Last week, the likelihood of the broad markets rising, and ultimately extending the bear market rally, diminished.   All of the broad indexes closed lower for the week – the first showing of moderate weakness in many weeks. Looking at the markets, it currently looks like there is substantial downward risk coming into play because many of the economic points investors have recently been speaking about – signaling a bull market rally – have shown weakness. The sector of the market hit the hardest during the course of the previous week was the commodity and natural resources sector. The sector moved lower partly due to the surprise strengthening of the US dollar and partly because it is more probable that the economic recovery is going to be slower than initially anticipated. Not even gold was spared from last week’s downturn; this was somewhat surprising because, typically, when the market turns downward gold is one of the first things that moves up due to its perceived safety. Gold may have recently been driven up as a result of over speculation regarding what China is or is not purchasing and the overall worldwide demand for gold. Gold needs to see a pull-back from its speculative peak, which occurred near $1,000 per ounce. One good item to note about the decline last week was that it occurred with extremely low volume, with most of the large institutional money managers apparently waiting on the sidelines. The only day with above average volume was Friday, which correlated to quadruple witching in the options market, a day which typically sees volume spike upwards as options contracts come due and new ones are created.

Overall leadership of the markets appears to either have changed or be in the process of changing, with commodities and natural resources in the recent rally falling from the top spots and sectors such as health care, biotechnologies and pharmaceuticals rising. I am actively watching these emerging sectors for the right moment to make an investment and will move when the situation warrants.  One item I am watching very closely is the VIX indicator of  overall market volatility, which spiked upward during the first two trading days of last week and settled back down toward the end of the week. The move, which occurred at the beginning of the week, was quite significant (up 16 percent) and at the same time broke the downward trend it had been in since March of 2009. The VIX settled back down during the last three trading days of the week. Typically, once a downward trend has been broken, clusters of spikes soon follow. Hopefully, the VIX does not rise to such lofty levels as were seen last year as the market deteriorated, but it is a possibility.

On the political front last week, President Obama’s administration set out the basic guidelines for the financial industry regulation reform they will be seeking from congress. Most of the reform will have very little impact on the everyday consumer and is aimed at the large financial institutions to try to avoid a recurrence of our current economic situation. The tricky part of the new legislation will be establishing the correct amount of oversight without causing an undue burden to the industry as a whole. The vast majority of financial institutions had very little to do with the current economic situation, doing exactly what they should have been doing, while a few outlier firms caused the majority of the mess. Also on the political front, there has been little news regarding the possibility of Bernanke and Paulson having to testify under oath on Capitol Hill about the Merrill Lynch Bank of America sale. While the public should know the truth about what happened during the sale, it really does not have any effect on where things are now and what is being done about them. Even if Bank of America was pressured into closing the deal, was it really any more pressure than the government used when they forced banks to take TARP money?

For the trading week ending 6/19/09, the returns in FSI’s portfolio models were as follows:

	Last Week	Year to Date
S&P 500 WD (benchmark)	-2.59 %	3.34 %
Aggressive Model	-5.62 %	2.94 %
Growth Model	-3.66 %	2.97 %
Moderate Model	-1.84 %	1.29 %
Stable Model	-2.82 %	2.84 %

Over the course of the week, as mentioned above, I was very actively moving out of investments with a lot of inherent market risk and moving toward the safety of the sidelines. The sold list is quite extensive and includes Direxion funds Latin America (DXZLX) and Emerging Markets (DXELX), Profunds China (UGPIX), Rydex Financial (RYFIX), Natural Resources (EWC, DNLAX, PGNAX) and half of the position in Direxion Funds Small Cap Bull Fund (DXRLX). These sales were made because of the way natural resources have recently been behaving; I rode them up very nicely, but felt that the downside risk was growing greater by the day and that it was time to take some profits and see if the natural resources return to a comfortable level, where it makes sense to buy in again. With the end of the trading week behind us, it looks like our move-out earlier in the week was very timely as commodities and natural resources have continued to decline. I am also actively watching my other holdings for any signs of true weakness and will make decisions on an individual holding basis as to whether I need to sell or hedge the positions with inverse funds. The bottom line is that I have moved toward safety in order to preserve wealth and will be actively looking for investments with a strong potential upside and a relatively low downside risk.

Economic Wrap Up: Last week, the economic news released had little direct impact on the overall market, but the combination of economic news and factors led investors to believe that the rally may in fact fail to materialize. Both the Producer Price Index (PPI) and the Consumer Price Index (CPI) releases last week showed that there is virtually no sign of inflation taking hold on the US economy. This lack of implied inflation is very good for the Federal Reserve, and I am sure they breathed a little sign of relief at the news, since they can now continue working on the issues at hand without the added wildcard of inflation being a problem, at least for now. Initial jobless claims came in a little higher than expect at 608,000 while the market had been expecting 604,000, but the difference was so small in the grand scheme of things that there was little adverse effect on the market. One figure released last week continued to indicate that the housing market could possibly bottom out. The housing starts figure of the month of May was released last Tuesday to show that there were 532,000 starts during the month; the release was almost a full ten percent above market expectations and in line with more optimistic expectations which continue to show a bottoming in the US housing market.

This week, there will be a few very key economic news releases scheduled – the most important being the Fed’s decision on interest rates, which is set to be released during the middle of the trading day on Wednesday. Most market participants expect the Fed to leave the rate alone, especially since data released last week showed that there was little cause for alarm from inflation. Critics of the Fed are calling for rates to be increased so that the money supply is tightened up a little, which should in turn help minimize the angst about inflation in the future. Another release that could have a meaningful impact on the market is the final GDP figure for the first quarter of 2009, which will be released on Thursday. The consensus is that the previously released negative 5.7 percent will stand unchanged; any deviations from this value could result in large movements of the broad markets. The final economic releases for the week are occurring on Friday and include both personal income and spending. These two figures will provide some insight into the mind of the US consumer and it will be interesting to see if spending has gone up with the previous increase in consumer confidence. If consumer confidence rises and yet consumers do not increase their spending, it could lead to a very interesting situation. This situation would be a very difficult situation for the Fed to get around because they really need to get consumers spending, whether they are confident in the system or not, in order for all of their recent stimulus actions to have the desired effects.