The schizophrenic market we discussed in the February 18th commentary continued last week, with the DOW retreating from 9903 on Tuesday to a low of 9734, and all the way back to 9960 to post a total gain for the week of 57 points (0.58%). However, the S&P and the NASDAQ didn’t fare as well, losing approximately 1% and 4% respectively. Volatility continues to be high, as evidenced by Thursday’s 197 point swing in the DOW. Given the negative volatility of the NASDAQ and the sideways consolidation of the DOW, our defensive market posture continues to serve us well.
DOW component IBM caused a stir when they announced that their recent quarterly results met expectations only because of a $300 million sale of its optical transceiver business to JDS Uniphase. This announcement caused a slight retracement of big blue’s stock under the $100 mark for the first time since October 2001. Accounting “surprises” of this nature tend to increase volatility, and diminish the credibility of corporate earnings in general, our scenario supports a short-term defensive posture. Additional reasons for the choppy market include an SEC investigation of JP Morgan/Chase’s corporate finance relationship/trading relationship with Enron (negative), a surprisingly strong housing market (positive), and short-covering during the later part of the week (neutral).
The Compass Portfolios’ posture is still defensive, with both large and small value stocks being the only market sector continuing to show strength. Our S&P 500, NASDAQ and Russell 2000 Small Cap Growth components are all protected with money-market and inverse (“bear market”) positions at this time. As we indicated last week, the portfolios are performing admirably in this difficult market, with all tactical portfolios outperforming their appropriate benchmarks. While we are understandably pleased with being on the correct side of the market at this time, we remain hopeful that economic conditions will improve to the point that our clients can soon return to fully-invested positions.