Hennion & Walsh Trending

In terms of the potential for a near-term pullback in the equities market, our research suggests that the probability of occurrence may be increasing. As you will recall from an earlier Portfolio Strategy News post on June 4, 2009, we contend that the S&P 500 200 Day Moving Average, with a 5% margin of safety, can be utilized, in conjunction with other market data, as a fairly reliable overall market timing statistic. It is our opinion, at Hennion & Walsh, that merely crossing through the 200 Day Moving Average is not a sufficient signal alone. When markets are moving quickly in the midst of seemingly trendless volatility, the average could be crossed in both directions on multiple occasions without presenting any clear market signals. As a result, we utilize a 5% margin of safety for our own internal assessments.

Applying this indicator to the price of 1041.24 that the S&P 500 index closed at on June 29th would suggest that the S&P 500 index has now crossed through this potentially, momentum turning technical level and that a short-term pullback may now be in the cards.

Source: Bloomberg, June 29, 2010

However, this one statistic does not necessarily mean that now is not the time to be in the equity markets or that another downturn is inevitable. As the landmark “Determinants of Portfolio Performance” study conducted in 1991 by Brinson, Singer & Beebower, as published in the Financial Analysts Journal, concluded, it is asset allocation that is responsible for more than 91% of portfolio performance – many times greater than the selection of individual securities or market timing. As a result, we believe that this particular market timing observation should serve as just another reminder that all investors should revisit their asset allocation strategies, if that haven’t already this year, and look to incorporate a wide breadth of asset classes and sectors to help ensure that they have the diversification in place to not only weather volatile markets but to also help in advancing towards their own, unique short and long term financial goals.

Please note: Past performance is not an indication of future results. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index.