May 2010

Market Update - Volt Tactical US Equity Strategies

Over the last month we have seen the first signs of significant market weakness since the current market rally began in mid-March 2009.  The S&P 500 lost -6.3% during the first week in May alone, and six of the nine sector ETFs that we invest in lost even more than the S&P 500 during that week. Therefore, while we do not traditionally provide market updates mid-quarter, we felt that the extent of the market volatility is such that an update is warranted.  In the interest of efficiency, we will start by providing the key takeaways from the commentary Summary, and then we will follow with a more detailed explanation:

· While we currently have maintained a "fully invested" investment position since late 2009 (all nine sectors invested), the increased volatility and market weakness for a majority of the underlying sectors has translated to a changed environment biased towards continued weakness for several of the sectors.

· Based on current conditions, we would anticipate that over the next several weeks it is likely that at least one and potentially three sectors could turn negative and be removed from the portfolio.

· The likelihood of six sectors turning off and beginning to build a position in short-term Treasuries is not likely unless we see meaningfully more market deterioration.

Market Status - Backdrop

The performance of the sectors of the S&P 500 continued to weaken in May, building on the trend that began in early April.  In fact, as of May 18, all nine sectors are now below their high points in 2010, with three of the sectors having declined more than 11% from the 2010 highs (Materials, Energy and Financials).  The best performer has been Consumer Staples, which is only off 2.5%.  To compound the challenge, based on the analytics we use, our internal evaluation of volatility has shown a very consistent increase from the beginning of the year.  In fact, eight of the nine sectors have seen our measure of volatility increase 50% or more, and three of the sectors have seen volatility more than double year to date (Technology, Utilities, and Health Care).  The only sector which has maintained a reasonably stable volatility level is Financials, but that is ironically due to the fact that Financials, unlike the other sectors, never benefited from as significant a decline in volatility from the extreme levels in 2008 and 2009.

Implications for Portfolios - US Equity

We make all portfolio decisions based purely on quantitative data and tools. Therefore, all decisions are made completely objectively and unemotionally. This point is worth emphasizing because periods where there is a meaningful change in profile of the markets, characterized by many of the sectors either turning off or back on, are, by definition, highly uncertain periods with massive amounts of conflicting data. Our track records have been built on the premise that such environments are prone to emotionally-based mistakes, and that therefore an objective, quantitative approach is the right answer to successfully navigate such decision points.  To put our investment approach in its most simplistic terms, our analysis is attempting to determine, sector by sector, whether the current market weakness is likely to continue. We recognize that all of the sectors have shown a recent downturn and a shift in trend from their prior extended market gains. The key question to determine is whether or not the past several weeks represent a modest correction in a longer-term bull market or a break in environment, and now reflect a higher than desirable probability that the weakness will continue. Again, this assessment is made sector by sector.  Key to our analysis are extent of the loss, the period of time the losses are incurring, and whether or not the losses are accompanied by an increased level of volatility.

Summary

At this point, it now appears that several of the sectors appear to be in or are approaching the range where the probability of further losses are sufficient for turning off one or more of those sectors. While all nine sectors remain on within all of our US Equity portfolios, we would anticipate that at least one and potentially three or four of the sectors could be turned off over the next several weeks - assuming the current market conditions remain in place.  After nearly five months with all nine sectors positive, the environment for several of the sectors appears to have changed to a negative bias. However, we do not at this point see evidence that the weakness has spread to enough sectors to suggest beginning to build a position in short-term Treasuries. Our investment models require six of the nine sectors to turn negative in order for a classification of a "bear market" and a subsequent position in Treasuries to begin being built. We do not see such a situation occurring unless there is more extended or accelerating market weakness.

** This report is meant to inform the reader of our current market opinion, which we, as professional money managers,use in our decision-making. It should be noted that stock market and bond market data are subject to varying interpretations and any one interpretation will not necessarily guarantee investment success. The information obtained from the sources specified herein and used as basis for our current market opinion is believed reliable, but we do not guarantee the accuracy of such information.