MARKET UPDATE - CONFLICTING SENTIMENT DATA, BUT POSITIVES OUTWIEGH NEGATIVES

As of the close of the week both the Dow Jones Industrial Average and The S&P 500 Index lie within 1% of their respective January highs. At the same time the smaller cap indicies such as the Russell 2000 and S&P 600 have exceeded their January highs and are both now at their highest levels from the March 2009 lows. The smaller cap stocks have been outperforming the larger cap stocks for quite a while and we look for that trend to continue. In fact many would be surprised at how long the small caps have been outperforming the large caps. The chart below shows the small caps as represented by thre S&P 600 (SML) have outperformed the S&P 500 (SPX) for the last 10 years. As the folks at Dorsey Wright put it, "The small cap phenomenon has been dominant over the past decade. In fact, a relative strength chart comparing the S&P Smallcap 600 (SML) to the S&P 500 (SPX) shows that since February 18th 2000, the chart has been on a buy signal, suggesting you favor SML over SPX. Since that RS signal was given, SML is up 68.23% while SPX is down 16.92%. Prior to the most recent signal, the RS chart favored large caps (SPX) from February 11th 1997 to February 18th 2000, and during that time SML was up 41.78%, but SPX was up 70.48%. That is an interesting story too, isn't it?"

Technical Back Drop

Sentiment
Investor Intelligence Reading

In the first few weeks of 2010 the market sentiment indicators displayed very high bullishness readings among investors, portfolio managers, and newsletter publishers. For example in early January the Investors Intelligence survey showed that bulls outweighed bears by more than a 3 to 1 margin. The 9% correction from late January into Feburary helped bring the Investors Intelligence sentiment indicator back to bull to bear levels of 1.3 to 1.




According to the latest Investors Intelligence survey, the bulls are at 42.1%, up slightly from last week (41.1%). The bears fell back somewhat to 22.7% (from 23.3%). The gap between bulls and bear is starting to widen once again to almost 2:1 , but we still are a good distance away from the January peak of 3:1. We consider this reading neutral.

HSNI Reading

A more concerning sentiment indicator comes from the latest Hulbert survey of investment newsletter writers. Hulbert writes, " Based on the several hundred investment advisers I track, I'd have to say that bullish sentiment is approaching dangerously high levels. Consider the Hulbert Stock Newsletter Sentiment Index (HSNSI), which represents the average recommended stock market exposure among a subset of short term stock market timers tracked by the Hulbert Financial Digest. It currently stands at 62.8%, up from 13.8% just one month ago. That's an awfully big jump for so short a period of time, especially considering that the Dow Jones Industrial Average rose a modest 4.4% over this period." Just as Hulbert, we consider this reading bearish.

ISE Option Sentiment Reading

The ISE Sentiment reading is currently in bullish terrioty as the 5, 10 and 20 day moving averages are all at levels that do not show excessive bullishness and in fact are currently displaying more pessimism than optimism.


NYSE AND NASDAQ NEW HIGHS/NEW LOWS

The new highs / new low data continue to show strength in this bull leg. The new highs data suggest that this market still has room to run and should be considered bullish.




NYSE BULLISH PERCENT

This is an indicator that we give a high degree of respect. The NYSE bullish percent represents the percentage of NYSE stocks on a bullish point and figure chart pattern. On Friday this signal went positive. While this development does not suggest that market will continue to trade straight up from here, it is a important positive in the overall picture.

SUMMARY

This is just a sampling of the indicators we watch.
While the indicators are currently giving mixed signals, we find the more reliable data suggest that the overall conditions favor the bulls. Mutual fund inflows continue to show that investors are avoiding stock funds while pouring money into bond funds. On a contrarian basis we find that comforting. Also consumer confidence readings on the economy continue to remain very low. Historically the stock market has performed well following periods of poor consumer sentiment.
Ned Davis of Ned Davis Research last week wrote to clients: "The disparity between hope on Wall Street and malaise on Main Street continues. I have never seen anything like it. Perhaps it is dangerous to draw a conclusion, but for now I think it is consistent with a neutral to mildly bullish trading strategy."

In the MWA Active Equity ETF Strategy we are currently 100% invested. We are overweight in the small cap ETF's and also have a position in the IYR which is the iShares US REIT ETF. The REIT sector has shown superior relative strength to the other market sectors in the last few months and thus we have chosen to direct 10% of our equity exposure there.

In the MWA Active Fixed -Income Strategy we remain balanced across the portfolio. With 20% exposure to all 5 primary ETFS. The recently improving economic data should benefit the corporate and high yield sectors and we will continue to keep 40% of the fixed income portfolio invested in those areas.

iShares Short Tern Treas. 20%
iShares Med Term Treas. 20%
iShares Long Tern Treas. 20%
iShares Corp. Bond 20%
iShare IBoxx High Yield 20%



The MWA Long/Short Strategy currently has no short exposure. Some of our long positions include AAPL, GDX, TRF, UNH, and LCC.