Market Turn?

Posted May 27, 2010 by admin. tags:
Beautiful small lake and mountains



photo by Jeff Pang

Written by Dave Young, President of Paragon Wealth Management

Last Tuesday we hit the lowest point of the current sell off to date.

After falling about 300 points, the Dow recovered to end the day down only 27 points. Tuesday’s market action had a lot of the characteristics of a classic reversal day. It was a high volume selloff accompanied by panic and capitulation. The index broke the lows of the previous ‘flash crash” just enough to take out those weak players who panicked and sold out. The day ended on a strong positive reversal, which erased the day’s losses. It is too early to know that if that was the bottom, but it looked good from a technical standpoint.

Our models have been very close to sell mode, but currently we are 85 percent invested and 15 percent cash. Several clients have asked why the models have not gotten more bearish. The short answer is that most factors that would push the models completely bearish haven’t yet evolved.

For example:

-The S&P 500 gained 78 percent from the March 9, 2009 low until the April 22, 2010 high. Then, the market sold off and its lowest point was down -13.9 percent from the high. After the recovery of the last two days the S&P 500 is still down -8.7 percent off its April 22 high. Even though we have recently sold off, the longer-term trend is still up.

-Fundamentals for stocks are excellent. PE ratios are low, earnings are high, corporate cash reserves are 20-year highs.

-Fundamentals for growth are also exceptional with interest rates and mortgage rates at long-term lows. Fiscal and monetary policies are very positive for the market.

-This is not an overvalued frothy market by most measures. Over the past 18 months 80 percent of the inflows into the market have gone into fixed income. Only about 20 percent went into equities. The bulk of the money that came into equities went into Emerging Markets not the U.S. market.

-Sentiment has moved back to levels that are generally very positive for the market.

People have also asked, “Since the Dow Industrials recently broke its 200 day average shouldn’t we be selling?”

While it is true that the Dow and S&P broke their 200 day average that is not an automatic sell signal. Often the indexes will hit that point and then move through, but then reverse and move back up. Often, they will whipsaw back and forth across the 200 day average before moving decisively one way or the other.

Leading indexes like the Russell 2000 and the Dow Transports have not yet moved below their 200 day averages. Other indexes like the NASDAQ 100 broke through, but then reversed back above the 200 day average. Bottom line, there is not yet enough confirmation that we are clearly below the 200 day average to initiate a sell.

In summary, the models haven’t yet moved bearish because there are too many bullish factors. While there are several bearish issues, there haven’t been enough to tip the scales into sell mode.

Another subject that has been in the news a lot this week, is the financial reform package that congress is passing.

It seems to have a lot of similarities to the health care bill.

In short, like the health care bill, it is also 1500+ pages (that few the congressmen have read). It is being negotiated behind closed doors. The votes are falling on purely partisan lines. Favors are being extended to supporters while opponents are being demonized.

Much of what caused the financial crisis is not being addressed.

It feels like deja vu with the health care bill. We will have to wait and see what the final outcome will be, but if past performance is any indication of the current process, I am not terribly optimistic about the bill, but I do like the market at these levels.

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

Volatility Continues

Posted May 20, 2010 by admin. tags:Tags: , , , ,
Rollercoaster


photo by andreia

Written by Dave Young, President of Paragon Wealth Management

After initially recovering from the flash selloff two weeks ago, the markets have spent the past six market days going down.

Including today’s 376 point sell off, from their recent highs, the Dow is down 10.2 percent, the S&P is down 12 percent and the NASDAQ is off 12.9 percent. This is the first official “market correction” since the bull market began 14 months ago.

The VIX, which measures volatility hit 46 today, indicating extreme fear. Historically, a reading above 42 generally triggers a buy signal. That is usually the point where the market reverses and starts moving back up. The only exception to that rule was in the 2008 bear market where for the first time ever the VIX moved beyond 45 and kept going as the bear market got more and more extreme.

So is this going to be a rerun of 2008?

That question stokes the fear and is in the back of everyone’s minds.

This sell off is being driven primarily by concerns over the economic mess in Southern Europe, in other words, Greece, Italy, Spain and Portugal. The list of concerns is too long to put in this blog post. Those concerns come from traders who assume the worst possible scenario. They then further exaggerate the situation by imagining every possible related problem that might occur.

There are legitimate issues to be concerned about. In my opinion, and I emphasize, only in my opinion, I don’t think that this is a return of 2008. I believe that this is a regional issue that is currently causing the U.S. markets a lot of unnecessary grief.

Of course nothing operates in a vacuum, but if you look at the U.S. market alone, it appears to be reasonably healthy.

Earnings, which drive stock prices, have been nothing short of amazing. Companies have consistently beaten their earnings estimates each of the last five quarters. Beating their estimates has caused many companies forward PE ratios to move to a level that normally indicates significant undervaluation.

In summary, it appears that many areas of the market are relatively cheap again. Also, the correction has once again made market sentiment favorable for the U.S. market. In other words, now we see compelling reasons to buy U.S. stocks. The mess in Europe is currently throwing cold water on all stock markets. We believe that once the fear surrounding European mess dissipates, (for whatever reason) our markets and a few others may be very well positioned to resume their upward trend.

What we don’t know, is how long before the fear surrounding the mess in Europe diminishes. It may be soon or it could take a while to play out.

This sell off reminds me a lot of the Asian crisis in 1998. That selloff was short and sharp, and its subsequent recovery was relatively the same.

The most important issue for you as an investor is to make sure that you are invested according to your risk tolerance so that you can ride through the volatility.

Stay tuned…

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

Crash in a Flash…

Posted May 13, 2010 by admin. tags:Tags: , , , ,
Sad Day


photo by pedrosimoes7

Written by Nathan White, CFA

Last Thursday’s remarkable “insta-crash” has resulted in a frenzy of activity to determine the “cause”.

Rumors spread wild about all sorts of causes, but as the facts come to light, it looks like there was no single cause, but rather the culmination of many events, which led to a quick sell-off.

The initial and widely reported “fat-finger” mistake at a trading house seems to be a hasty conclusion and is fading fast.

A Wall Street Journal article by Scott Patterson and Tom Lauricella on Monday reported that a possible trigger that caused the Dow to lose 700 points in about five minutes might have been triggered by a hedge fund placing a large option bet.

This caused people on the opposite side to hedge by selling, which caused others to sell, which caused more selling and triggered sell-stop loss orders, which resulted volatility caused the high frequency trading firms (they account for upwards of two-thirds of stock market volume) to stop trading thereby removing a significant amount of liquidity, which resulted in a few minutes of very thin to no bids for stocks (I witnessed this as some stocks were down almost instantaneously 50%!).

All of this occurred within the backdrop of continuing video feeds of rioting in Greece, which had already contributed to a 3% drop in equities for the day before the “insta-crash”.

Then, as soon as it started, it was over…

About 10 minutes after the markets hit a low, they were back to pre-crash levels. Many have said that the markets failed to work, but I actually thing the opposite is true.

Because the markets were able to snap back so quickly, it shows that the sell-off was not justified. As soon as the market participants were able to start reacting to the dramatically low prices, bids reappeared and liquidity entered causing the market to snap back. It happened so fast that there was virtually no time to try and take advantage of the opportunity.

During these type of events quote and trading systems often freeze up and get bogged down as the systems become temporarily overwhelmed. Placing markets orders can be perilous because you do not know what price you will get and your limit orders are being constantly left behind.

The lesson from that day is that “events” like these will always be a possibility and will occur. The one thing that you should NOT do during these events is sell, because it is effectively too late.

Emotions run extremely high, and reason flies out the window. It is very hard to make sound decisions when in panic mode.

If you are positioned how you want to be before the event, it is absolute futility to try and sell during a “crash”. I firmly believe that you should wait it out and make your allocation decisions when the market has “normalized”.

As I mentioned initially, everyone is falling all over themselves to determine the cause of the crash so that they can stop it from happening again.

They can’t.

Congress, ever wanting to be seen as the saviors, is holding congressional hearings. Heaven help us.

Their “solutions” will likely cause more harm than good. The exchanges are also frantically trying to figure out some preventions. My main reservations with these groups’ potential fixes is that whatever they come up with to supposedly stop the market from going down also will likely hinder it from recovering.

Congress of course is mainly about intentions and not consequences whereas in “real life”, it is all about trade-offs. They like to make rules that on the face of it seem simple such as, “if the market is going down due to selling why don’t we just prevent selling by halting the market and presto, the selling stops” without considering what the consequence of their actions.

Trading halts, which I am not totally against, are no panacea and often make matters worse as it gives time for more people to panic and spread rumors and so when the market opens it gaps down ever further than what would have occurred without the halt.

The action on May 6th happened so fast that there really wasn’t time for the vast majority of investors to react.

My experience tells me that many would have reacted badly (panic selling) if they were given more time by something like a trading halt that would have dramatized to the nth degree by the media. The quick recovery prevented many from hurting themselves and is a main reason why I believe that the market did not “fail” us.

Click on this link to read the Wall Street article mentioned above, Wall Street Journal.

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

Crazy Day on Wall Street

Posted May 7, 2010 by admin. tags:Tags: , , , , ,
Greese

photo by eustaquio santimano

Written by Dave Young, President of Paragon Wealth Management

Yesterday we were reminded that investing in the stock market still involves volatility.

For the past 14 months we’ve seen a phenomenal rally off the March 2009 lows. Yesterday we saw the market “freak out” bringing back memories of the 2008 bear. The VIX increased by 60% yesterday and hit almost 41, which indicates extreme fear.

Why all the drama?

Greece hasn’t yet figured out that socialism doesn’t work and has come asking the more responsible Euro countries to bail them out of their financial mess. The other Euro countries agreed to bail them out with a 141 billion dollar package, but told them that they would have to cut back on spending and implement an austerity package. That caused rioting in the streets (the Greeks just wanted the money they didn’t want to cut back on anything). The rioting was picked up by the media and played over and over all day long.

The news and video from Greece caused traders and investors to assume the worst.

What if this rescue of Greece doesn’t work? What about the other “spend more than you have” countries like Italy, Portugal and Spain? Are they next? As traders assumed the worst, they panicked and sold their investment positions. That took the market down about 3%.

Then, just to make it interesting, there were some problems on the trading desks. No one is sure what happened, as it is still being investigated, but the rumor is that there were some huge trade errors that took the indexes down hard and fast. Then, just as fast as they went down, they recovered.

The market went from being down 3% to 5% to 10% in a matter of minutes. Then, just as fast as the market corrected itself, it returned to being down only 3%.

Even though the drop was temporary, the HEADLINE NEWS will most likely say that the Dow dropped 1000 points, which is the biggest drop since the 1987 crash.

So what’s next?

I wish I knew, but I don’t. In the very short-term (days), depending on the news, this market could move harder down or swing right back up. Yesterday’s market was very unusual.

I can speculate though. If this is like the majority of panic sell offs in the past 100 years, then calmer heads will prevail once traders decide that it’s not as bad as everyone imagines. If that occurs, then sometime in the next few days or weeks, the market will recover its losses.

On the other hand, perhaps we are on the beginning of a contagion that will take the market lower. No one really knows.

In the coming days the pessimists will be outlining “end of the world” scenarios and the optimists will ignore the market action altogether.

One thing for sure, if you act on your emotions you will likely do the wrong thing.

The bottom line, we won’t sell in a panic situation. That is always a mistake.

However, if this sell off does continue to unfold and gain momentum, then we will follow our models and rely on them to guide us through this.

Feel free to call us 800-748-4451 if you have any questions or concerns.

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

If Mike Lee or Bob Bennett Win the Race – Energy Solutions Wins

Posted May 3, 2010 by admin. tags:Tags: , ,

Written by Dave Young, President

I don't usually write about political topics in Utah, but with all of the attention the senate race is getting, I thought i would add my two cents…

Controversial Energy Solutions is sitting quietly on the sidelines. In the upcoming election, if the senator they want wins, it will significantly increase their political strength for the next six years. They are on track to bring large amounts of nuclear waste into Utah and create the largest privately owned nuclear waste facility in the United States. With the state convention coming up, state delegates have a responsibility to fully understand the politics around energy solutions.

A January 20th, Mason-Dixon Poll discovered that 76 percent of Utahns oppose disposal of thousands of tons of depleted uranium that Energy Solutions wants to bring to their state. Opposition was evenly distributed among republicans, democrats, men and women.

Because of opposition by the people of Utah, Energy Solutions has taken another approach to get their way. With their staff of attorneys, lobbyists and public relations experts their strategy is two pronged. They are spending large amounts of money to change public opinion and more importantly, influence legislators.

The first step is to change public perception and convince Utahns that they want nuclear waste that the rest of the world does not. This is done by ongoing advertisements and mailings extolling their virtues. Even though they do not sell consumer products in Utah, they spend a lot of money to put their name on the most popular sports stadium in the state. They run enough advertising on radio stations to put the talk show hosts on their side.

Their second step is to influence the local and national politicians that make the laws. If you have the ear of the people who make the laws that regulate you… you win. 

How do you influence a politician? It is simple. All you do is contribute to their campaign. It is surprising that it doesn't really cost much. Energy Solutions through its PAC and employees is one of the largest campaign contributors in the state. They aren't partial, and they give money to any politician, republican or democrat, local or national, that might further their cause.

So far, their strategy is working. On the national side, Rob Bishop, a former company lobbyist, is not a U.S. House Representative, representing Utah. On a local level, many legislators are changing their stance and now favor Energy Solutions. Never mind the controversy over their expanding beyond what they originally promised Governor Huntsman or the controversy surrounding the science behind the "blended waste" they want to bring to the state.

The poll mentioned earlier also said that 68 percent of Utahns want to ban importing radioactive waste from foreign countries. Energy Solutions employees and PAC donated about $47,000 to Bob Bennett. That donation went a long way as Bennett ignored the polls and is currently blocking legislation that would stop Energy Solutions from bringing nuclear waste from Italy. With his campaign chairman being a former Energy Solutions Vice President, draw your own conclusion as to where Bennett's loyalties lie. Attorney Mike Lee is another senate candidate with direct ties to Energy Solutions. When asked about his involvement with Energy Solutions, Lee brushes it off by saying, "I just helped them with one small case" he successfully argued against the will of the Northwest Compact, which is made up of Utah and seven other states, against Governor Herbert and according to the poll, against the people of Utah.

Using the free commerce provision of the U.S. constitution, he argued the state and won the right for Energy Solutions to bring low-level waste in from Italy to Utah. Utah argued that once waste from Italy is allowed, then neither the state nor the NRC will have any way of limiting waste from all over the world. The shipment from Italy is the largest amount of low-level radioactive waste the Nuclear Regulatory Agency has ever been asked to allow into the U.S. For obvious reasons, no other country accepts foreign radioactive waste for disposal. Also in line are pending applications to import waste from Brazil and Mexico for disposal in Utah. This was not just "one small case."

Two of the four leading senate candidates do not have ties to Energy Solutions. Those two without ties are Cherilyn Eagar and Tim Bridgewater. If as the poll says, 76 percent of Utahns oppose bringing thousands of tons of depleted uranium her for burial, it might make sense to elect a candidate that shares Utahns' views.

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

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