There is the feeling that the market ran too fast from March to June. Maybe it did, but the “big money” participants have not decided to truly join the party. As we have highlighted in the past, volume indicates institutional money flows. Volume typically follows the trend. Well, since the March 2009 low we have only seen volume shrink month over month as the market crawls higher (see chart of the Dow Jones Industrial Average on the top of the next page). The arrows indicate lower volume, as the market moves higher. If this is a new bull market this should not be occurring.

In addition, after July’s sell-off we made a new high in August. Since that time the TSX has had issues figuring out if there is enough substance to go higher and fresh money to step in OR if it will cave to the general consensus that we should have a substantial correction.

The second chart on the next page highlights the TSX, which has been choppy for nearly three months. Nothing has been decided yet as the TSX is only up 3.4% since the August peak (as of the close on Oct. 21st). It’s been a frustrating time for quantitative managers this year as high-quality stocks have dramatically underperformed low-quality stocks since March 9th, with that trend only starting to reverse in late September. In broad terms, quantitative analysis is simply a way of measuring things and a powerful tool in the investment community. Managers will use aspects such as simple financial ratios (i.e. earnings per share) to more complex areas such as discounted cash flow or option pricing. Likewise, our strategy which is largely based on fundamentals (i.e. earnings growth) has underperformed the markets.

We aren’t concerned by the results year to date and hope that clients will be reassured that a strategy that limited the downside last year will be rewarded in a positive environment going forward. Actually, as we’ve transitioned our business and clients over to our discretionary platform we are now in a position to fully execute a strategy we have hoped to deliver several months back. Since August we have outperformed the markets. This has been enhanced since September as high-quality stocks and true leadership starts to reassert itself. Of course we are concerned with the lack of volume. However, as high-quality stocks reach our buy levels we have continued to execute buys until the underlying conditions change.

Its earnings season and the positives have far outweighed any pitfalls as many big names with innovative products such as Google have surprised to the upside. Negative reports from bellwethers such as IBM should not be overly concerning. IBM is no longer a market leader and diversified companies such as this typically lack the innovation to drive exceptional growth moving forward. We are simply watching our positions held in discretionary portfolios and viewing the market indexes for further evidence whether we get more exposed or back off.

Yesterday’s close (Oct. 21st) was a bit concerning for us. Stocks appeared to be heading for gains, but turned sharply lower late in the session. Reversal days such as this to the downside are clearly a negative sign. Volume was up across the board. This collaborates with recent selling days to show a clear sign of institutional selling. For now, the market is in an uptrend that is under a bit of pressure, so we will manage this accordingly.

Take care,
Clinton & David

"The kind of commitment I find among the best performers across virtually every field is a single-minded passion for what they do; an unwavering desire for excellence in the way they think and the way they work. Genuine confidence is what launches you out of bed in the morning and through your day with a spring in your step"
-- Jim Collins

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