Stadion’s investment strategy is built on a foundation of trend following and technical analysis.  While we do not use chart analysis in our decisions to be invested or not, it is a useful tool we employ in our portfolio management process.  The chart below shows the S&P 500 from 12/31/2010 through 2/16/2012.  The red box outlines an area of resistance established early in 2011 and retested several times throughout the first half of the year.  As you can see, we are once again within this resistance band.  Typically at these areas, prices may have a difficult time “breaking through” this band to the upside. It is normal to see increased volatility or even a decline in prices as the market tests this level of resistance.

Should the market break through this resistance level, we could see the market rally up to the next level of resistance: the 1400-1415 range for the S&P.  If this happens, it would be the first time the S&P 500 has reached the 1400 level since June 2008.

But let’s not get ahead of ourselves! We cannot predict how the market will react to this resistance.  As the chart shows, this level was tested several times in 2011 and the market failed to break through each time. This resistance level is very strong. Therefore we will continue to manage our portfolios with our model driven sell criteria in place.  Should prices continue higher we will be well positioned for the rally.  However, if prices begin to wane, our sell criteria will tell us the proper time to take risk off the table, and to begin to move to more defensive allocations to protect our clients assets.

By Danny Mack – Senior Analyst, Portfolio Management

The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. It is not possible to invest directly in indexes which are unmanaged and do not incur fees and charges. Past performance is no guarantee of future results. Investments are subject to risk and any of Stadion’s investment strategies may lose money. Any references to specific securities or market indexes are not intended as specific investment advice and should not be relied on for making investment decisions.

Back in December we blogged about an interesting “coiling” chart pattern of subsequent higher lows and lower highs developing in the S&P 500 (as shown by the ETF ‘SPY’).   Historically, when these patterns take place over several months they tend toward a pronounced upward or downward move as the market, or coil, tightens. A coiling market can breakout in either direction and in this case we are seeing the market break upward, as shown in the chart below.

Click Image to Enlarge

With 2011 now in the rearview mirror, the first couple weeks of 2012 have brought a nice, steady march upwards in a breakout from 2011’s pattern of consolidation.  It appears that headline risk, which so dominated 2011, is currently being shrugged off by the forward-looking machine that is the stock market. News, like the downgrade of several European sovereign nations’ debts by the S&P, that would have sent shockwaves and imminent downside price action in 2011 has resulted in higher price action as we move into 2012.

As trend followers, our model recognized this positive price action, with confirming breadth and improving sentiment, and appropriately signaled to add equity allocations to our portfolios. So far so good. Nevertheless, as confident as we would like to be, headline risk still looms. As always, our goal is to read and react, not predict. However, to finally see a possible trend developing is good news for a trend-following model like ours.

Brad A. Thompson, CFA,
Chief Investment Officer

SPY is the market symbol for units issued by SPDR S&P 500 ETF Trust, a Unit Investment Trust. SPY seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. SPY is a managed fund that incurs fees and charges. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. Past performance is no guarantee of future results. Investments are subject to risk and any of Stadion’s investment strategies may lose money. Any references to specific securities or market indexes are not intended as specific investment advice and should not be relied on for making investment decisions.

With yesterday’s strong price action the S&P 500 index closed at 1,308.04. This is significant because 1,300 has become a major milestone level for the S&P 500. This is not necessarily a technical level as much as it is a psychological level for investors, but with the index closing above that 1,300 plateau it is a good sign that we could see a nice break out above that level absent any major macro news event that would reverse the current upward trend in stock prices. While the market has exceeded this plateau on several occasions it has been temporary.

Let’s put this into perspective. The S&P 500 first crossed the 1,300 barrier on March 15, 1999. So, some 12 years and roughly 10 months later the market, as measured by the S&P 500 index, is right where it was when it first crossed that 1,300 level.

As you might imagine, this could be a very frustrating 12 years and 10 months for the typical buy and hold index investor. This is why we believe it is so important not to compare your personal portfolio returns to that of an index such as this. Remember, you can invest in a fund or ETF that tracks the index and never underperform the index in any specific year, but we don’t consider breaking even over a 12 to 13 year period a very good investment strategy. Rather we believe it is important to think beyond single year or period relative performance and focus on how your portfolio will help you achieve your long term financial goals.

Brad Thompson, CFA, Chief Investment Officer

The S&P Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The example demonstrated does not take into consideration the reinvestment of dividends, which could benefit an investor in terms of dollar cost averaging during a bear market. Past performance is no guarantee of future results.  

As 2011 winds down an interesting pattern is playing out in the S&P 500 as shown in the chart below of SPY, an ETF that tracks the S&P 500.  Currently, we are seeing lower highs and higher lows resulting in a symmetrical triangle or what is called a coiling market.  As this triangle created by the price action wedges tighter, you can see that we are getting closer to a possible breakout in one direction or the other.  As of this writing on 12/28, there is a good chance that we will see this breakout and a new trend develop with the start of the new year.  The good news is Stadion’s Investment Model keeps us well positioned in our tactical portfolios; a break to the upside could see us back invested or with a downside break our safety measures should keep us on the sidelines.

Brad A. Thompson, CFA, Chief Investment Officer

SPY is the market symbol for units issued by SPDR S&P 500 ETF Trust, a Unit Investment Trust. SPY seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.  SPY is a managed fund that incurs fees and charges.   The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. Past performance is no guarantee of future results. Investments are subject to risk and any of Stadion’s investment strategies may lose money. Any references to specific securities or market indexes are not intended as specific investment advice and should not be relied on for making investment decisions.

The weakness in the markets since last week has been unmistakable. With the S&P 500 down about 3%, pundits have begun asking when investors will lose hope for a near-term resolution of the international debt crisis. On the other hand, some long term investors say that the likelihood of a large market decline leading into 2012 is fairly low given certain positive economic data surfacing recently. This, however, presumes they are correct in two assumptions: First, that estimates for potential growth in the economy are sound. Second, that the markets will react “in-line” with expectations. The problem with forecasting is that the markets rarely behave the way one might predict. This is why Stadion doesn’t make predictions. We react to what ‘is’, not what ‘might be’.

As a reminder, Stadion’s market reactions are driven by the market’s ‘internals’, a set of measures including price indicators and breadth indicators that are tracked within our Stadion Investment model. Price indicators help determine the direction, or trend, of the markets. Stadion’s price trend indicators consider various time frames and calculation methodologies in an effort to identify the market’s trends. The goal is to establish whether the market is weakening or strengthening and the likelihood that the current trend will continue over time. Market breadth is also important as we “look under the hood” of the market. It helps us to determine the driving force in the price movement. Are small caps outperforming large caps? Are growth issues outperforming value issues? Does volume in top performing stocks and indexes outweigh the volume in underperforming investments? These are all questions that our market breadth indicators try to answer as they help us determine risk levels in the market, which in turn help determine our willingness to participate.

What makes 2011 a tough year for trend following? Simple: this year there has yet to be an established long term trend, up or down. However, there have been many short and medium term trends, including some in which our tactical, trend-following strategy has attempted to participate. But they have been inconsistent. In fact, the S&P 500 has seen twenty swings of at least 5%, positive or negative, since mid-February. Each of these price swings have lasted, on average, only 10 days. In other words, the market has been very volatile! Will this “trendless” market go on forever? In the last 15 years, the longest sideways market lasted a little more than a year. It’s easy to think a sideways market will continue forever, but this is historically—and practically—not true. The market has always broken out, ultimately moving either up or down. Until it does, we will continue doing what we do, reacting to movements according to the dictates of our model. When the market eventually begins to trend again, we will react to capture that trend if prices are rising, and avoid it if markets are falling.

While sometimes it may not seem so, Stadion’s model internals are doing exactly what they are designed to do. Don’t let the market’s inconsistency make it seem otherwise. For nearly 16 years Stadion’s model has demonstrated its ability to track and respond to market conditions.

By Danny Mack – Senior Analyst, Portfolio Management

The S&P Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges.