FEATURE
28 MARCH – 3 APRIL 2013
A chain of technical events
Michael Levas, founder of the Olympian Group, looks at the reasons behind the recent highs experienced by the Dow Jones Industrial Average
killful portfolio management requires knowledge not only of the markets but also how the different asset classes interact, and how changes in valuation for the different asset classes can impact target returns. A perfect illustration of this point can be seen in the events of the last few months during which the Dow Jones Industrial Average hit a new record high that was heard around the world. The high may have been a surprise to some, but the fact the DJIA began its ascent was not a surprise to those monitoring the chain of events that preceded it. The following is a top-down analysis for being long the equity market following the recent move to new highs. To start, the combination of low interest rates and continued strength of the credit markets has led to corporate buybacks, rising dividend yields, and M&A activity that has provided a floor in support of the equity market, lowering the risk equation for the time being. On the commodities front there was a bounce in gold futures. Gold has been in a negative trend since early October, falling from $1,798/ounce to a low of $1,555/ounce during the third week of February. The illustrious metal itself bounced after reaching oversold levels, but remains in a negative trend. Traders quickly abandoned the gold trade the last week of February as selling pressure increased once the futures bounced a bit. On 25 February 2013, citizens of Italy went to the polls in what proved to be very dismal elections, to say the very least. Confusion and indecision caused the equity markets around the globe to decline. It also resulted in a “flight to safety”, where investors and traders bought the US dollar, which pushed the US Dollar Index (DXY) higher, confirming a technical breakout. Initially the US Treasury market was the beneficiary, knocking interest rates lower. As the dollar rose other currencies fell. The euro has been declining and the British pound broke
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BY MICHAEL LEVAS, FOUNDER OF THE OLYMPIAN GROUP
a quadruple low that was also a support point. Subsequently the pound sterling sank to a two and a half year low. As that support level was broken, it attracted more sellers of the pound, as well as weakness in the euro, which resulted in buying of the dollar. That money eventually found its way into the equity market. This “flight to safety” in the equities market tends to translate into a move to either defensive stocks, such as utilities and health care, or megacap stocks, which are typically less risky than smaller companies. It should come as no surprise then that the Dow Jones Industrial Average, the benchmark of megacap stocks, surpassed its previous record high. Several other averages and indices recorded the same achievement during the past two months, while others have a long way to go. One that also saw a high was the Dow Jones Transportation Average, resulting in a Dow Theory buy signal that technical analysts look for as an indication that there is the potential for continued upside movement on a much broader scale. The combination of record highs for both the industrial and transportation averages, occurring in the same week, had been eluded for months. As a result of a review of all the events in the chain, the next step was to find issues that would continue to outperform the general market. Strong sectors, which have included consumer discretionary, healthcare and financial companies, narrowed the list of available candidates for purchase. As a result, individual securities purchased led to strategies that increased Alpha by capturing premiums from the options market in exchange for agreeing to sell the shares at pre-set levels, similar to invoking price targets. Investment decisions are not made lightly and require discipline, team work, timing and the ability to control risk. I believe that clients pay us not to just manage their money, but to be creative when we need to be and to always manage their risk. Being creative means always watching for opportunities in the markets overall. By analyzing the credit, currency and even the commodity markets on a global basis, you can find relationships that transcend and evoke into generating alpha across all markets.
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25/03/2013 15:54