Market sentiment is neither overwhelmingly bullish nor bearish, and this is a problem if you are a bull.  If there are no bears, then short covering fuel to propel a rally is non-existent.  If there are no bulls to embrace a rally, then the market simply won’t go higher.  At best, the price action remains range bound, and as we approach the new year, prices are at the upper end of that price range.

Other factors weighing on equities continue to be strength in the Dollar and in Treasury bonds.  I have also contended that stocks won’t go higher until the bullish trends in these assets turn bearish.  As stated above, my bond model has been bullish for the past 9 months.  My Dollar model remains bullish, and it is likely to do so for at least another 3 months.  These are the anti-risk trades, and both of these assets outperformed equities in the past year.

The leading story of the year has been Europe, and it is my impression that many investors believe that if it wasn’t for Europe, the USA would be on the track to a bull market.  Of course, you would also have to believe that US economy is also immune from what appears to be a global slowdown.  My data shows that the USA is at risk for recession, so I just view the Europe story as a sideshow and a diversion.  Yes, it is another chance for a bailout, and lord knows, market participants like bailouts, and maybe that is what this market needs — another bailout.

And with bailouts in mind, it is worth repeating what I said last month: “While my thesis remains that the market is vulnerable, I remain open to the idea that the Fed can avert another recession, and the only way we will know this is to have higher prices.  I really think it is that simple.  Last year’s QE2 rally really started in early November with the Fed announcement of how extensive QE2 would be, and it went on until mid- February at which time the market struggled its way into a top.  If the same were to happen again, there should be enough time to capture a sizable portion of the gains.  Remember, these actions won’t solve any problems.”

Last year’s problems have not been solved, and if you call papering over our problems as a solution, well you might be in luck here.  This seems to be the only solution ever offered — spend your way to prosperity.  To this observer, it seems like the market is living on more hope than normal.  Hope that there will be a bailout.  Hope that Santa Claus will show up.  Hope that investors will favor the USA only because we are less bad than the rest of the world.  Yes, there is a lot of hope.  I don’t invest on hope.  The data has a bearish tilt, and as we start the new year, our portfolios are positioned accordingly.  If wrong, I am confident our models and strategies will steer us in the right direction.

For the 4 week period from December 2, 2011 to December 30, 2011, the Conservative Portfolio lost (1.73%).  Over the same time period, the SP500 gained 1.18%.  Poor relative performance was due to gold’s 10% loss last month.  We end the reporting period, like we started, with positions in: GLD and BND.

Since January 1, 2011, the Conservative Portfolio has returned 7.83%. Buy and hold S&P500 has returned a negative (0.0032%).  Results are through December 31, 2011.  The 2011 Conservative Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78%)  annualized total return since 1871 of the SP500.  Capital preservation is a hallmark of this strategy.

For the 4 week period from December 2, 2011 to December 30, 2011, the Broad Market Portfolio gained 0.68%.  Over the same time period, the SP500 gained 1.18%.  The Broad Market Portfolio continues to trail the index by a handful of percentage points as few sectors had the “proper” relative strength to participate in October’s snapback rally.  This portfolio has been out of equities for 7 straight weeks now. Current positions include:  BND.

Since January 1, 2011, the Broad Market Portfolio has returned a negative (5.84%). Buy and hold S&P500 has returned  a negative (0.0032%).  Results are through December 31, 2011.  The 2011 Broad Market Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 4 week period from December 2, 2011 to December 30, 2011, the Aggressive Portfolio lost 2.9%.  Over the same time period, the SP500 gained 1.18%.  The majority of the portfolio’s losses were from the 10% down draft in gold.  As we start this reporting period, last month’ s positions are this month’s and they include: GLD, BND , OIL, and SH.

Since January 1, 2011, the Aggressive Portfolio has returned 12.44%. Buy and hold S&P500 has returned a negative (0.0032%).  Results are through December 31, 2011.  The 2011 Aggressive Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.

Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs.  Actual performance results will vary from these examples.  Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product.  ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

In one word, I can best describe the market action as “crazy”.  A terrible August and September is followed by a blockbuster October.  The middle two weeks of November saw the market fall out of bed, which was followed by a 7%  plus move in one week!  Pundits and analysts are having a field day telling us why the next bull or bear market is just around the corner.  Over the past month, I have read statements like “it was the worst Thanksgiving week since 1932″ or “it was the best week since the March, 2009 bottom”.  You get the picture.   Everyone is frantic yet no one knows which way the market is going to go even if they pretend to.

And despite all the concern, what has the market done this past year or  past month?  Why absolutely nothing.  Yes, it is a day trader’s delight, but that isn’t our gig.  There is a lot of noise out there,  but that is why we use a strategic and balanced approach.  That is, we follow our quantitative models across multiple assets, and this discipline allows us to execute when others are lost in the noise in the market.

So where do we find ourselves today?  The data is consistent with a recession, and bullish trends in Treasury bonds and the Dollar Index continue to support this contention, and the price action has this fast and furious feel to it, which I think is more consistent with a bear market than bull.  In August, 2010, we had similar conditions.  A recession was imminent, and there were bullish trends in Treasury bonds and the Dollar Index.   But then the Fed came to the rescue with QE2.  Equities took off; Treasury bonds and the Dollar Index reversed course.  This probably averted the recession.  Presently, the Fed is out of meaningful ammunition as the political climate in the USA isn’t conducive to another bail out.  Wasn’t it only 3 months ago they announced Operation Twist?  Each intervention has become less and less potent in goosing the markets.  But hey we can always bail out Europe, and the concerted efforts of the major central banks this past week seem to suggest that our financial leaders will continue down a path of throwing good money after bad.  I doubt this plan or whatever comes down the pike will solve anything, but that doesn’t seem to be the intent of all these programs.  The intent remains to avert a recession and to see the stock market higher.

While my thesis remains that the market is vulnerable, I remain open to the idea that the Fed can avert another recession, and the only way we will know this is to have higher prices.  I really think it is that simple.  Last year’s QE2 rally really started in early November with the Fed announcement of how extensive QE2 would be, and it went on until mid- February at which time the market struggled its way into a top.  If the same were to happen again, there should be enough time to capture a sizable portion of the gains.  Remember, these actions won’t solve any problems.

In equities, last month I stated: “If this is a recession, then the market should rollover at or near this level (i.e., the 40 week moving average).  It is my belief that the only thing that can avert a recession is a mega-bailout from Europe.  So we are in a ‘wait and see’ mode.  There are clearly crosscurrents.”  And as we start this month off, from this vantage point very little has changed.  Our portfolios had very little exposure to equities all month long, and consequently, we didn’t have the angst that everyone else had.  Going forward I would be willing to “get long” on any meaningful close over the 40 week moving average in the SP500, but until then, I am bearish on equities.  I view this as an opportune time to be short the market as prices are right at the 40 week moving average.  “Prove me wrong,” I say.

Treasury bonds continue to have a bullish signal.  However, the price action is poor.  Who wants to be in bonds when you can get a year’s worth of gains in 1 week from equities?  Of note, this model has been positive since March, 2011 and it is my contention that this is due to economic weakness and not a flight to safety.  If Treasury bonds are going higher, then Bernanke and company have failed in their efforts to lift the economy from the brink of recession.  Conversely, if equities are going to go higher, I would expect to see a sell signal from this model.

Gold continues to consolidate.  The fundamentals continue to be strong, and the headlines are very gold positive.  Economic crisis = printing money = higher gold prices.  The rising Dollar has been an excellent time to buy gold over the past 10 years and this is contrary to what most pundits believe.  If I were to guess, I believe gold will be in a trading range, but it will ultimately test its highs at $1923/ ounce.

I think the most exciting development for the coming month is a bullish signal in our crude oil model.  Crude could be on the rise due to geopolitical concerns or as a hedge against inflation as central bankers go all in, again.  There are favorable fundamental and technical reasons to be long crude oil.

In summary, we continue to follow our methodology as a means to navigating the markets.  All the flopping around (i.e., noise) doesn’t matter to me.  For the most part, our portfolios performed in line with SP500 but without all of the ups and downs.

For the 4 week period from November 4, 2011 to December 2, 2011, the Conservative Portfolio lost (0.25%).  Over the same time period, the SP500 lost (0.26%).  The portfolio was out of equities for 3 out of the 4 weeks.  We end the reporting period with positions in: GLD and BND.

Since January 1, 2011, the Conservative Portfolio has returned 9.73%. Buy and hold S&P500 has returned a negative (1.06%).  Results are through December 2, 2011.  The 2011 Conservative Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78%)  annualized total return since 1871 of the SP500.  Capital preservation is a hallmark of this strategy.

For the 4 week period from November 4, 2011 to December 2, 2011, the Broad Market Portfolio lost (0.02%).  Over the same time period, the SP500 loss (0.26%).  The Broad Market Portfolio continues to trail the index by a handful of percentage points as few sectors had the “proper” relative strength to trigger buy signals in the prior month’s run up.  This month, the portfolio was out of equities for 3 out of the 4 weeks. Current positions include:  BND.

Since January 1, 2011, the Broad Market Portfolio has returned a negative (6.48%). Buy and hold S&P500 has returned  a negative (1.06%).  Results are through December 2, 2011.  The 2011 Broad Market Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 4 week period from November 4, 2011 to December 2, 2011, the Aggressive Portfolio lost 0.83%.  Over the same time period, the SP500 lost (0.26%).  For most of the month, the portfolio held positions in BND and GLD.  As we start this reporting period, current positions include: GLD, BND , OIL, and SH.

Since January 1, 2011, the Aggressive Portfolio has returned 15.8%. Buy and hold S&P500 has returned a negative (1.06%).  Results are through December 2, 2011.  The 2011 Aggressive Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.

Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs.  Actual performance results will vary from these examples.  Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product.  ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Prior to October, the price action was consistent with a bear market.  However, a 10% move in a month has a way of making the technicals look good, and in essence, by the end of the reporting period, the price structure was more consistent with a bull market.  For example, how can you have a bear market when the NASDAQ100 is flirting with its secular highs?  However, it doesn’t matter what we call it because we will look to capitalize on whatever opportunities are presented to us.  We can go long in bear markets or short in a bull.   It really is just a matter of understanding of where we are on the playing field.

So where do we find ourselves today?  The data is consistent with a recession, and bullish trends in Treasury bonds and the Dollar Index support this contention.  Last August, we had similar conditions, but the Fed came to the rescue with QE2, and this probably averted the recession.  It appears that the Fed is out of meaningful ammunition as the political climate in the USA isn’t conducive to another bail out.  Therefore, the ball seems to be in Europe’s court, and we are dependent upon them to “save” the day.

To start the month, we were able to ride the equity surge right into the 40 week moving average.  If this is a recession, then the market should rollover at or near this level.  It is my belief that the only thing that can avert a recession is a mega-bailout from Europe.  So we are in a “wait and see” mode.  There are clearly crosscurrents.

Treasury bonds continue to be positive and have added benefit to our portfolios.  The price action was poor, especially as equities were ramping, but the model never gave a sell signal.  This model has been positive since March, 2011 and it is my contention that this is due to economic weakness and not a flight to safety.  If equities are going to go higher, I would expect to see a sell signal from this model, but alas, I am still waiting.

Gold has got its mojo back after taking a drubbing in the prior reporting period.  The fundamentals continue to be strong.  The rising Dollar has been an excellent time to buy gold over the past 10 years and this is contrary to what most pundits believe.  If I were to guess, I believe gold will be in a trading range, but it will ultimately test its highs at $1923/ ounce.

In summary, we continue to follow our methodology as a means to navigating the markets.  Despite the big gains in the SP500 Index, we only saw slight under performance in two of our portfolios.  Curiously, both portfolios had 50% or less equity allocation all month.  The Broad Market Portfolio, which is designed to track the SP500 Index most closely, trailed the index the greatest amount.  This portfolio uses the signals from the trading models and a relative strength filter.  After the drubbing stocks took the prior 3 months, only a few sectors showed the positive relative strength necessary to generate the signals.  Therefore, this portfolio was mostly in Treasury bonds all month long.  I have confidence that the Broad Market Portfolio will somehow catch up.

For the 5 week period from September 30, 2011 to November 4, 2011, the Conservative Portfolio gained 5.81%.  Over the same time period, the SP500 gained 10.53%.  Gains were driven by our position in GLD, SPY, XLU and BND.  We end the reporting period with positions in: GLD, BND, SPY, and XLU.

Since January 1, 2011, the Conservative Portfolio has returned 10.01%. Buy and hold S&P500 has returned a negative (0.35%).  Results are through November 4, 2011.  The 2011 Conservative Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78%)  annualized total return since 1871 of the SP500.  Capital preservation is a hallmark of this strategy.

For the 5 week period from September 30, 2011 to November 4, 2011, the Broad Market Portfolio gained 1.25% .  Over the same time period, the SP500 gained 10.53%.  The Broad Market Portfolio is trailing the index noticeably as few sectors had the “proper” relative strength to trigger buy signals.  Such price action (the “V” shaped rally) is more consistent with a bear market rally.  Current positions include:  BND, XLY, XLU, and XLK.

Since January 1, 2011, the Broad Market Portfolio has returned a negative (7.31%). Buy and hold S&P500 has returned  a negative (0.35%).  Results are through November 4, 2011.  The 2011 Broad Market Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 5 week period from September 30, 2011 to November 4, 2011, the Aggressive Portfolio gained 8.08%.  Over the same time period, the SP500 gained 10.53%.  Positions in GLD, SPY, and QQQ contributed to portfolio gains.  Current positions include: GLD, BND , and SPY.

Since January 1, 2011, the Aggressive Portfolio has returned 16.76%. Buy and hold S&P500 has returned a negative (0.35%).  Results are through November 4, 2011.  The 2011 Aggressive Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.

Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs.  Actual performance results will vary from these examples.  Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product.  ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The price action remains consistent with a bear market.  (I made the “call” on August 9.)  Many analysts have yet to call for a bear market as the SP500 is still down less than 20% from its quarter 2 highs.  But just survey the landscape, and it is littered with the carcasses of sectors and assets taken to the woodshed and bludgeoned to death.  Emerging markets (EEM) down 30%.  Small caps (IWM) down 25%.  Financials down 30%.  Copper down 33%.  Crude oil down 35%.  Europe (EFA) down 26%.  All of this since early May (or over 5 months of time).  There is a message in all this carnage.

Last month I stated: “When we put it all together, it shouldn’t surprise anyone that we are in a bear market.”  I think this is still a surprise to some.  We may not have met the “official” definition, but it sure feels like a bear market.

The media seems focused on Europe.  It’s Europe’s fault our markets are down.  Europe is dragging the world economy down.  Very little focus has been given to the oncoming recession here in the US.  If only Europe would get its act together.  I personally don’t think Europe is the issue at all.  The issue is recession.  The media is just overlooking this small detail.  Europe is not helping, but our economy isn’t healthy.  The Fed is apparently out of bullets or whatever they have left in their arsenal is seemingly less and less effective.  If we aren’t in recession, we are certainly teetering on the edge awaiting a good swift kick into the abyss.

Last month I posed the question: “Can the Fed save the day?”  They tried, but the market didn’t like Operation Twist.  Maybe the market didn’t like the Fed’s outlook for the economy.  The market sold off after the Fed meeting, and long term Treasury bonds soared.

To start the month, we had positions in the equity markets, but those trades have either been stopped out or about to be stopped out.  Fortunately, we were buying these issues near the August lows, and we were only tagged for small losses.  I always considered these counter trend trades within an ongoing bear market.  These losses are what I would characterize as failed signals.  Buying should have occurred and a bounce to new highs (or at least the 200 day moving average) would have been expected.  That did not happen.  All the market did was stop going down for about 6 weeks.  Now we are on the verge of heading lower.  And this could be much lower.  Failed signals lead tend to lead to waterfall declines.  Going forward we look to protect capital vigorously, and we will be on alert for reversals.

Treasury bonds benefited from a 1) flight to safety (Europe was good for something); 2) Operation Twist as the Fed was buying at the long end of the curve; and 3) the oncoming recession.  In a cruel twist, however, our own bond position was actually down slightly for the month.  In our portfolios, we utilize a general bond fund that more closely tracks the Dow Jones Composite Bond Index, which is what we use to construct our models.  Most of the action was in the long end of the curve in anticipation of the Fed’s intervention.

Gold was no safe haven this past month either, and once again reminding us that this is a bear market.  Gold was off about 14%.  The fundamentals for gold remain strong.  The current draw down is about the median point for past draw downs while the gold model is positive.  Some pointed to the strength in the Dollar, but my own research suggests this doesn’t fly.  Over the past 10 years, the best time to buy gold was when the Dollar was strong.  Others have suggested the deflationary effects of the oncoming recession as to why gold sold off.  Recessions are deflationary, but gold can up in recessions, and it really depends on the direction of interest rates.  Interest rates are favorable for gold at present.  Two explanations can be offered for the sell off in gold: 1) forced liquidations due to market losses; 2) gold was up 25% in the prior two months — profit taking was in order.

In summary, there was really nowhere to hide this month.

For the 4 week period from September 2, 2011 to September 30, 2011, the Conservative Portfolio lost (4.17%).  Over the same time period, the SP500 lost (3.31%).  Losses were driven by our position in GLD.  The XLU had a slight gain for the months.  We end the reporting period with positions in: GLD, BND, and cash.

Since January 1, 2011, the Conservative Portfolio has returned 3.97%. Buy and hold S&P500 has returned (-10.04%).  Results are through September 30, 2011.  The 2011 Conservative Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78% annualized total return since 1871) of the SP500.  Capital preservation is a hallmark of this strategy.

For the 4 week period from September 2, 2011 to September 30, 2011, the Broad Market Portfolio lost (5.74%).  Over the same time period, the SP500 lost (3.31%).  The Broad Market Portfolio is experiencing a larger than expected draw down (~18%) from its peak.  Over the month, losses in XLE and IYR were significant.  The position in bonds added little protection.  Current positions include:  BND and cash.

Since January 1, 2011, the Broad Market Portfolio has returned a negative (8.45%). Buy and hold S&P500 has returned  a negative (10.04%).  Results are through September 30, 2011.  The 2011 Broad Market Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 4 week period from September 2, 2011 to September 30, 2011, the Aggressive Portfolio lost (4.87%).  Over the same time period, the SP500 lost (3.31%).  Positions in GLD, SPY, and QQQ contributed to the portfolio losses, and BND provided little protection.  Current positions include: GLD, BND and QQQ.

Since January 1, 2011, the Aggressive Portfolio has returned 9.73%. Buy and hold S&P500 has returned a negative (10.04%).  Results are through September 30, 2011.  The 2011 Aggressive Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.

Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs.  Actual performance results will vary from these examples.  Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product.  ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The biggest development over the past 5 weeks was price action that would be consistent with a bear market.  (I made the “call” on August 9.)There are lots of macro headwinds including but not limited to: 1) high and structural unemployment; 2) a moribund housing market; 3) poor political leadership; 4) debt; 5) European sovereign debt; 6) ineffective or lack of monetary policy options; 7) slowing global economies.  (I am sure I missed a few things.)  There is a real risk of recession if it isn’t here already.  When we put it all together, it shouldn’t surprise anyone that we are in a bear market.

To start the month, we had positions in the equity markets, but those trades were stopped out as the market fell out of bed.  As expected, sentiment towards equities turned ugly, and two short weeks later, we were back in buying at what has turned out to be the recent near term low.  At present these trades are profitable.  It has been my expectation that the current trade is a counter trend trade within an ongoing bear market.

The question becomes: what’s next?  It is difficult to see what the catalyst might be that could propel prices higher.  Investors have placed a lot of hope in the Federal Reserve, yet it isn’t clear if the FOMC is going to take action or whatever action they do take will soothe the markets.  One thing is for sure, there are fewer and fewer policy initiatives, and they are working with less and less effectiveness.  As usual, we won’t let the noise of the market guide our investing decisions.  At best I can see the market getting to the 200 day moving average.  On the downside, we won’t be afraid to cut our losses if the price action warrants.  It is very important to defend our capital here as breaks of support (while investor sentiment is bearish) can lead to waterfall declines.

As I stated last month: “Can the Fed save the day again?  There is always hope.  Hope isn’t a particularly great strategy, but in the absence of anything else, this is how most investors function.  While I always hope for the best, I follow our models to maximize returns.  The models don’t always get it right, but it is a much more efficient way to function in the markets.”

In Treasury bonds, our model remains positive.  The model has been positive since March, 2011.  Bonds have benefited from a weak economy and the fact that the Fed is  targeting asset purchases in the long end of the yield curve (i.e., Operation Twist).  All good things will come to an end, but bonds have been a great diversifier, and they remain highly uncorrelated to other asset classes.

In this past reporting period, gold was up about 15%, and this was on top of a 10% gain in the previous month.  Yikes!  Once again, huge returns.  But the fundamentals are supportive.  Falling interest rates and the expectation that the only policy response to all our ills will be more money printing are the drivers for gold.

The crude oil model gave a sell signal at the end of the last reporting period.  Over the month, crude dropped nearly 20% before recovering.  I like roller coasters, but not that one.  Fortunately, we did not have positions in crude oil.

For the 5 week period from July 29, 2011 to September 2, 2011, the Conservative Portfolio gained 2.23%.  Over the same time period, the SP500 lost (9.09%).  Gains were driven by positions in GLD and BND.  The XLU has been a relative out performer only when compared to equities (i.e., SPY).  We end the reporting period with positions in: SPY, GLD, BND, and XLU.

Since January 1, 2011, the Conservative Portfolio has returned 8.49%. Buy and hold S&P500 has returned -6.65%.  Results are through September 2, 2011.  The 2011 Conservative Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78% annualized total return since 1871) of the SP500.  Capital preservation is a hallmark of this strategy.

For the 5 week period from July 29, 2011 to September 2, 2011, the Broad Market Portfolio lost (7.99%).  Over the same time period, the SP500 lost (9.09%).  The Broad Market Portfolio is performing as expected — in line with the SP500 but with better gains and lesser losses.  When the market tanked earlier in the month, the  Broad Market Portfolio liquidated almost all of its positions.  Upon recovery, only a few positions were initiated as the majority of sectors “looked” poor from a technical standpoint.  The portfolio’s performance benefited from a position in bonds, which is taken as a hedge when the number of investable sectors drops below 5.  Current positions include:  XLE, XLU, IYR, BND.

Since January 1, 2011, the Broad Market Portfolio has returned a negative (3.05%). Buy and hold S&P500 has returned  a negative (6.65%).  Results are through September 2, 2011.  The 2011 Broad Market Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ 2011 return 

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 5 week period from July 29, 2011 to September 2, 2011, the Aggressive Portfolio gained 4.61%.  Over the same time period, the SP500 lost (9.09%).  The portfolio benefited from higher allocations than normal to GLD and BND.  Earlier in the month, the equity positions were mild losers, but positions were reestablished at lower prices, and these are currently profitable.  Current positions include: GLD, BND, SPY, and QQQ.

Since January 1, 2011, the Aggressive Portfolio has returned 15.34%. Buy and hold S&P500 has returned a negative (6.65%).  Results are through September 2, 2011.  The 2011 Aggressive Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.

Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs.  Actual performance results will vary from these examples.  Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product.  ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

As expected, the bottom that was forged in late June has led to very choppy price action.  When the pre- July 4th bounce began, the rubber band wasn’t particularly stretched.  There was a lack of consensus amongst the various sentiment indicators (i.e., “dumb money”, Rydex, corporate insiders) that I follow.  Furthermore, shorter term data has continually shown investors willing to “buy the dip” on the slightest decline.  In essence, there is little firepower on the sidelines and short covering has been non-existent.  This has had me wondering: where is the buying going to come from?

While these insights have so far proven correct, the equity trading models remain in the markets.  However, support levels (i.e., areas where sell signals would be generated) are currently being tested.  Owing to fact that the models essentially “nailed” the bottom (as we are buying when others are bearish), losses are non-existent.  The SP500 model is essentially flat since the entry point, and the NASDAQ 100 has been a relative out performer and this model is currently up about 5%.

Failure of these models at these support levels is a good indication that the markets are heading into a bear market.

The news flow has been dominated by the US debt ceiling circus.  I never really felt that this was going to have much impact on the markets as the outcome was a forgone conclusion — a deal was going to get done before the deadline.  Nothing would be done to “roil” the markets.  Yes, the lack of fiscal discipline is significant, but avoiding default was never an issue.  I think the bigger issue going forward is the economy.  The “soft patch” which seeped into investors consciousness in quarter 2 and was forgotten at the end of last month as the markets erased a 2 month slide in 8 trading days, appears to be something more.  With quarter 1 GDP revised significantly lower, ISM manufacturing near contraction levels, unemployment not improving, and the lack of government support (i.e., QE2) for the economy, the economy is at best in stall speed.  It’s the “economy stupid”, and I think this is what is really weighing on prices.

Looking forward, Bernanke and Jackson Hole will be in focus.  Can the Fed save the day again?  There is always hope.  Hope isn’t a particularly great strategy, but in the absence of anything else, this is how most investors function.  While I always hope for the best, I follow our models to maximize returns.  The models don’t always get it right, but it is a much more efficient way to function in the markets.

In Treasury bonds, our model remains positive.  The model has done a good a job of “catching” the concern over the economic weakness, and as we start August, Treasury bonds are catching a bid as the equity markets sell off.

Last month I stated that the fundamentals for gold remain strong — weak economy, short term interest rates less than rate of inflation, and falling bond yields.  Nothing has changed here and if anything, we can add a weakening Dollar to fuel the fire further.  Gold was up nearly 10% this month!

The crude oil model issued a sell signal.

For the 4 week period from July 1, 2011 to July 29, 2011, the Conservative Portfolio gained 1.41%.  Over the same time period, the SP500 lost (3.48%).  There were no changes to the portfolio this month, and current positions include: SPY, GLD, BND, and XLU.

Since January 1, 2011, the Conservative Portfolio has returned 6.12%. Buy and hold S&P500 has returned 2.75%.  Results are through July 29, 2011.  The 2011 Conservative Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Conservative Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78% annualized total return since 1871) of the SP500.  Capital preservation is a hallmark of this strategy.

For the 4 week period from July 1, 2011 to July 29, 2011, the Broad Market Portfolio lost (3.13%).  Over the same time period, the SP500 lost (3.48%).  There were no changes to the portfolio this month, and current positions include: XLB, XLE, XLF, XLI, XLK, XLU, XLY, IYR, EEM and EFA.

Since January 1, 2011, the Broad Market Portfolio has returned 5.37%. Buy and hold S&P500 has returned 2.75%.  Results are through July 29, 2011.  The 2011 Broad Market Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Broad Market Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.

For the 4 week period from July 1, 2011 to July 29, 2011, the Aggressive Portfolio gained 1.82%.  Over the same time period, the SP500 lost (3.48%).  There was one change (USO) to the portfolio this month as the crude oil model ended a sell signal, and current positions include: SPY, QQQ, GLD, and BND.

Since January 1, 2011, the Aggressive Portfolio has returned 10.26%. Buy and hold S&P500 has returned 2.75%.  Results are through July 29, 2011.  The 2011 Aggressive Portfolio equity curve v. buy and hold SP500 is shown in the next figure.

Aggressive Portfolio v. Buy and Hold SP500/ 2011 return

The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.