Burke-Leslie April Market Analysis

Burke-Leslie Professional 407-562-1861
Asset Management, LLC. jleslie@burke-leslie.com
801 International Parkway wburke@burke-leslie.com
Lake Mary, FL 32746

A PRIL M ARKET N OTES

JOHN LESLIE’S BRIEF MARKET ANALYSIS April 2011

U.S. Economy and Markets Move Ahead I NSIDE THIS ISSUE :

After a rough start, March prices. U.S. Consumer Confi- B ULL —B EAR 2
Madness prevailed as the major dence fell slightly in March ac-
M ARKET D ATA 4
indexes closed the quarter with cording to the Conference Board
the strongest gains in more than as did the Michigan Sentiment C ALENDAR 5
10 years. The economy contin- index. Housing continues to lag
ues to show steady improve- other sectors as Construction M AJOR M KTS 6
ment with the notable exception spending fell again in February
S ECTOR P ERF 11
of housing. Nonfarm payrolls to the lowest level since 1999.
came in above expectations at New Home sales fell 16.9% to F IXED I NCOME 14
216,000. The unemployment the lowest level on record
rate fell again for the fourth (1963) while sales of existing C OMMODITIES 17

straight month to 8.8%. That’s homes showed a similar decline
the lowest level in two years. (9.6%). But both of these indi-
These numbers can be a little cators can be quite volatile and
confusing as fewer workers are subject to revision. Market Trends
reentering the job market sug- Short Term MTI
Global markets rebounded in
gesting they don’t see much Bearish
promise of jobs. But the trend March suggesting a continuation
Intermediate Trend
is clearly positive. The manu- of the global recovery. April and Bullish
facturing sector continued to May are seasonally favorable Long Term Trend
show strength as the Institute months for the equities markets. Bullish
of Supply Management (ISM) There are still clouds on the ho-
index declined in March to 61.4. rizon, but the market has been
(A reading above 50 indicates
climbing the wall of worry thus
expansion, below 42 reces-
sions). Manufactures drew far. Both the Bulls and the
down inventories as all 18 in- Bears state their case on page
dustries reported paying higher 2. And yes, it is Tax Time!

April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.

THE BULL AND BEAR STORY

Every time someone buys a stock, someone else is selling it. It’s safe to assume that
what one investor views as an new opportunity, another views as quiet differently. This
is what makes an auction market. Viewing the same economic data, analysts and inves-
tors often come to very different conclusions. That’s never more apparent than now
when the major market averages have essentially doubled from the March 2009 low.
So where are you, bullish or bearish?

The Bulls view the economic environment as very positive. Af-
ter all, interest rates are still very low. The 2 year T-Notes
are yielding only .8%, the 10 year is 3.45% and the 30 year T-
Bond is 4.48%.
The unemployment rate is falling, now 8.8% and the econ-
omy is finally creating new jobs.
The Purchasing Manager’s Index (PMI) points to an expansion
of manufacturing. And retail sales continue to improve.

Corporate earnings are expected to come in strong for 2011. The estimated price
earnings ratio (P/E) for stocks are estimated (by Bank of America analysts) to come in
at 14 for 2011 and 13 for 2012. From a historical perspective, the market is not over-
valued.
The Federal Reserve is clearly in an accommodative mood. Even though QE II ends in
June, the FED is committed to economic growth and a higher inflation rate.
The bulls view this data as very encouraging, and believe the stock market has lots of
room to go higher from here. Cash then, is trash.


THE BULL AND BEAR STORY —P ART 2

The Bears have a different take on the data. The unem-
ployment trend is down, but the real unemployment
rate is much higher than 8.8%. According to the Wall
St. Journal, “There are still 13.5 million people who
would like to work, but can’t get a job.” The broader U-
6 unemployment rate includes those who are marginally
attached to the labor force. That number continued to
decline but still remains at 15.7%.
They question what will happen when the FED stops
flooding the economy with money (quantitative easing)
in June.
Bears worry about the current political unrest in the Mid-
dle East and North Africa (MENA), the sovereign debt cri-
sis in European Union, and the fallout from the natural disasters in Japan.
They are concerned about the growing federal debt service obligation, and the current
focus on cutting government spending. What will the fallout be on the economy?
They are concerned about the ramifications of the large budget deficits, and the sliding
U.S. dollar. If the dollar falls so low that it is no longer the global currency, what hap-
pens to the cost of doing business in the global economy?
Commodity prices continue to climb, in part because of the falling dollar. Will higher
prices be inflationary pushing up the cost of retail goods? Will the FED be forced to
raise interest rates? How will the housing market respond to higher interest rates? Is
there a possibility of a double dip in housing prices?
“The Bears acknowledge that Bull markets climb a wall of worry … but today’s wall of
worry is one of the highest and most daunting in years” according to Mark Huard. The
Bears conclude that lower prices are around the corner.


Market Data


Economic Calendar

______________________________________________________________________________________

SEASONALITY
For the past 10 years, April has been a sea-
sonally favorable month for the Dow Jones
Industrial average. The index has been up
almost 67% of the time with an average gain
of 2.1%.


Major Market Indexes
The S&P and DJI indexes remain in bullish main in positive longer term trends.
trends, albeit bearish wedge patterns. Last
Given the strong price performance since last
week’s Mid-East turmoil pushed energy prices
August, a pull-back or “correction” would be
higher, and the indexes lower but they did
both expected and healthy. In our opinion,
NOT break below support.
we have completed two of an anticipated
The NASDAQ Composite and Transportation three wave cyclical bull market.
Indexes have broken below the prior pivot
Given the current geopolitical events, we are
low, so price is below the Trend Bar (black
alert to the possibility of increased volatility.
line) and now negative on an intermediate
However, news does not normal affect the
term. The Transportation companies have
longer term price trends. Ultimately, price is
been hurt by rising energy and commodity
the best “indicator” and we monitor those
prices. Both of these indexes, however, re-
trends daily. Don’t ever panic.



The major indexes traded lower in early March in what appeared to be the beginning of a
correction. But price reversed mid month to rally an impressive 700 Dow points.
The S&P has rallied to within a few points of its bull market high. Seasonality factors favor a
continuation of the positive trend. Momentum indicators are bullish on both daily and
weekly time frames. Viewing 10 color coded technical indicators, green for positive/red for
negative signals, the index turned bullish the week of September 13th.


The bearish “wedge” pattern broke down in February taking price to the 1250 area. The re-
versal off 1250 created the support trend line. The Index is now in a positive channel with
an up-side target above 1400. There is no assurance it will reach that technical target, but
the trend is clear.

The same pattern is manifest in the Dow Jones Industrial Average. The trend line resistance
is in the range of 13000.



Market Breadth Indicators are positive including:

New York Stock Exchange
Advance vs. Declining Issues.
(More stocks are advancing
than are declining.)

New York Stock Exchange
New Highs vs. New Low
(There are many more stocks
making new highs than are
making new lows.)



The New York Stock Exchange Bullish Percent Index records the number of stocks with bull-
ish “point and figure” buy signals. The indicator has confirmed the new bullish trend in Sep-
tember, the correction in February, and the resurgence of positive price movement in late
March.
The near term sentiment, momentum, and price patterns are in positive trends. But with the
many unresolved global challenges, it’s important to avoid complacency.

Negative crossing

Positive crossing


SECTOR PERFORMANCE


SECTOR ETFs
Relative strength is a measure of the relationship of price performance between a
stock/ETF and another stock/ETF in the same category, against an index or against the
broad market. For our Sector ETF analysis, we are measuring strength between the
Sector ETF and the S&P 500.
Robert Colby’s long term relative strength ratings are listed in descending order of
strength:
Energy — Bullish: relative strength further above 2 year highs.
Limited storage issues may push oil futures lower in the near term as trades can-
not accept delivery. But the continued instability in MENA (Mid-east, north Af-
rica), the global economic recovery and growing demand point to higher prices
in the intermediate term.
Industrials—Bullish: relative strength back above 12 year highs.
Manufacturing is improving according to the latest ISM data, and growth could
actually be stronger than anticipated. But the overall view is neutral due to fiscal
restraints, Asian monetary policy, and a rollover of the orders/inventory ratio
Materials— Bullish: relative strength rose above 6 week highs
Materials continues to move with the overall market with a positive trend.
Higher commodity prices can put a damper on growth however.
Consumer Discretionary—Neutral: relative strength in trading range.
As we enter the later stages of the economic expansion, this sector become more
vulnerable to pricing pressure. With limited pricing power to offset costs, the
sector remains a neutral.
Technology—Bearish: 50 period moving average of relative strength crossed below
the 200 moving average. Absolute price is neutral.
Still recovering from the market correction, an improving economy will boost
tech sales and bottom line. Financials are solid and the sector is rated neutral.
Health Care— Neutral: relative strength back up to neutral
This beaten down group has climbed back into the neutral area. There are still
issues with health care reform which could limit profits. But low valuations re-
main attractive.
Financial—Bearish: relative strength fell below three month lows. Absolute price
broke down below 10 week lows.
Housing, the related mortgage market and new capital requirements will create a
drag for this sector, while higher interest rates and the ability to begin or in-
crease dividends point to stronger performance. Still a market performer, but an
improving sector.
Consumer Staples— Neutral: relative strength neutral but weakening
While traditionally a defensive sector, prices are improving with the economic
recovery. But rising commodity costs are putting a ceiling on margins. The
sector remains a weak neutral rating.


Utilities— Bearish: relative strength fell below prior 2 week. Absolute price is neutral.
While relative performance puts utilities at the lowest range of the sectors, low bond yields
and high utility stock dividends have attracted buyers. The potential fallout from the Japa-
nese nuclear incidents and the risk of additional regulatory response keeps a cloud over this
sector. It’s neutral now, but vulnerable to a further downgrade.

Absolute price performance for major sectors, for both 1 month and
3 months


FIXED INCOME

Both the 10 and 30 year Treasury’s rallied in February to challenge resistance. Both were
turned back. Inflation and interest rate fears are pushing yields higher and bond prices
lower. There is great uncertainty on the horizon as Congress has yet to resolve the debt
ceiling. House Speaker Boehner is quoted as saying that “any increase in the debt ceiling
cannot and should not pass without spending cuts and reforms.” According to JP Morgan
analysts, “while it’s almost certain the Congress will eventually raise the debt ceiling in
tome for Treasury to avoid a default, a game of chicken that delays this decision in to June
is a clear negative for Treasuries.”
Walmart CEO Bill Simon recently announced that inflation “is going to be serious. We’re
seeing cost increases starting to come through at a pretty rapid pace.” Because of their
fixed payouts, bond prices do not perform well in times of increased inflation.
Bonds, like the U.S. equities markets, are at a critical point. If price breaks below the sup-
port levels (below), it would suggest that the bond market has a growing anticipation of
higher inflation (and interest rates). Both have negative implications for any fixed income
investments.


INTERMARKET RELATIONSHIPS
The relationship between bonds, commodities, the U.S. dollar and the stock market

Intermarket relationships are key to understanding economic cycles. Generally
speaking:

Bond prices and commodities trend in opposite directions;
Bonds usually trend in the same direction as stocks. Any significant divergence
warns of a possible reversal in stocks.
A falling dollar will eventually cause commodity prices to rally which in turn will
have bearish implications for bonds and stocks.
Falling interest rates pull the dollar lower. With the falling dollar, we initially have fal-
ling commodity prices. As interest rates are falling, bond prices and later stock prices
rally. [There are periods of time when these relationships are in transition, and even
occasionally, reverse]. Eventually, the falling dollar pushes commodity prices higher.
Rising commodity prices pull interest rates higher and bond prices lower. The lower
bond market eventually pulls the stock prices lower. Rising interest rates start to pull
the dollar higher, and the bullish cycle starts all over again.1

Intermarket Technical Analysis, John J. Murphy, 1991


The U S Bond ETF ($USB) follows the U S dollar in the below chart.

Stock and commodity prices are currently moving together. Here is a comparative
view of the Commodity Research Bureau (CRB) index and the S&P 500 ($SPX).

Do you notice anything funny about the relationship between the CRB and the broad
stock market?
Remember our initial tenet: commodities and stocks should not be moving in the
same direction. This suggests an unhealthy market. It is impossible to know which
market will change to reestablish the normal relationships, or even when. But clearly,
caution is advised.


COMMODITY MARKETS
The dollar traded down to support at $76 and bounced briefly. Momentum indicators are
still negative suggesting the dollar might retest the 75.81 lows in the near term. There is a
great deal of technical support just beneath the current price. If that support is broken, the
dollar is vulnerable to much lower prices.

WEEKLY CHART

DAILY CHART


Gold remains in a bullish trend, but as yet unable to break through resistance at $1450.
Support is the lower trend line. While the consensus is that gold will move up from this
range and perhaps challenge the $ 2000 level. However, until the resistance level is vio-
lated, gold may continue to consolidate around 1430

Copper prices broke above resistance near the 4.70 target, but quickly fell back down into
the trading range. Price broke below the intermediate term trend line, and has made a se-
ries of lower highs and lower lows. Trend is now negative in this economic bell weather.


Crude oil prices briefly dropped below the intermediate trend line, but quickly rallied to
close the week at 107.07. The trend remains bullish while crude oil inventories are quite
high. The March 30th EIA (Energy Information Administration) inventory report shows
Cushing storage at a record 41.9 million barrels. The maximum capacity is 44 million. U.S.
supplies overall rose to 355.7 million.

There is an increased focus on Natural Gas as an alternative to nuclear energy. But large
inventories continue to hold price down. The trend is positive, but within a larger price
range (consolidation). Until price moves above the prior price high (pivot), NG is neutral.


DEBT CLOCK

Burke -Leslie, LLC, is a registered investment advisor (RIA) with the SEC. The information contained within is neither a solici-
tation nor an advertisement for any investment. The articles and information provided are for the benefit of our clients and are
not an offer to purchase or solicit any mentioned investment. Opinions expressed about any security mentioned in this newslet-
ter may change at any time and Burke-Leslie, LLC maintains no duty or obligation to update information as changes occur.
While every effort is made to ensure accuracy of the articles published herein, we are not liable for any inaccuracies.


Burke-Leslie April Market Analysis

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