February 7, 2016

L a n e A s s e t M a n age m e n t
2015 Review and 2016 Fearless Forecast

Market Recap for Janaury and Early February

ther weakness in the 3rd largest economy

There just hasnt been a lot of good news so far this year which showed as the
S&P 500 and DJI had their worst opening months ever. Much of the blame for

the poor performance has been laid at the feet of China and oil. While I believe
that Chinas slowdown has been a significant contributor to global weakness, Im

Not only did U.S. industrial production (IP) deteriorate to the weakest growth
in 6 years, extended weakness is showing up globally, including in the U.K., the

Zacks reports blended Q4 EPS growth for the S&P 500 based on 68% of
the index companies reporting and the balance estimated to be 5.8% or

dergoing a significant slowdown:

The ISM Factory Index and Prices fell to their weakest level since June 2009

Non-farm payrolls for January came in below expectations though improvement did come to average hourly earnings

In any event, just a sampling of U.S. indicators makes it clear that the U.S. is un-

The ISM Non-Manufacturing Index contracted to its lowest reading in

nearly 2 years

not sure how much of oils impact on the markets is cause and how much is effect.

Japans central bank surprise move to a negative policy rate signaled fur-

4.2% lower revenues (ex-energy and Citigroup, earnings and revenues for
Q4 are about flat)

Zacks also reports that EPS estimates for Q1/2016 are coming down on a
daily basis.

Euro area, Japan, China, South Korea, Mexico and Canada

The main question I would have at this point is how much of this bad news

The Empire State Manufacturing Index collapsed to its worst level since 2009

has already been reflected in equity prices and how much is yet to come.

The charts on the following pages use mostly exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly nor do they reflect the total return
that comes from reinvested dividends. The ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses for these ETFs can be found with an internet search on their symbol. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t

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S&P 500 Total Return

Total return for the S&P 500 fell apart in January and early February with the index falling almost 8% from
the beginning of the year to February 5th. From a technical perspective, the 100-day moving average turned
negative during the month while the MACD momentum indicator also deteriorated. The volume spike in
the middle of January provided a brief hope that the current sell-off had bottomed, but it was not to be. Not
shown, but about 75% of the stocks in the index are below their 150-day moving average, a point at which in
the last 20 years either a recovery soon followed or a much more significant correction was in store.
There is a great deal of pressure on equity prices currently with weakness in both current earnings reports for the 4th quarter of 2015 as well as
the outlook for the next two quarters. Global economic weakness attributable in large part to reduced growth in China relative to recent years
adds to the markets challenges. As the S&P 500 index sits at this writing, approach is being made to support at about $1870 ($187 on SPY)
with technical weakness. Caution is advised as the next week or so will provide clues whether the support will continue to hold.

SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no
guarantee of future results.

L a n e A s s e t M a n age m e n t

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S&P 500 The Longer Term View

Below is an updated 20-year weekly chart of the total return for the S&P 500 with a 60-week moving average
trend line and the momentum indicator MACD. Since the beginning of the year, trend has turned negative,
momentum has worsened, and the index has come down to the bottom of its current long term channel for
the first time since late 2011. In the last 20 years, the 60-week trend has rarely turned negative without
considerable additional market deterioration. While past performance is no guarantee of future performance, this is a clear
warning sign for investors. Given issues like weakness in domestic and global growth, a more severe correction cannot be
ruled out. As I indicated last month, investors should be prepared for this possibility with either a strategy to lower exposure early (with a plan
to reenter) or a willingness to ride out a condition that could last for months or longer.

SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no
guarantee of future results.

L a n e A s s e t M a n age m e n t

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Portfolio Protection
Reflecting the concerns of most investors, this analysis chart has been prepared to assist in making a decision about
protecting against a major market sell-off such as occurred in 2000 and 2008. The chart shows the weekly value of
SPY (the ETF proxy for the S&P 500 index on a total return basis) for the last 3 years. The red line is a 50-week exponential moving average (50EMA) and the green line is a 25-week exponential moving average (25EMA). When
the weekly price has fallen below the 50EMA, the 25EMA has crossed below the 50EMA, and the slope of the 50EMA
has turned negative. these three critical criteria would be an important signal to me that it would be timely to reduce equity exposure, perhaps significantly so depending on the current state of the economy and market valuation. All three criteria have been triggered only twice previously in the last 20 years, and it has now happened again in the last few days.
On the basis of this analysis, we are now at a crucial stage for the market and, in my opinion, it would be worth either taking some equity exposure off the
table or be prepared to ride out a period of low or negative return. While its true there can be false or short-lived signals, taking steps to protect assets
at the wrong moment is, I believe, a small price to pay, especially since we dont know how wrong the moment is at the time it occurs.

Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t

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All-world (ex U.S.)

International equities, represented here by Vanguards all-world (ex US) ETF,VEU, was unable to hold support at $43, falling through that level and the next just above $41, coming to a halt at the next line of support at $38.50 before backtracking. This current line of support ($38.50) hasnt been broken since mid2013.
From a technical perspective, the negative outlook followed through on my analysis last month and continues to look weak
for both trend and momentum. One positive sign is the heavy volume over the last couple of months, especially in January, which is frequently
associated with market capitulation and recovery.
At this stage, though the technical outlook is largely negative, it may be worth taking a small position in selected developed markets and adding
to that position based on technical improvements as they occur for those specific markets. I would continue to avoid the broad index on account of its emerging market exposure that I believe is under a more significant cloud both technically and fundamentally.

VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. As of 11/30/14, VEU was allocated as follows:
approximately 19% Emerging Markets, 46% Europe, 28% Pacific and about 7% Canada. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t

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Asset Allocation and Relative Performance

Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. One useful tool Ive
found for establishing and revising asset allocation comes from observing the relative performance of major asset sectors (and
within sectors, as well). The chart below shows the relative performance of the S&P 500 (SPY) to the Vanguard All-world (ex U.S.)
index fund (VEU).
In this chart, the relative strength of equities remains in an established up-channel although there has been considerable volatility and recent
weakness, especially with regard to momentum. While we remain in the current upward channel, I still favor equities over bonds for the long
term. That said, the weakening momentum is troubling and could be a warning sign of further equity deterioration something well need to
keep a close eye on.

SPY and VEU are exchange-traded funds designed to match the experience of the S&P 500, (with dividends) and the FTSE All-world (ex US) index, respectively. Their prospectuses can be
found online. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t

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Income Investing
Investment grade corporate bonds, represented below by LQD, continue their slow drift downward that
began last Fall with both negative trend and momentum. Interestingly, there was a reversal in January
of the long term negative correlation with 10-year Treasury bond yield an aberrational event that I
think is more a function of the unexpected drop in yields than a change in the long term relationship. In
other words, as I expect the drop in the 10-year yield is a temporary phenomenon, I believe the long
term negative correlation will reemerge and investment grade corporate bonds will continue to drift sideways or lower.

LQD is an ETF designed to match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of

L a n e A s s e t M a n age m e n t

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Asset Allocation and Relative Performance

In this chart, we see the impact of the January sharp selloff in equities resulting in relative underperformance for the S&P 500 compared to an index of investment grade corporate bonds. As it turned out, the caution I expressed last month about relative equity
performance and avoidance of overweighting equities turned out to be the right move.
Going forward, we see the relative performance reaching an established support line which, a number of times in the past, has indicated a reversal in favor of equities. That said, despite a likely equity recovery of at least a technical nature in the next few days or weeks, Im
not prepared to overweight equities against investment grade corporate bonds at this time (preferred stocks are another matter).

SPY and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends) and the iBoxx Investment Grade Corporate Bond Index, respectively. Their
prospectuses can be found online. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t

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Income Investing
In this chart, we have the relative performance of the S&P U.S. Preferred Stock Index ETF (PFF) to investment grade corporate bonds showing relative strength of preferred stocks.
While investment grade corporate bonds have generally been inversely related to the 10-year Treasury yield,
the same has not been true to preferred stocks, especially those of financial institutions or REITs. In fact, as
shown below, there is a generally positive correlation between the yield on the 10-year Treasury bond and the
relative performance of preferred stocks to investment grade corporate bonds, probably driven more by the search for yield
more than the change in the Treasury yield. With the expectation of a slowly rising 10-year Treasury yield (despite Januarys experience) and the
improving trend and momentum of the relative performance with bonds, I believe preferred stocks offer an excellent alternative incomeoriented investment.

PFF seeks to track the investment results of the S&P U.S. Preferred Stock Index (TM) which measures the performance of a select group of preferred stocks . LQD is an ETF designed to
match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t

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Interest Rates
Shown below are the 2-year and 10-year U.S.Treasury yields for the last two years. The 2-year yield might be taken as a
proxy for the markets opinion about what will ensue for the Fed funds rate. The 10-year yield is a reflection of not only
domestic attitudes about changes in the Fed funds rate, but also the global interest rate environment and developing
strength or weakness in the U.S. dollar.
As you can see, both yields dropped precipitously in January, something I think few people, including me, expected a
month ago. It appears that this result for the U.S. 10-year yield is on account of lowered expectations for global growth, leading the ECB and Japan to attempt stimulation through negative policy rates (this applies to the interest earned by commercial bank deposits with the central
banks, not to consumer rates) leading, in turn, to increased demand for U.S.Treasuries (a flight to quality and higher yield), thereby depressing
U.S. yields.
As for the drop in the 2-year yield, along with the correlation with the 10-year, I believe this is a reflection of the lowered expectations for the
U.S. Federal Reserve to be implementing the second round of Fed rate increases any time soon. While its too early to be totally confident, this
matches my expectations for fewer rather than more Fed rate increases in 2016.

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L an e A ss et M an ag em ent
Disclosures
Edward Lane is a CERTIFIED FINANCIAL PLANNER. Lane Asset Management is a Registered Investment Advisor with the States of NY, CT and
NJ. Advisory services are only offered to clients or prospective clients
where Lane Asset Management and its representatives are properly licensed or exempted. No advice may be rendered by Lane Asset Management unless a client service agreement is in place.

and related exchanged-traded and closed-end funds are selected based on his opinion
as to their usefulness in providing the viewer a comprehensive summary of market
conditions for the featured period. Chart annotations arent predictive of any future
market action rather they only demonstrate the authors opinion as to a range of possibilities going forward. All material presented herein is believed to be reliable but its
accuracy cannot be guaranteed. The information contained herein (including historical
prices or values) has been obtained from sources that Lane Asset Management (LAM)
considers to be reliable; however, LAM makes no representation as to, or accepts any
responsibility or liability for, the accuracy or completeness of the information con-

Investing involves risk including loss of principal. Investing in interna-

tained herein or any decision made or action taken by you or any third party in reli-

tional and emerging markets may entail additional risks such as currency

ance upon the data. Some results are derived using historical estimations from available

fluctuation and political instability. Investing in small-cap stocks includes

data. Investment recommendations may change without notice and readers are urged

specific risks such as greater volatility and potentially less liquidity.

to check with tax advisors before making any investment decisions. Opinions ex-

Small-cap stocks may be subject to higher degree of risk than more es-

pressed in these reports may change without prior notice. This memorandum is based

tablished companies securities. The illiquidity of the small-cap market

on information available to the public. No representation is made that it is accurate or

may adversely affect the value of these investments.

complete. This memorandum is not an offer to buy or sell or a solicitation of an offer

Investors should consider the investment objectives, risks, and charges

to buy or sell the securities mentioned. The investments discussed or recommended in

and expenses of mutual funds and exchange-traded funds carefully for a

this report may be unsuitable for investors depending on their specific investment ob-

full background on the possibility that a more suitable securities trans-

jectives and financial position. The price or value of the investments to which this re-

action may exist. The prospectus contains this and other information. A

port relates, either directly or indirectly, may fall or rise against the interest of inves-

prospectus for all funds is available from Lane Asset Management or

tors. All prices and yields contained in this report are subject to change without notice.

your financial advisor and should be read carefully before investing.

This information is intended for illustrative purposes only. PAST PERFORMANCE

Note that indexes cannot be invested in directly and their performance

DOES NOT GUARANTEE FUTURE RESULTS.

may or may not correspond to securities intended to represent these

Periodically, I will prepare a Commentary focusing on a specific investment issue.

sectors.

Please let me know if there is one of interest to you. As always, I appreciate your feed-

Investors should carefully review their financial situation, making sure

back and look forward to addressing any questions you may have. You can find me at :

their cash flow needs for the next 3-5 years are secure with a margin
for error. Beyond that, the degree of risk taken in a portfolio should be
commensurate with ones overall risk tolerance and financial objectives.

www.LaneAssetManagement.com
Edward.Lane@LaneAssetManagement.com
Edward Lane, CFP

The charts and comments are only the authors view of market activity

Lane Asset Management

and arent recommendations to buy or sell any security. Market sectors

Kingston, NY
Reprints and quotations are encouraged with attribution.