How We Made Double Digit Gains in September

Hi, Friends,

September is in the books and Wall Street Sector Selector returned 11.7% unrealized gains for the month compared to 3.6% for the S@P 500. On a Year to Date Basis, we’re up 17.26% compared to the S@P at 7.72%.

Of course, our monthly gains are all unrealized as we follow the maxim, “let your winners run,” but our trailing stop loss positions will lock in profits no matter which way the markets move in the future. And, if you think about it, the S@P gains are unrealized, as well, since, as the old saying goes, “the markets will fluctuate.”

September’s market action was an excellent demonstration of the power of sector rotation and our analytical methodology. It was an excellent month for almost all equities as the markets responded to the 50 basis point gift from “Benevolent Ben” and his merry band of Feds, but as always, some stocks did better than others.

Using a composite of relative strength, momentum, trend, price patterns and sector analysis, we were able to identify five sectors that outperformed “the market” by 3-16%. And this is how we were able to make double digit returns in September.

Now, of course, we won’t always see double digit months or be this successful, but the scoring system we use to analyze over 50 Exchange Traded Funds is designed to consistently lead us to outperforming sectors of the market. And, that’s why we take risk, to outperform. It makes very little sense to me to take on market risk and just equal the averages as so many index buyers do every day.

The View from 35,000 Feet

It was an interesting week as the markets continued digesting the Fed’s rate cut and came in with gains for the month and quarter in spite of a continuing avalanche of bad economic news.

The Dollar continued hitting record lows against the Euro, oil was up 11.4% in September, Gold hit a 27 year high at $752/oz., new home sales hit a 7 year low, down 8.3% in August, the lowest since June, 2000. Home sales are now down 21% for the past 12 months, and currently there is a 10 month supply of unsold homes on the market which could quickly go to 12 month with more foreclosures and sub prime mortgage resets coming down the pike in First Quarter, 2008.

As if all that wasn’t enough, the Conference Board reported consumer confidence at its lowest level in nearly two years, which points to lower spending ahead, and the Freddie Mac now forecasts a 40-45% chance of recession while “Annoying Alan Greenspan” chimed in on BBC with comments indicating that probability of a U.S. recession has increased due to the housing slump and its impact on consumer confidence and spending; he now sees chances of a recession at “still less than 50-50.”

The Week Ahead

This will be a big week for reports with September manufacturing index due out Monday, vehicle sales on Monday, pending home sales on Tuesday and the Big Kahuna, the September jobs report due out on Friday. All eyes will be on the jobs report Friday because that will give some indication of the Fed’s next move at their next meeting on Halloween; will it be trick, or will it be treat?

What It All Means

Clearly the economy is slowing and the consumer is in increasing distress and caution flags are out. A recession brings a bear market, with typical drops of 40% in the equity markets, and our view is that the Fed will continue lowering interest rates to avoid the “R” word, particularly in the Presidential Election year.

Our radar looks out 6-8 weeks, and for that time period, we see excellent opportunities to be invested in the strongest sectors and will continue to maintain our long positions with the appropriate trailing stops. Beyond that, we’ll be watching for the “R” word and the necessity to trim our positions and revert to a more defensive or even “short” posture.

Sector Spotlight

Hot sectors for September were international, particularly Asia and emerging markets, precious metals, particularly silver, and energy. Laggards were the U.S. Dollar, home construction and Transportation.

Most interestingly, ishares Real Estate Index was up 3.2% for the month compared to the S@P 500 at 3.6%. I mentioned this last week as an interesting point with all the bad news surrounding the real estate sector. Oftentimes, early moves like this are early signs of resurgence in a particular sector. This index is obviously responding to the trend towards lower interest rates, and if home construction shows a turn, a bottom to all of this glum news in housing could be on the horizon.

Last week, I went fly fishing twice to my favorite spot in the world at the headwaters of the Deschutes River. On Thursday, it was a beautiful 75 degree day, and I can’t describe how beautiful this spot is; a pristine trout stream lined with ponderosa pines, emerging from Little Lava Lake which is like a mirror for Mt. Bachelor towering behind it. And on Friday, it was snowing, but equally majestic.

The trout gods were good to me as I caught and released the glistening fish, but I also realized how much we can learn about investing from fly fishing. One has to have the right fly (investment) at the right time, skillfully cast (know when to buy,) be patient (don’t chase winners,) be disciplined (never give up) and don’t rush the fish to the net. (sell early, or late.) I had a good two days on the river; we had a good September. I’m looking forward to working with you in the days and months ahead.

Your Partner in Prosperity,
John Nyaradi
Publisher
Wall Street Sector Selector
http://www.wallstreetsectorselector.com