OUTLOOK

"S&P Rallies as Forecasted"

5/5/2008

In our Outlook on 11/12/07, we expected the S&P 500 to rally to at least 1500 or more within 8 weeks from a close of 1453.70 on 11/9/07.  Our forecast was correct.  The S&P 500 rallied to 1500 or more within 8 weeks, closing at 1515.96 on 12/10/07.

Although our forecast was correct, our long trade in the S&P 500 did not go as expected.  Ideally, we would have exited our position and taken profits at our forecasted target of 1500 or more in December of 2007.  However, our system did not register an exit signal at the 1500 level for the S&P 500.  Thus, we continued to hold on to our position and gave up our trade profits during the market downturn of 2008.

What we learned from this experience was that our exit rules were too rigid and needed more flexibility to handle different market conditions.  Consequently, we have added more flexibility to our exit rules so that we are better able to retain profits and minimize drawdowns in the future.

Mark Yuan, CFA