Week 42 Performance.....One side of the "Wall of worry" is starting to Fall Down

Most of the four major equity indices were headed higher to start the week and then...major earning reports started to file in.  First the surprise from Google, then Microsoft and then to close the week with misses from McDonald's and General Electric which helped to send the DJIA down over 200 points on the 25th anniversary of Black Monday back in 1987.

Some indices took it worse than others with the NASDAQ taking the worst of it, down 1.3% for the week.  Technology names were just hammered all week as investors saw the weak earnings report as a reason to cut back.

This is now the fourth week in a row that the DWCM Fund has pulled back, down 0.5% this week.  Our YTD returns still have us far outpacing the four major equity benchmarks, but the real question is how much longer will this correction last and how deep will it go?

This is where technical analysis can lend a hand to your investment strategy by looking at key support and resistance levels.  Remember resistance levels are those prices reached at the top where a stock can either break out to the upside or head lower.  Support levels are price points in which stocks have sank to a low to where they will either bounce off those lows or breakdown to the downside.

With either support or resistance levels you need to be aware of what are called head fakes.  For example a stock could blow past it's resistance level to the upside only to begin a downward spiral.

As with most things within the stock market you never really know which way things could head which is why you make strategic bets that could limit your upside or downside but gives you the advantage of knowing specifically how much capital you have at risk.  

So what are investors to do in these types of situations?  This type of situation is precisely why we have advised clients to carry such an overweight position in cash within their portfolio holdings.  The advantage here is two fold:

1. Being in cash limits your downside exposure (although it also can limit your upside as well) by not having a big of position in the equity markets.
2. Having that much cash allows you to take a look at stocks that you have been wanting to own but have not hit your price targets.  This is in essence going on a shopping trip when the items you want are finally on sale.  This doesn't mean that prices can't continue to head lower, but it does get you into the market at a price you are comfortable with.

This week in the DWCM fund we liquidated our call option position in Google just before it reported earnings and began to descend.  We are the first to admit that our timing was more lucky than good because we had no inside knowledge that Google was going to report disappointing numbers.  This does not mean that we would not be buyers of Google because we are currently looking at buying shares right now given the 8.5% drop that it sustained this week.  We saw this as an opportunity to lock in gains and increase our cash position which now sits at 50%, the top range of the 30% to 50% range that we have been advocating to clients.  

There really are no other positions that we would be sellers of within the DWCM Fund so we are electing a wait and see approach to determine how the rest of this correction plays out.  We are comfortable about maintaining our long-term core strategy of holding agriculture names, dividend paying companies with solid balance sheets, and owning a few technology names for growth.

We are advising people to really focus on their watch lists and determine entry points to stocks that they have wanted to own in case this correction continues and even better buying opportunities present themselves.

The Week Ahead

Earnings reports are likely going to be the main source of attraction this week within the equity markets.  The FMOC reconvenes this week but we don't see them making any news headlines.  Although, Fed statements always draw such scrutiny that they could easily move markets depending upon how they are interpreted.

Last week surprising home data helped spark the markets higher early in the week only to see gains wiped out by poor earning reports.  This week economic data is a little more diverse with housing number again in the mix along with regional manufacturing indexes.  The week closes with a bang with the report of new GDP numbers and consumer sentiment data which are likely to be key market drivers.

• Mon - N/a
• Tue - FOMC Meeting Begins, Richmond Fed Manufacturing Index
• Wed - PMI Manufacturing Index Flash, New Home Sales, FHFA House Price Index, FOMC Meeting Announcement
• Thu - Durable Goods Orders, Jobless Claims, Chicago Fed National Activity Index, Pending Home Sales Index, Kansas City Fed Manufacturing Index
• Fri - GDP, Consumer Sentiment

Have a Great week!

DreamWorks Capital Management

If you are currently trying to develop your own investment plan or are seeking the help of a professional investment advisor we urge you to give us the opportunity to show you what DWCM can do for you.  No matter what stage in life you are currently at, DWCM can help you plan for your ever changing needs.

DWCM can you help you with any of the steps in your wealth management journey including;

• Addressing emergency fund needs
• Developing a retirement plan
• Sending a child to college
• Looking at various investment options
• Determining how to involve philanthropic passions as apart of your planning process

With our "SMART Principles", we can help you develop your unique goals and create a focused customized plan to achieve your financial and lifestyle goals.

Contact us at pfenner@dwcmllc.com.