Over the last six months I have indicated repeatedly that the S&P was likely to rise to between 1000 & 1100 this year; consistent with my year end forecast of 1050. We are now rapidly approaching the 1000 level. While still below fair value (1100) the S&P is no longer cheap, thus we are tempering our bullish outlook and trimming positions. My caution not withstanding it would not be surprising to see the market moving higher still before failing.

We are starting to see (formerly skeptical) investors jump on the bandwagon. Transaction volume, although still too low to support another major up move, is at six month highs. Unlike a month ago when the S&P first reached 950, our proprietary sentiment indicator has not yet flashed the short term warning lights. The consumer has retrenched but companies that have survived have learned to live with lower sales volume levels.

All of this argues for a continuation of the recent improvements in the economy and the markets. However, those improvements are likely to be modest and erratic as foreclosures and job losses continue. Commercial real estate is turning into a new black hole for landlords and the banks that financed them. A big shift from consumption to savings means that top line growth will be modest or non existent for most corporations. Most of the gains from cost cutting have already been realized. Therefore upside profit surprises are less likely to appear later in the year than they are in the current quarter. In fact, sales declines would have been worse has not so many competitors restructured or gone out of business. The most obvious example is the jump in Ford sales at the expense of GM & Chrysler. Ford sales and profits are up, but the combined sales of the big three are down substantially. In like fashion, survivors in many industries will post better numbers, but aggregate corporate profits will only look good in comparison to last year’s losses. These problems place serious limits on gains in both the economy and the markets. These conditions are however a dramatic improvement when compared to the economic paralysis that gripped the economy from September through March.

Despite recent gains, the S&P 500 remains down about 35% from the Oct 07 highs. Fortunately, our Diversified Sector Program is down less than 15% from that time and posting 20%+ gains (gross of fees) in 2009. Our Fixed Income strategies are have achieved 15-20% gains relative to both year end and the Oct 07 highs. With the Market approaching nine month highs we are increasing out cash position and favoring those sectors that have underperformed the market over the last few years (despite spectacular performance over the past few months). These turbulent timesrequire us to actively trade about 15-20% of portfolio. Buy and hold strategies used by others have been disastrous for the last decade and are likely to produce only mediocre results at best over the next few years.