June 2, 2007


Dear Member,

I hope you are doing well. It seems that the market is doing very well too. As we stated last month, the market is overextending itself and has become a bit of a play on momentum. In other words, the risk of market correction has gone up.

Our next InvestWELL Report will be released on July 6, 2007.
(following the Labor Report which is generally recognized as a "market mover").

Derek Polcyn,
President

In This Issue:
Investment Idea
Quiz
Our Results
Market Highlights
Behavioral Finance Indicators
Answer to the Quiz

Investment Idea

Question:
In terms of investment strategy, is it better to buy the last year's best or worst performing asset?

Answer:
Diversification appears to outperform both of these strategies and the same results hold for stocks, mutual funds and asset classes. In a well-known study, Templeton Investments researched the outcome of the diversification vs. moving money within 3 asset classes (i.e. stocks, bonds, and cash). The results indicated that diversification among asset classes was the most optimal solution.

Quiz

Assume that you buy a stock for $100 in year 0. If the stock increases 100% in year 1 and declines 50% in year 2, how much money will you have made?

A) -25%
B) 0%
C) +25%
D) It cannot be determined exactly

Answer to the Quiz at the bottom of the newsletter

Our Results (Cumulative %)

InvestWELL Picks & and S&P 500 index index are very close with a InvestWELL Picks slightly leading. Our readers should keep in mind that over 80% of professional mutual fund managers are not able to outperform the S&P 500.

Investment Strategy – MEMBER SECTION

Chart 1.

Market Highlights

• During the last month, the US equities have managed to climb to new highs (Chart 2 & 3). The market appears overextended but the sentiment indicators are pointing to a lot of pessimism which may actually be a bullish factor despite the current high level of the markets.
  
  

Charts 2 & 3. S&P 500: 3 Years and Last Month

Charts courtesy of StockCharts.com

• During the last month, the Canadian equities have followed the US market fairly closely (Chart 4 & 5).

Charts 4 & 5. TSX Canada: 3 Years and Last Month

Charts courtesy of StockCharts.com

• Last month, the US employers added 157K new jobs, while keeping the unemployment rate steady at 4.5%. In May, the acceleration of U.S. job growth and stronger manufacturing added to signs that the economy is gaining momentum.
  
  
• The Canadian labor data will be available next Friday. The US Labor Report is at time published before the Canadian one but the Canadian data is generally more reliable and subject to fewer revisions.
  
  
• The U.S. currency has recently recorded strong gains versus the euro and Yen as economic reports encouraged traders to reduce bets on a cut in borrowing costs by the U.S. Federal Reserve.
  
  
• China announced it may "re-weight" future purchases of foreign currencies to diversify its holdings. In other words, if China currently holds close to 100% of its reserves in the US dollar, it will buy other currencies instead. This is clearly bad news for the U.S. dollar, especially if other countries decide to follow China's example.

Opportunities and Risks – MEMBER SECTION

Behavioral Finance Indicators (see explanation)

Here is a direct quote from the Behavioral Section in last month's Member newsletter: "We are looking at the current fundamentals in the market and we are getting a mixed picture with more of a downward tendency for the market". Again, the market appears to have a mind of its own. We will be watching the new developments carefully.

MEMBER SECTION

Charts 6 - 8: Advancing/Declining Line, AAII and Equity Put/Call Ratio








Charts courtesy of StockCharts.com and DecisionPoint.com

Answer to the Quiz

B is correct. In this question, many people try to average 100% and 50% and arrive at an incorrect answer. In order to correctly measure investment returns, we need to use a geometric average (which allows for compounding over time) instead of an arithmetic average.

Thank you for reading InvestWELL Report.


InvestWELLFinancial.com

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