The S&P 500’s monthly streak of posting seven consecutive monthly gains came to an end in October 2009.  The 1.98% drop in October was tranquil as compared to past Octobers.  During the seven month streak from March 2009 through September 2009, the S&P 500 gained a surprising 43.80%.  Intuitively, one would expect a major pullback after the run we had, but history tells a different story.  In a study done by Greg Blaha and Ryan Malo at Bianco Research, LLC, they found in the fourteen previous market streaks of seven months or longer, the S&P average return was 4.16% for the following quarter and 7.84% for the following year.  While the majority is expecting a major correction, don’t be surprised if the market continues to confound the consensus.

On the economic front, there is continuing improvment in the numbers and we expect the U.S. economy to show a 3.5% growth rate in the second half of 2009, with growth continuing positive through 2011.  The Federal Reserve is likely on hold until 2011 before we start the upward moevment in short-term interest rates.  The Fed has pumped massive amounts of liquidity into the economy and this will need to be withdrawn at the right time and pace.  Unemployment will continue to be a drag on the economy, but will peak near 10% and gradually improve over the next few years.

The markets and many portfolios have been whipsawed over the past 15 months and this seven month streak gives everyone a second chance to anaylze their financial situation.  This is the perfect time to make a thorough evaluation of your portfolio to make sure you are diversified within and among the asset classes and the risk of your portfolio is aligned with the risk you can afford.  If the risk in your portfolio matches your personal goals, the next round of market volatility will be much less stressful.

The equity markets bottomed on March 9, 2009 and since then has been on a one way ride higher with seven consecutive months of gains.  Here is a look at the first nine months of 2009 by the numbers.

Stock Market Benchmarks:

                                                            9/30/09                    12/31/08                 Return    

• Dow Jones Industrial Average       9.712                     8,776                         10.7%
• S & P 500                                    1,057                        903                         17.1%
• S & P 400 Mid Cap                        691                        538                          28.4%
• NASDAQ                                    2,118                     1,577                          34.3%
• Dow Jones Utilities                          377                        371                            1.6%
• NYSE Financial                            4,928                     3,848                           28.1%
• NYSE Energy                             10,866                     9,434                           15.2%
• BBG Reit                                        135                        120                            12.5%

Some observations from the first nine months of the year: smaller capitalization companies outperformed larger companies by a large margin, the typical defensive sectors were the under performers - utilities, energy, and real estate, the financial sector which was on the ropes a year ago has made a dramatic rebound from the lows, and commodity prices were generally higher. The third quarter was the best performing quarter for equities since 1998.

Key Bond Rates:                              9/30/09                    12/31/08                 Change

• U.S. 3-Month T-Bill                   0.10%                    0.09%                      +0.01
• 2-Year U.S. Treasury                 0.94%                    0.77%                      +0.17
• 10-Year U.S. Treasury               3.31%                    2.25%                      +1.06
• 30-Year U.S. Treasury               4.05%                    2.68%                      +1.37
• 30-Year Fixed Mortgage            5.16%                    5.14%                      +0.02
• BBG Investment Grade Corp      5.06%                    6.17%                      -1.11
• BBG High Yield Corp Bond      10.26%                  16.72%                     -6.46

The fixed income market had mixed results in the first nine months of 2009.  U.S. Treasury securities were the worst performing sector within the fixed income market as interest rates on longer maturity bonds moved higher, driving prices lower. Specifically, Treasuries investors are concerned about the massive amount of new supply coming to market as the government continues to spend and expand deficits.   Mortgage-backed securities performed better than Treasuries as mortgage rates are basically unchanged for the year to date period.  The corporate bond sector, both the investment grade corporate bond and high yield sections produced positive returns in the first half as corporate bonds rates there actually declined as risk premiums tightened.  The total returns from the high yield sector up an amazing 48.5% this year as measured by the Merrill Lynch High Yield Index.

With the market rally, this is the perfect time to review your portfolio, access your portfolio’s risk level and check to see if it is in line with your personal risk tolerance level.  After September and October of 2008, we all have a better understanding of risk and the importance of diversification.

Historically, September and October have not been kind months for the equity markets.  A study of the S&P 500 total return by month from 1926 to 2008 has proven this point.  September is the only month of the year with average returns in negative territory, coming in at -0.91%.  October is the second worst performing month of the year with a positive 0.34% average return for the month. The U.S. Equity market has enjoyed a 52 percent rebound from a 12-year low on March 9 left the S&P 500 valued at about 19 times the profits of its companies, the highest ratio since June 2004. 

The Shanghai Index was down 6.8% overnight and has the U.S. market is set to open lower this morning.  Overnight, the U.S. stock-index futures dropped, indicating the S&P 500 will trim its sixth straight monthly gain.  Futures on the S&P 500 expiring in September lost 0.7 percent to 1,020.5 at 8:38 a.m. in New York. Dow Jones Industrial Average futures slipped 0.6 percent to 9,477, while Nasdaq-100 Index futures dropped 0.9 percent to 1,628.5.

While a collapse of 2008 proportions is not likely, a manageable pullback from these levels would be healthy for the market.  This is the perfect time to review your portfolio, access your portfolio’s risk level and check to see if it is in line with your personal risk tolerance level.  After September and October of 2008, we all have a better understanding of risk and the importance of diversification.

The markets seem to find a way to cause maximum pain to the largest number of people.  A year ago, investors were generally very bullish and their portfolios where higher in risk then their true risk level thresholds.  The October to March time period caused many investors to capitulate to a defensive portfolio position only to have the market rebound, leaving many in the dust. 

From a technical standpoint, the market has reached an equilibrium point between bulls and bears and seems to be setting itself up for a long period of slow economic growth.  The next economic recovery will likely begin in 2010 and it may feel like the recession never ended.  The factors leading to a long, slow global economic recovery will be:  U.S. consumer retrenchment, financial sector deleveraging, weak commodity prices, increased government regulation and involvement in the economy, protectionism and deflation.  These factors are longer term in nature and it will take years, not months to change the path we will travel.

This is not bad news, it is just the likely landscape we are left to navigate.  Today is always the right time to evaluate your investment portfolio, fairly evaluate your true risk tolerance and set realistic investment goals.  Building a diversified balanced portfolio that provides for upside participation, income generation, and a downside cushion is the successful formula for the long slow ride back to a healthy economy.     

The U.S. stock market as measured by the S&P 500 rose 0.8 percent last week to 987.48, the highest since Nov. 4, capping its fifth straight monthly advance. This benchmark rebounded an incredible 46 percent from a 12-year low on March 9.  Last week, the Dow Jones Industrial Average rose 78.37 points, or 0.9 percent, to 9,171.61, extending its monthly advance to 8.6 percent, the biggest since October 2002. The Russell 2000 Index of small companies added 1.5 percent during the last week of July to 556.71.

The recent rally in stock prices has been fueled by companies reporting earnings above expectations.  These companies include Motorola Inc., MasterCard Inc., Amgen Inc., the world’s largest biotechnology company, and Dow Chemical Co., the largest U.S. chemical maker.  About three-quarters of the 148 companies in the S&P 500 that released second-quarter results this week topped estimates. 

While stocks have been perofrming remarkably well, U.S. Treasuries rates are on the rise causing prices to decline.  The two-year note yields rose the most in eight weeks after mixed results at this week’s four note auctions worried investors about the huge supply of government debt.  U.S. Government securities have declined in price for four consecutive months, the longest losing streak since 1996. The Treasury sold $115 billion of notes over the five days ended July 31, including a record $42 billion of two-year securities and $39 billion of debt maturing in five years.

US equity markets rose yesterday after Intel forecast a stronger third quarter and wary investors heaved a sigh of relief from Fed’s improved take on the economy.  Major stock indices were up around 3% on the day, with the Dow Jones industrial average posting its biggest one day advance in nearly four months.  The buoyant mood pressured treasuries as investors shied away from safe havens. Today, concerns around CIT’s ultimate fate is creating a mini flight to quality trade as Treaury prices as up this morning.  

Stocks prices shot up Monday after analyst Meredith Whitney’s optimistic forecast on Goldman Sachs (NYSE:GS) triggered an equity buying spree.  Share prices rallied thereafter as investors snapped up banking and industrial stocks and the gains spilled over to the broader market.  Goldman’s fixed income and trading businesses posted impressive numbers.  Then, Intel’s (NASDAQ:INTC) much better quarterly sales and its upbeat third-quarter outlook encouraged investors further as they brushed aside concerns over CIT Group Inc. (NYSE:CIT). 

On Wednesday, the Dow Jones industrial average gained 256 points, or 3.1%, to close at 8,616.21.  The S&P 500 index added 27 points, or 3%, to 932.68 and the tech-laden Nasdaq leapt 63 points, or 3.5%, to 1,862.90.  The Treasury’s benchmark 10-year note declined 1 2/32, to 96 2/32, and the yield rose to 3.60% from 3.47% late Tuesday.  In a broad show of strength, advancing shares outpaced declining issues by nine to one, even as NYSE volume remained a moderate 1.4 billion shares. 

This morning stocks are basically unchanged.  JP Morgan Chase (NYSE:JPM) reported numbers that bettered analysts’ projections.  The firm cited strength in trading operations and record investment banking returns, but did admit operations were hurt by “the continued high levels of credit costs in consumer lending and card services, which we expect will remain elevated for the foreseeable future.

The first half of 2009 is a tale of two distinct quarters.  The first quarter this year was a painful extension of 2008, while the second quarter rewarded investors who rode the storm out or were brave enough to re-enter the market.  Here is a look at the first half of 2009 by the numbers.

Stock Market Benchmarks:

                                                            6/30/09                    12/31/08                 Return    

• Dow Jones Industrial Average       8,447                     8,776                        - 3.8%
• S & P 500                                       919                        903                           1.8%
• S & P 400 Mid Cap                        578                        538                           7.4%
• NASDAQ                                    1,846                     1,577                          17.1%
• Dow Jones Utilities                        358                        371                         -  3.5%
• NYSE Financial                           3,899                     3,848                           1.3%
• NYSE Energy                              9,762                     9,434                            3.5%
• BBG Reit                                        102                        120                        - 15.0%

Some observations from the first half: stock market volatility has dropped to the pre-Lehman bankruptcy news, smaller capitalization companies outperformed larger companies by a large margin, real estate continues to be the hardest hit, financial stocks made a dramatic rebound from the lows, and commodity prices were generally higher. The second quarter was the best performing quarter for equities in over ten years.

Key Bond Rates:                               6/30/09                    12/31/08                 Change

• U.S. 3-Month T-Bill                   0.18%                    0.09%                      +0.09
• 2-Year U.S. Treasury                 1.11%                    0.77%                      +0.34
• 10-Year U.S. Treasury               2.55%                    2.25%                      +0.30
• 30-Year U.S. Treasury               4.33%                    2.68%                      +1.65
• 30-Year Fixed Mortgage            5.39%                    5.14%                      +0.25
• BBG Investment Grade Corp     5.79%                    6.17%                       -0.38
• BBG High Yield Corp Bond    12.04%                  16.72%                       -4.68

The fixed income market had mixed results in the first half of 2009.  U.S. Treasury securities were the worst performing sector within the fixed income market as interest rates on longer maturity bonds moved higher, driving prices lower. Specifically, Treasuries investors are concerned about the massive amount of new supply coming to market as the government continues to spend and expand deficits.   Mortgage-backed securities performed better than Treasuries as mortgage rates only drifted 25 basis points higher.  The corporate bond sector, both the investment grade corporate bond and high yield sections produced positive returns in the first half as corporate bonds rates there actually declined as risk premiums tightened. 

The 4 major US Equity indices (S&P 500, Dow Jones Industrial Average, Nasdaq, and the Russell 2000) have found support at the intersect of their respective 50-day and 200-day moving averages.  This fact is of technical significance on its own, but today is also the “quadruple witching day” where all of the futures and options for June expire.  This tends to increases market volatility for all participants.

Yesterday’s equity price rally occurred on lower trade volume which is not bullish.   A lower close on S&P 500 Cash today will complete a bearish divergence pattern - often indicative of an intermediate price top - so do not be an aggressive buyer at this stage.  However, S&P futures have not corroborated this bearish pattern - which provides caution to both sellers & buyers.

From a technical prospective, the major capital market instruments have the following medium term indicators:  U.S. Treasuries (short - believe rates are going higher), Stocks (long - expecting higher prices, but concerned about a short-term top), U.S. Dollar vs Euro (neutral - expect a trading range around 1.39-1.40),  Crude Oil (long - expecting oil prices to move higher but need to break through $73.06 to remain aggressive, Gold (neutral in a 929-944 no action trading range.

In the long run fundmentals drive market movements, but technicals can provide valuable insight for trading direction and appropriate trading levels.  At Gradient, technicals are a tool in the tool box, but our investment philsophy is based on sound funadmental analysis and a long-term approach to the markets.

The Consumer Price Index increased by 0.1% in May, less than the expected increase of 0.3% after remaining unchanged in April and decreasing 0.1% in March.  Over the year the index is down by 1.3%, the largest 12 month decrease ever.  Excluding food and energy prices, which tend to be most volatile in terms of expenditure categories in a typical consumption bundle, the Core CPI is up by 0.1 in May, and over the past year, the Core CPI increased 1.8%.  The Current Account deficit fell to $101.5 billion for the 1^st quarter, the lowest deficit since the 4^th quarter of 2001.

Yesterday, stocks fell for a second session in a row, extending a global slide, as recent investor’s optimism faded.  The Dow Jones Industrial Average, which had fallen 187 points on Monday, slipped another 107 points and gave back two weeks of gains as investors sold off stocks.  A strong report on housing starts provided some strength early in the session, but stocks pared gains as the Federal Reserve reported a 1.1% decline in industrial production and concerns about the economy resurfaced.  The S&P 500 also recorded its second consecutive decline, falling 1.3% and the Nasdaq was off 1.1%.  

Today’s market is down slightly even though consumer price data and the current account data were generally positive. In the bond world, Interest rates in the U.S. Treasury market have retreated from recent highs as investors become more concerned about the current state of the economy.  The two day downturn in the equity markets has provided a bid for U.S. Treasuries.  We believe bonds still offer the conservative investor a safe place to invest and would overweight investment grade corporate bond funds and mortgage-backed securities funds in this environment.    

U.S. stocks pared early losses and ended the day mixed, helped by a late-day surge in banking shares.  Treasury prices declined for another day, pushing yields higher.  Financials also took a cue from Princeton University economist Paul Krugman who noted, “there’s some reason to think that we’re stabilizing.”  Trading was volatile on Monday and the Dow Jones Industrial Average, which had shed almost 130 points earlier in the session, closed the day just above unchanged.  The S&P 500 index closed 0.95 point lower and the tech-heavy Nasdaq lost seven points.  Volume on the NYSE was light as only 1.1 billion shares exchanged hands.  Just after the open today the stock market is basically unchanged.

With the government’s plan to sell $65 billion in debt this week, investors remain concerned that interest rates could be hiked sooner than expected.  Investors are also awaiting news from the Treasury Department, which is expected to announce which banks will be allowed to repay funds borrowed under the Troubled Asset Relief Program.  On Monday, some media reports suggested the US government will allow ten banks to pay back at least $50 billion in TARP funds.  The reports said JP Morgan Chase & Co (NYSE:JPM) is among the banks cleared to pay back TARP funds.  The list is also expected to include Goldman Sachs (NYSE:GS), American Express (NYSE:AXP), Bank of New York Mellon (NYSE:BK), Capital One (NYSE:COF) and State Street (NYSE:STT).  Countering interest rate hike expectations, however, were remarks which pointed out that the Fed has never begun raising interest rates before the unemployment rate, now at a 26-year high, has begun to fall.

Treasury yields continued higher yesterday, reflecting increased hope of an economic recovery.  The 2-year was up 12 basis points to 1.43% and the 10-year rose 5 basis points to 3.91%.  Commodities declined, with basic material sector shares falling 1.5%.  Crude prices continue to fall for the second day, easing 0.5% to $68.08 and copper was off 1.4%; gold prices dropped 1.1%.