Investors Ride from Despair to Hope as News Points to the Positive

Portfolio Manager Market Notes
Investor sentiment swung dramatically from despair back to hope, helping drive the best weekly gain for the major averages since the market recovery began. Gains among smaller-cap shares were even stronger, with the Russell 2000 Index rising by over 10%. Volumes were not particularly impressive though. Determining proper positioning is challenging when the market falls 7% one week and rips up 8% the following. If the highs from October get taken out, we’ll raise equity exposure. But each time the market has hit the top end of the range, it’s been repelled lower.

Reports of strong sales over the “Black Friday” weekend started the week off on a strong note. News of concerted action to stem the European banking crisis drove even stronger gains on Wednesday, sending the broad S&P 500 Index up by over 4.3%. Many of the world’s leading central banks announced plans to provide low-cost loans of U.S. dollars to European banks in order to head off tightening liquidity in the region. Investors were also encouraged by a reversal in Chinese monetary policy. The Chinese central bank lowered the reserve requirements for the nation’s banks, indicating that growth was supplanting inflation as the central concern of Chinese policymakers. Signs of further improvement in the U.S. labor market also helped drive gains in the week. On Wednesday, the payroll processing firm ADP announced a solid rise in its tally of monthly private sector job gains. The official count from the Labor Department on Friday was not quite as large, but the government also announced a steep drop in the unemployment rate, from 9.0% to 8.6%. Much of the other economic data released during the week also suggested the U.S. was weathering the troubles in Europe better than many economists had expected. Indicators pointed to continued expansion in the manufacturing sector, pending home sales in October jumped to their highest level of the year, and an index of consumer sentiment hit its highest level since early in the summer. Source: T. Rowe Price

Technical Outlook
The technical picture continues to confound. Down 7% one week and up 8% the next. At this point it is pretty much impossible to say which way the next intermediate term move is headed but the best clue seems to be based on what the dollar does. If the dollar looks to be breaking higher the market should be moving back to the bearish camp and vice versa.

As investor frustration continues, we continue to manage our strategies with an emphasis on downside protection.