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June 29, 2010

Here We Go Again?
Once More, Negative News Rules the Markets
Just a few months ago, positive economic trends and market results were
ascendant and many analysts claimed that the recovery was well underway. Policy-
wise, the talk was of "austerity" and winding down stimulus packages lest inflation rear
its head and crush the stability of the world economy.
However, since the end of April and our valuation watch, we have witnessed
yet another leg down for the major indices. The news has turned, and this morning
we see headline after headline indicating trouble. Fall offs in commodities like oil--
which challenges the story of growth. Deteriorating home sales figures that potentially
signal a second leg downward. Currencies like the yen and dollar gaining strength
while the Euro suffers. Treasury rates that are at record lows as investors seek safety.
Gold is down--precisely the opposite situation one would expect if the market feared
inflation.
This sort of news snapshot coupled with the market declines makes one
wonder, is this merely another case of "sell in May and walk away" or do we have the
onset of a double dip here? Will the free market-fetishists who have held sway for so
long and have been preaching budget cutting and trashing Keynes ad infinitum
throughout the current downturn be proven wrong yet again-- just as FDR found out
when he cut back Depression-era stimulus plans and spending in 1937?
Our Chief Market Strategist Richard Suttmeier has made a series of timely
macro calls throughout the current crisis. He remains pessimistic as his read of the
technicals is buttressed by our VE model data. He still sees Dow 8500 before 11500.
The recent Alpha of our market neutral portfolios has been provided by the 50-50
allocation and the strength of the short-side-- along with prudent stop losses for all
picks (8% for longs, 5% for shorts.)
Certainly our models remain pessimistic. If one considers valuation figures one
sees a market that is very undervalued. But this provides little solace since our
universe can remain severely undervalued for long periods of time. The
undervaluation we find now is nowhere near the peak levels we saw back at the
bottom in March, 2009--@90% overall with 78% of stock undervalued by 20% or more
vs. 70% overall and 38% undervalued by 20% or more today.
In terms of forecast figures, our models have been pessimistic for some time
now as well. If we screen the entire database for tickers with full data coverage, we
get 4070 stocks. In this basket we find 974 tickers with positive forecasts. Thus the
models are pessimistic with less than 25% of the universe predicted to gain in the next
30 days. If we screen for 4-Engine or higher buy-rated stocks, we find 691 tickers. If
we filter the screen for tickers with positive short-term forecast figures, we get 258
tickers. Thus, @37% of the buy-rated stocks have positive short term forecasts.
As many power users know, we have seen numerous stocks rated a buy whose
forecast figures are negative. This reflects the fact that our ratings system runs on a
hard bell curve and always ranks the stocks relative to the rest of the universe. So,
stocks that are weak in one factor, such as forecast, may make up for it in others--
such as P/E Ratio, Market Cap, Valuation, and Momentum.
However, we can also use the overall market forecast figures as a sign of the
system's overall view of the market. If a large majority of the universe is predicted to
decline, we have another bearish datapoint to add to our analysis.
When you consider the overall macro environment, the fundamentally-based
quant analysis of our models, and the deteriorating technicals of the various major
indices as detailed by our Chief Market Strategist, one sees the need to assume a
more defensive posture. Hedging via some short ETF products-- as Suttmeier
recommends to his ValuTrader clients, or via a short-side portfolio-- as found in our
Forecast 22 MNS Newsletter, would be most prudent at this time.
We also recommend keeping a close eye on the overall market trend as
tracked in our universe and sector valuations as well as the individual equity valuation
and forecast data--all of which is available for members on our website. Not a
ValuEngine Premium Website member? Then please consider signing up for our no
obligation, two-week free trial today.
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--The ValuEngine Forecast 22 MNS Portfolio

Since inception, we are up more than 30%, our average monthly return is @1.5%, our
Sortino Ratio--"good" volatility--beats the S&P 500 by @50%, our max drawdown is 1/3
the S&P's, and our annual volatility is @30% less than the S&P 500!

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--The ValuTrader Model Portfolio Newsletter

The ValuTrader Model Portfolio Newsletter is based on ValuEngine Chief Market


Strategist Richard Suttmeier's proprietary market analytics. Suttmeier combines his
technical analysis expertise with ValuEngine's proprietary valuation, forecast, and
ratings data for more than 4000 equities trading on US markets to come up with a 20
stock portfolio tailored to current market conditions. With ValuTrader, subscribers
access Suttmeier's "Buy and Trade" strategy with a portfolio designed to function well
in both up and down markets.

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MARKET OVERVIEW

Summary of VE Stock Universe


Stocks Undervalued 70.09%
Stocks Overvalued 29.91%
Stocks Undervalued by 20% 38.35%
Stocks Overvalued by 20% 11.92%

SECTOR OVERVIEW

Last 12- P/E


Sector Change MTD YTD Valuation
MReturn Ratio
Basic Industries 1.15% 0.31% 31.64% 7.98% undervalued 44.27% 23.36
Capital Goods 1.18% 0.21% 5.34% 7.48% undervalued 33.35% 19.21
Consumer Durables 0.71% -0.60% 0.51% 10.77% undervalued 47.01% 21.05
Consumer Non-Durables 0.69% -0.03% 1.20% 9.70% undervalued 37.02% 19.03
Consumer Services 1.01% -2.10% 4.24% 11.69% undervalued 35.28% 21.26
Energy 1.22% 3.98% -6.58% 4.21% undervalued 35.14% 21.22
Finance 1.13% 0.24% 6.91% 6.84% undervalued 20.00% 18.7
Health Care 1.63% -0.91% 4.27% 14.12% undervalued 23.72% 19.83
Public Utilities 1.26% 4.15% -4.46% 5.81% undervalued 16.68% 17.52
Technology 1.06% 0.08% 4.21% 16.12% undervalued 39.99% 24.22
Transportation 1.20% 0.83% 5.03% 11.80% undervalued 34.62% 20.25