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.

As I am writing this, the US equity futures market is up around 2.81% prior to this morning’s market open.  This is after the futures were trading in negative territory overnight.  So what is all the euphoria about?  Well, at 6am this morning, China announced it has cut its reserve requirement by 0.50% off of a record high of 21.5%.  This theoretically will ease money to offset slowing exports. 

However, it seems like this might be a bit of an over-reaction given that this cut was made because of an expectation for slower global growth.  It is believed that the Wednesday PMI data announcement for November will show contraction for the first time since February of 2009.  

This news–combined with a NY Times headline reporting  that “Six Central Banks Take Joint Action to Enhance Global Liquidity”–appears to be what is driving this market movement.  As the NY Times reported, “The Federal Reserve, the European Central Bank and four other big central banks took coordinated action on Wednesday to ease the strain of the European debt crisis on the world economy. The Fed, the E.C.B., the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank agreed to reduce the interest rate on so-called dollar liquidity swap lines by 50 basis points, among other measures”. “The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the Fed said in a statement.  

 At the same time the market seems to be ignoring some other significant headlines. American Airlines parent company is filing for bankruptcy, the S&P is cutting credit ratings for dozens of banks worldwide, the Eurozone is begging for IMF backing to beef up a bailout, news that overnight Asian markets fell sharply, and the folks in Washington still can’t agree on a payroll tax cut extension.  Add to that a major economic publication’s statement of the obvious….”Italy’s debt needs orderly restructuring”.  The Central Bank’s actions remind me of Abraham Maslow’s remark, “When all you have is a hammer, every problem becomes a nail” (Maslow’s Hammer).  In fact, Forbes reported that the Central Bank’s actions may have been in reaction to a very large European bank being on the brink of failure overnight.

This reminds me of a satirical cartoon from the 1980’s.  It went something like this:  “Markets fell sharply this morning on news that a giant meteor is headed toward earth that could cause catastrophic destruction, but markets rebounded on news that the Fed has cut rates by 0.25%.” 

Will today’s euphoric rise in market prices continue?  Will this be the start of a year-end rally?  Or will this be just another brief head fake rally that causes frustration as the markets fall back again once the euphoria subsides?  While we don’t know for sure what will happen in the days and weeks to come, it is obvious–and has been through large portions of the year–that the market is trading wildly at times and large price swings can reverse quickly.  This kind of spontaneous volatility is frustrating and sometimes can produce shattering results for buy and hold investors when they collapse into the kind of devastating bear markets that have followed dramatically volatile markets. That is why we will continue to manage using our risk controlled strategy.  In the end, market particpantswill vote with their dollars and the market will pick a direction.  It is the risk that the direction will be down that the Stadion model is designed to identify.  We know our process is not perfect, especially during periods like some lately where market action is reversed quickly by news driven events that cannot be modeled.  But, over time, our investment process has been reliable in helping us identify the market’s leanings once a sustainable trend is established in one direction or the other.

The greatest risk of all may be getting caught up in emotion when circumstances demand science and discipline. 

 Brad Thompson, CFA, Chief Investment Officer   

Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money.

Technical analysis utilizes historical price and volume data to understand the direction of the market.  Technical analysis can also be used to establish where areas of market support and resistance have formed or, to explain it another way, historical price levels at which demand is greater or less than supply.

The chart below shows the Nasdaq Composite Index for November 2010 – November 2011.  The area highlighted in the blue box shows two times when prices were expected to decline, but did not during two market selloffs in March and June of 2011.  During a selloff, some expect that security prices will decrease with the decreased level of demand for equities.  However, when that does not occur technical analysts will say that it is a result of market support. When prices fail to decline, it may be because the market is at a price level where the demand for equities becomes greater than the supply of them. We have highlighted two time periods, March and June, where market support kept prices from falling. However, when markets decline through established support levels, this is considered a break in support.  This occurred in early August as fears continued to grow about a possible default of the US government and the support level from March and June was broken. 

After the large decline in prices seen in early August, the market began to rally with market participants committing capital.  However, the former support levels had now become areas of resistance as you can see on the chart in late August and September. What was once the minimum amount buyers would pay for equities now became the maximum amount they were willing to spend. Demand from buyers was waning and sellers were becoming more aggressive, which forced the market to selloff.

Beginning in early October, market participants again committed capital to the equity markets as headlines suggested a possible resolution to the sovereign debt issues in Europe.  Once rising equity prices reached previously established resistance levels of, breaking through to the upside became difficult.  But an  added surge of new seems to have broken  the former resistance ceiling, which is now buoying prices at or above current price levels as you can see on the chart in late October and early November.

Where will we go from here?  If the market continues to move forward, devoid of major negative news, prices should continue to head higher and we could see the support level established in late October help keep prices from dropping too far.

But all this is guesswork, and guesswork is not part of how Stadion manages money.

 Stadion’s  trend following strategy uses underlying market breadth data to help determine how risky the investing environment is at any given time.  Mean reversion/support and resistance analysis is a useful tool, but  it is not directly tied to our investment strategy.  So while the Stadion portfolios are currently positioned for possible participation in positive market price movements we are aware that there is no guarantee that will happen.  While hoping for an upside gain,  Stadion’s process attempts to manage potential risk through a strong sell discipline.  At the moment, we are  ready for a continued upturn, but with one foot always lightly on the brake  if the market drops beneath its current support level.

By Danny Mack – Senior Analyst, Portfolio Management

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks listed on the exchange. It is not possible to invest directly in indexes which are unmanaged and do not incur fees and charges. Investments are subject to risk and any of Stadion’s investment strategies may lose money. Past performance is no guarantee of future results.