Following the extended July 4th holiday weekend, stocks returned to their volatile ways, with the Dow Jones Industrial Average trading up or down by 100 points or more each day of the week. On Monday, the Dow traded in a 200-plus point range only to finish slightly lower. The sectors that declined sharply on Monday rallied Tuesday pushing the Dow up 152-points for the day. But Wednesday saw the Dow give back 237 points, a real setback for the bulls. Thursday was up 82, but Friday gave back 129 points on a whipsaw day that pushed the Dow below 11,000 for the first time since July of 2006. For the week, the Dow ended with a loss of 188 points (-1.7%) to close at 11100.
The NASDAQ traded lower for the sixth week in a row, losing 76 points (-0.3%) and ending the week at 2239.
Year-to-date, the Dow is down 16.3% while the NASDAQ has lost 15.6% of its value.
Look for a watershed week, as the second quarter earnings reports roll in, most notably among financials. The guidance is apt to be cautious among many companies; however, with a lot of bad news baked into the markets at this point, any hint of optimism is likely to result in a welcome relief rally. It is important to remember that even in a bear market there are often opportunities for short-term advances. But in reality, only one advance will be sustained
The Appleton Group Composites™
Last month, we indicated that we were closer to reducing positions than to increasing positions, and that’s exactly what we’ve done. Shortly after the publication of our last Market Commentary on June 18th, we began to sharply reduce our exposure to the stock market once again this year, as the market rally that began in April has completely reversed course. Through the end of the 2nd quarter (June 30th), all of our managed portfolios continued to sport only single-digit losses, with year-to-date declines averaging only -3.42%. This is largely in-line with performance as of the end of the first quarter of the year, while the market’s overall performance has worsened considerably. As of the end of the quarter, the S&P 500 Total Return Index, for example, was down -11.91%. We continue to sport a conservative stance, with our positions in cash, bonds, and “bear market” mutual funds near maximum levels. This posture will remain intact until the market can find its footing. For now, our defensive posture is certainly warranted, but we stand ready to reallocate our cash and other defensive positions back to the markets as conditions become more supportive.
It’s official: a full market cycle is in the books as the three major market indexes (NASDAQ, S&P 500 Index and Dow Jones Industrial Average) have all officially entered bear market territory (-20% decline from their respective highs). A full market cycle often runs several years, and is defined as a bull market peak (year 2000) followed by a bear market bottom (2002) back to a bull market top (2007). Defining a complete market cycle is important, because it is used to gauge the success of any particular investment discipline through both cooperative markets and uncooperative markets. Measuring the returns of a particular discipline and the risk that the discipline incurred over the full market cycle is important in determining whether the discipline is suitable, and whether it is successful or not. Bad news for strict buy and hold investors: you didn’t do so well. In fact, the S&P 500 Total Return Index (with all dividends reinvested) advanced only 1.66% on average per year. Hardly successful by any reasonable measure. Looking forward, we expect more and more investors (both individuals and institutions) to adopt more flexible asset allocation techniques such as those used by The Appleton Group Wealth Management Discipline. And why not? Over this complete market cycle, flexible portfolios such as ours have consistently performed better (higher real returns), while at the same time exposing the investor to significantly less risk (visit www.appletongrouponline.com for complete portfolio performance through the end of June 2008).
Please visit www.appletongrouponline.com to learn more about The Appleton Group Composites™.