MONTHLY RESEARCH: The Monthly Research for February was run over the weekend of January 30th, 2010, based on the data close out of Friday, January 29th. Your specific data were be pushed to you on Sunday, January 31st. The WEB site data (Workbook section) was available Sunday and the refreshed data applied to the Probability Plots, Screening features, and download files in the monthly File DownLoad section. The Strategy notebook should arrive on Thursday, February 4th. If you have not received your files, or the notebook by the dates indicated, please contact us. Call 239-948-0101 if you wish to schedule a conference call in January.
WEEKLY RESEARCH: Weekly Insider Data and Commentary files were updated on Saturday, February 6th with data from the Friday, February 5th, SEC closeout. The Insider portion of the Workbook section of the WebSite was populated with the new weekly data on Saturday and Sunday as well. Both of the e-mailed files on Insider behavior (Data for all companies, and Commentary) were pushed to you on Saturday or Sunday. Insider behavior moderated. (See the Insider Commentary from the past weekend for a sense of the change, including longer-term implications for price direction of the broad market.)
GENERAL COMMENTARY: After a strong start in favor of Growth, Style was tilted toward Value in January. The Capitalization component remained more in favor of Small-cap as anticipated at the end of December. MPT Model performance was again strong - led by the Insider, and Summary Model outcomes. This includes the observation that in our important benchmark model, Summary Best again outperformed Summary Worst. As expected, the Earnings model, applied to individual companies, performed less-well in January, following an anticipated signal in the first week of December that the cyclical component had turned down. It has however, reached a bottom as of the third week of January, and is expected to do well through the end of Q1. At the end of November we noted that the model was peaking in power. Conversely, the Insider Model, again did very well. The Insider Model turned in great performance in 2009 as a whole, and has started 2010 with a bang. The top-down, monthly Earnings model data continue to suggest both that the cyclical bottom has passed, and that the Economy, as measured by earnings momentum, probably bottomed in November of '08. TheTop Line Earnings Growth trend needed to improve, and after a review of the Q3, and now the Q4 reports, it appears to have done so. Bottom Line Expectations have far exceeded expectations as well.
We see the Market Cycle, in terms of MPT's "Market Clock," as fully engaged with the 6 o'clock position. From here, (with interim pauses for improvement such as the one we expected in December-January), the Insider model will gradually become less useful, and the Earnings model more important. However for now, Earnings combined with Insider screens should still work - just not as well. Market leadership will narrow from this point in the larger cycle, with Price and Earnings Momentum driving performance after we pass 6. Should we get a significant correction over the coming weeks, pay particular attention to the relative strength out-performers as they will most likely lead the next leg in equity prices higher. The Advance/Decline Line improved dramatically over the last 2-weeks of December, and into month-end - suggesting that further gains in the Equity Markets lie ahead. However, this does not preclude the possibility of a very "messy" and "choppy" January-February period, where a Market correction of significance (10-15%), and/or an adjustment to leadership, will pose difficult problems for managers. At present, we would view this as a longer-term buying opportunity in the "Mark-up" phase of an Equity cycle. Insider weakness in the Basic Materials Sector is not a condition we would have anticipated at this juncture in the Economic Cycle. We remain concerned that a typical and robust economic cycle - wherein deep cyclicals particpate in a meaningful way - may not materialize. The weakness in the Alcoa earnings report for Q4, 2009, may add additional fuel to this concern - initially expressed in poor relative MPT Insider model scores for the Sector.
We have moved into a period, following broad-market earnings expectations and surprise improvement, where the equity selection process needs to change focus - from acceleration, (in the MPT Earnings model) - to Market-relative scores, with an emphasis on the extreme tails, (decile 10 and 1). The outcomes at these extremes should be combined with companies showing good Market and Self-relative Insider Model scores. At this juncture, review of Self-relative Insider scores (using the Probability Plots) will be particularly important when making selections from more "Growthy" Sectors/Industries such as Technology.
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