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Ned Davis Research Group THE OUTLooK FOR StoCKS, CoMMODITIES, AND GLOBAL THEMES: SECULAR AND CYCLICAL INFLUENCES Atlanta MTA & CFA Society of Atlanta | September 24, 2008 Tim Hayes, CMT, Chief Investment Strategist The NDR Approach • Identify investment themes and stay with them until a sentiment extreme is reached. • We say… » "Go with the flow until it reaches an extreme and then reverses." » "The big money is made on the big moves." » "Let your profits run, cut your losses short." • We develop reliable indicators and models based on… » "The Tape" – Trend, momentum, confirmation & divergence. » Investor psychology – Sentiment and valuation extremes. » Liquidity – Monetary and economic conditions, supply & demand. • In summary, NDR approach is… » Objective » Disciplined » Risk-Averse » Flexible 1 Ned Davis Research Group Please see important disclosures at the end of this document. CURRENT POSITIONS Global Allocation: Overweight/Bullish: Underweight/Bearish: Stocks » Bonds (by 10%) » Stocks (by 15%) Cash 40% » Cash (by 5%) 15% Bonds 45% » Pacific ex. Japan » U.K. » U.S. » Japan U.S. Allocation: Stocks 40% Cash 20% » Cash (by 10%) » Stocks (by 15%) » Bonds (by 5%) Bonds 40% Styles: » Growth » Value Sectors: » Energy » Consumer Discretionary » Basic Resources » Financials » Consumer Staples » Utilities Commodities: » Correction within secular uptrend Bonds: » 105% of benchmark duration Neutral Positions: » Large-caps vs. Small-caps » Yield curve 2 Ned Davis Research Group Please see important disclosures at the end of this document. We've recommended maximum underweight exposure all year. Now we're ready to add exposure after re-test of lows. Daily Data 9/19/2006 - 9/19/2008 NDR U.S. Asset Allocation Recommendations 65 65 64 64 63 As of 9/19/2008: 63 62 40% Stocks () 62 61 61 60 40% Bonds () 60 59 20% Cash () 59 58 58 57 57 56 Stock Benchmark = 55% 56 55 55 54 54 53 53 52 52 51 51 50 underweight 50 49 49 48 48 47 47 46 46 45 45 44 44 43 43 42 42 41 41 40 40 39 39 38 38 37 37 36 Bond Benchmark = 35% 36 35 35 34 34 33 33 32 32 31 31 30 30 29 29 28 28 27 27 26 26 25 25 24 24 23 23 22 22 21 21 20 20 19 19 18 18 17 17 16 16 15 15 14 14 13 13 12 12 11 Cash Benchmark = 10% 11 10 10 OND J F M A M JJ A S OND J F M A M JJ A S (AA501B) 2007 2008 3 Ned Davis Research Group Please see important disclosures at the end of this document. Bottom suggested by record volume… Daily Data 7/16/1981 - 9/19/2008 (Log Scale) NDR All-Cap Equity Series Volume 1536 1536 S&P 500 Gain/Annum When: 1239 1239 1000 Volume Deviation Gain/ % S&P 500 1000 807 from Trend Is: Annum of Time 807 651 * Above 105 18. 7 47. 5 651 525 92 to 105 0. 7 48. 4 525 424 92 and Below -3. 9 4. 1 424 342 342 276 276 222 222 180 180 145 145 117 9/19/2008 = 1255.1 117 9511 9511 NDR All-Cap Equity Series Daily Volume (millions) 9/19/2008 = 11278.9 6101 6101 3913 3913 2510 2510 1610 1610 1032 1032 662 662 425 425 272 272 175 175 112 112 72 72 46 46 9/19/2008 = 117.0 140 140 NDR All-Cap Equity Series Volume Deviation from Trend 135 50-Day Smoothing/200-Day Smoothing 135 130 130 125 125 120 120 115 115 110 110 105 105 100 100 95 95 90 90 (S52) 1 9 8 6 1 9 9 1 1 9 9 6 2 0 0 1 2 0 0 6 4 Ned Davis Research Group Please see important disclosures at the end of this document. …and it's been on the downside. Daily Data 9/18/2006 - 9/19/2008 (Log Scale) NDR Multi-Cap Institutional Equity Series Advance/Declining Volume 1558 1558 9/19/2008 = 1255.1 1522 1522 S&P 500 Index 1487 1487 1453 1453 1419 1419 1386 1386 1354 1354 1323 1323 1292 1292 1262 1262 1233 1233 1204 1204 1176 1176 1149 1149 122.02 NDR Multi-Cap Institutional Equity Series Declining Volume / Advancing Volume (Log Scale) 9/19/2008 = 0.18 122.02 57.69 57.69 27.27 27.27 12.89 12.89 6.10 6.10 2.88 2.88 1.36 1.36 0.64 0.64 0.30 0.30 0.14 0.14 0.07 0.07 0.03 0.03 26 NDR Multi-Cap Institutional Equity Series 26 24 Advancing Volume / Declining Volume 24 22 9/19/2008 = 5.41 22 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 OND J F M A M JJ A S OND J F M A M JJ A S (S54A) 2007 2008 5 Ned Davis Research Group Please see important disclosures at the end of this document. Global market breadth has gotten "so bad it's good." Weekly Data 10/09/1994 - 9/21/2008 (Log Scale) MSCI World Index (Local Currency) 1175 1175 1115 1115 1058 1058 1003 1003 952 952 903 903 857 857 813 813 772 772 732 732 695 695 659 659 626 Index Gain/Annum When: 626 594 % of Markets Gain/ % 594 563 Above Smoothing is: Annum of Time 563 535 Above 60% 10. 9 59. 8 535 507 Between 10% & 60% -9. 9 34. 2 507 481 481 * 10% and Below 49. 9 6. 0 457 9/21/2008 = 925.66 457 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Bullish 95 95 90 90 85 85 80 80 75 75 70 70 65 65 60 60 55 55 50 50 45 45 40 40 35 35 30 30 25 Bearish 25 20 20 15 15 10 10 5 5 9/21/2008 = 2.4% So Bad It's Good (STH0821_C) Percentage of 42 NDR Global Markets Above Their 40-Week Smoothings 6 Ned Davis Research Group Please see important disclosures at the end of this document. Last five bears have ended in August 31 to October 19 period. Last FIVE NDR-DEFINED CYCLICAL BEAR MaRKEts ---- Beginning ---- ---- Ending ---- Date DJIA Date DJIA % Gain Days 8/25/87 2722.42 10/19/87 1738.74 -36.1 55 7/16/90 2999.75 10/11/90 2365.1 -21.2 87 7/17/98 9337.97 8/31/98 7539.07 -19.3 45 1/14/00 11722.98 9/21/01 8235.81 -29.7 616 3/19/02 10635.25 10/9/02 7286.27 -31.5 204 10/9/07 14164.53 ?? ?? -22.9* 342* Median (33 bears since 1900) -26.9 363 A Bear Market requires a 30% drop in the Dow Jones Industrial Average after 50 calendar days or a 13% decline after 145 calendar days. Reversals of 30% in the Value Line Geometric Index also qualify. This applied to the 1990 and 1998 high and low. (The table uses corresponding high and low dates and values for DJIA). *As of 9/15/2008 Ned Davis Research, Inc. T_200B (excerpt) 7 Ned Davis Research Group Please see important disclosures at the end of this document. Along with one-sided breadth and volume, bottom indicated by VIX… Daily Data 12/31/1996 - 9/19/2008 (Log Scale) Standard & Poor's 500 Stock Index vs VIX Index 1534.8 1534.8 1475.4 1475.4 1418.4 1418.4 1363.5 1363.5 1310.8 1310.8 1260.1 1260.1 1211.3 1211.3 1164.5 1164.5 1119.4 1119.4 9/19/2008 = 1255.08 1076.1 1076.1 1034.5 1034.5 994.5 994.5 956.0 956.0 S&P 500 Gain/Annum When: 919.0 919.0 883.5 Gain/ % 883.5 VIX Index Is: Annum of Time 849.3 849.3 * Above 28.5 100. 0 12. 1 816.5 816.5 Between 21.5 and 28.5 -4. 9 32. 0 784.9 784.9 21.5 and Below -4. 0 55. 9 754.5 754.5 44.0 44.0 High Fear Implied Volatility Index 9/19/2008 = 32.1 40.7 40.7 37.6 37.6 34.7 34.7 32.1 32.1 29.7 29.7 27.4 27.4 25.4 25.4 23.4 23.4 21.7 21.7 20.0 20.0 18.5 18.5 17.1 17.1 15.8 High Complacency 15.8 14.6 14.6 13.5 13.5 12.5 > 28.5 $10,000 becomes $26698 12.5 11.6 < 28.5 $10,000 becomes $6346 11.6 10.7 Buy and Hold $10,000 becomes $16944 10.7 9.9 9.9 M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S (DAVIS72) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 8 Ned Davis Research Group Please see important disclosures at the end of this document. …and intraday volatility. Daily Data 10/03/1928 - 9/19/2008 (Log Scale) Dow Jones Industrial Average 12127 12127 Median DJIA % Returns 8935 Since 6/27/1950 (14 Cases)* 8935 6584 6584 Days After All Signals Indicate Initial 4851 Later Signals Periods 4851 3574 Readings Above Top Band 3574 10 1.
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