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
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.