Financial Professionals


The Trend is Still Your Friend


Roughly one week has passed since the FOMC surprised the capital markets with an extremely aggressive new round of asset purchases. In the wake of that action, many have suggested an impending shift into riskier assets, highly cyclical in nature and sensitive to a lower U.S. dollar. As I wrote in the Q3 Playbook “The Trend is Your Friend,” my expectation throughout the remainder of 2012 is that investors should be allocated to an overall appreciating market but with assets that do not align themselves with the characteristics suggested late last week.
Subsequent price action has provided the evidence for, and strengthened my confidence in, the strategy outlined in the Q3 Playbook. QE3 will do little to alter the positive momentum for assets that have appreciated along with the S&P 500® Index (SPX) or to reverse year-to-date underperforming assets. In fact, the following is a glimpse into the price action of select assets that were the beneficiaries of previous QE announcements and how they have performed since the FOMC announcement on Thursday, September 13.
The 2009-2010 QE Relation Playbook Is not working…


9/13 Close $97.46

9/20 Open $91.77


9/13 Close $34.778

9/20 Open $34.605


9/13 Close $1772.10

9/20 Open $1772.40


9/13 Close $7.73 3/4

9/20 Open $7.55


9/13 Close $17.43 1/2

9/20 Open $16.68

10-Year Treasury

9/13 Close 1.723%

9/20 Open 1.7318%

XLB (Materials)

9/13 Close $37.88

9/20 Open $37.51

XLI (Industrials)

9/13 Close $37.5

9/20 Open $37.35

XLE (Energy

9/13 Close $75.57

9/20 Open $74.08


9/13 Close 1.2991

9/20 Open 1.2980

In addition, here are some quick observations about the recent market price action:
1.  Continue to use 1422.78 on a closing basis in the SPX as a point of reference to reduce current overweight holdings back to market weight.
2.  For investors using currencies as a portfolio hedge, I expect eurozone fundamentals will limit upside potential for the eurocurrency beyond 1.3500.
3.  While U.S. manufacturing continues to struggle, the U.S. consumer is proving to be most resilient. Therefore, a strategy of “Intangible services over physical goods” should be considered.
4.  Currently, there is no sign of “euphoria” in the equities market despite the constant search by those covering the markets to define a secular top. I am contemplating whether one of the true remaining headwinds, the “fiscal cliff,” could provide the euphoric moment in Q1 2013 should a grand compromise be orchestrated.
5.  While the spot price of oil is currently tilting to the downside, investors should not expect concurrent relief in the refined products of oil (gasoline & heating oil).
6.  Financial institutions continue to improve balance sheets and continue to suggest investment in the debt of those institutions.
7.  While the BRICs have underperformed year to date, the favorable “emerging market” investment thesis remains intact. The 2012 leadership of non-traditional emerging markets highlights the expansion potential of EM investments in the coming years.     
8.  Within the U.S., a strong argument can be presented that housing has troughed and the auto industry is currently experiencing a modest rebound. That equates to a much stronger fundamental scenario for Insurance companies providing coverage to the auto and housing industries.
Figure 1.1 S&P 500 Index SPX Year To Date

Source: Bloomberg
Figure 1.2 Euro Currency Year to Date

Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.