How the commodity bull market affects our outlook – Analytic Investment (BAL, MOO, JJE, DBC)

Author: Analytic Investment
Covestor models:  Dividend, Deep Value, Earnings Growth, Opportunistic Value, Enterprise Value, Focus Value
Disclosure: None.

In February, the bull continued to take control of the U.S. equity market, as the S&P 500 index closed above the 1300 level on all 19 trading days. The S&P 500 index had only one minor 3-day pullback on news about Libya’s chaos, showing the classic bullish mentality of “buy on bad news”. According to Yahoo! Finance, the S&P 500 index finished the month of February with a 3.196% gain.

As of February 28, 2011, the U.S. equity market condition remains bullish based on the following factors we use to manage risk in our models:

  1. Equity Earning Yield Over Treasury Yield (Cheap, Balanced, or Expensive): Cheap
  2. Equity Earning Trend (Up, Sideway, or Down): Up
  3. Credit Risk (Low, Normal, High, or Dangerous): Low
  4. Equity Volatility (Low, Medium, High, or Dangerous): Low
  5. Equity Money Flow (Positive, Neutral, or Negative): Neutral
  6. Yearly Equity Price Trend (Up, Sideway, or Down): Up
  7. Monthly Equity Price Trend (Overbought, Sideway, or Oversold): Oversold

Many commodity markets are even more bullish than equity market so far this year. For example, as of February 28, 2011, the Cotton No.2 futures contract has soared 41.66% in 2 months, and Class III Milk futures contract has gained 36.49% during the same period. With runaway commodity and energy prices as well as rising global interest rates, we do not expect interest rates in the U.S. to stay unchanged for too long, and we do anticipate U.S. equity market gain to moderate in the coming months due to the effect of inflationary pressure on corporate earnings.

Models Review

In February, all our Covestor models remained fully invested based on our computer algorithms.

Despite the S&P 500 index’s strong return, four of our models still managed to outperform that index in February according to Covestor’s calculation: Focus Value, Earnings Growth, Opportunistic Value, and Enterprise Value. And according to Covestor’s calculation, these four models also outperformed  the S&P 500 index for the past three months. None of our Covestor models use any form of leverage, and Earnings GrowthOpportunistic Value, and Enterprise Value are diversified models with each of them holding between 50 and 111 stocks, so the active return over the S&P 500 index for the past 3 months does not come from a few lucky stock picks or from any form of leverage.

As the U.S. equity market enters its 3rd year of a bull market, it is unlikely to sustain such strong gains month after month. If history repeats itself, we might see a much needed larger correction this year, giving a chance to the money on the sideline to participate the third leg of the bull market. Our investment strategy remains exactly the same regardless the short term market directions. As always, we continue to entirely rely on our computer algorithms to buy undervalued stocks and sell overvalued positions, to monitor market conditions, and to manage risk in all models, so that human emotion and buy-sell bias are completely eliminated from the investing process, unnecessary market timing is avoided, and continuous participation of market is possible for long-term growth.


Opening accounts of Analytic Investment Management LLC’s models through Covestor is not personalized investment advice, and Analytic Investment Management LLC does not take Covestor clients’ personal financial needs into consideration. Investing in the financial markets involves risk, including the risk of principal loss. Don’t invest with money you can’t afford to lose. Information in this report is in no way intended as personalized investment advice and should not be interpreted as such. Past performance is not necessarily indicative of future results. Performance results do not take into account any tax consequences. Focus Value and Focus ETF models are concentrated portfolios with less than 20 positions. Concentrated portfolios carry significantly more risk than diversified portfolios and may not be suitable for every investor.


S&P 500 Pricing from Yahoo Finance

“ICE: Cotton No. 2 Futures” InterContinental Exchange Inc, 3/7/11.

“Class III Milk” CME Group, 3/7/11.