Our Behavioral Indicator -Bullish Bias

Our Behavioral Indicator attempts to capture human trading emotions mathematically. It combines years of data from various indicators and aggregates it into an easy to understand model that assists in the investment decision making process. Our indicator encapsulates the put/call ratio, the volatility index, pricing and volume analysis, new high/lows and point and figure analysis to report the daily scores used in making decisions

Our indicator will score within one of five basic Market Cycles. These cycles include “Extreme Euphoria”, “Greed”, Rational Market”, “Fear”, and “Extreme Panic”. Depending on where we are in the market cycle determines how aggressive our portfolio structure. Typically, the best time to aggressively buy US equities are when we are rising out of Extreme Panic. The best time to be conservative is when we are falling from Extreme Euphoria.

Delving further in the interpretation, our models comprise of two lines. The first is the “Trigger Line”. This line tracks the general movements of the market and provides us with a “heads up” that a time to act is approaching. The second line is the “Trend Line” and provides us with the actual actionable entry or exit into the market.

The trigger line bottomed in the extreme panic zone and started higher on October 4th this year. The trend line turned higher soon after and we decided to increase our long exposure aggressively on October 12th.

While the strategy worked well for us in the month of October, we overstayed our "risk on" position when in early November the trigger line started lower. By November 14th the trend line was headed lower and an investor should have decreased his long bias in favor of a more defensive stance.

On December 6th, the trend line started higher once again. We are prepared to increase our long bias as this model leads us higher, but should a few events transpire, we are fully prepared to get very aggressive into the first hint of a year end rally.

Shouldwe see the S&P 500 firmly breakout above its 200 day moving average on above average volume, that would be confirmation for us to get as aggressive as we've been all year and capitalize on what we suspect is a coming rally.

On the other hand, if the trend line in our behavioral model starts to head lower and we continue find resistance on the 200 day moving average, we are equally prepared to take the portfolio to neutral and avoid losses during another sell-­off.

We are also encouraged by the leading sectors as we head into December. A few weeks ago we wrote that we were seeing more money flow back into cyclical sectors and away from defensive sectors, typically a good sign that we could see at least a near-­term rally in stocks. We noted that the one anomaly in this sector rotation was the lack of participation in the financial sector. This has changed over the past two weeks.

Figure4 shows the returns for the S&P 500 sector classifications over the past two weeks. What we are seeing for the first time since the downturn began in April of this year, is that the financial sector is leading the way off of the lows hit a few weeks ago.

A follow-­through from this all important sector would be another sign that there will be a year-end / early 2012 rally.

In our effort to increase our exposure to sector leaders, we bought four new names this week.

Airgas, Inc (ARG): Our average price: $76.08. Airgas, Inc., through its subsidiaries, engages in the distribution of industrial, medical, and specialty gases in the United States. It offers nitrogen, oxygen, argon, helium, hydrogen, and welding and fuel gases, such as acetylene, propylene and propane, carbon dioxide, nitrous oxide, ultra high purity grades, special application blends, and process chemicals. The company also produces nitrous oxide and dry ice, liquid carbon dioxide, and atmospheric merchant gases, as well as distributes process chemicals, refrigerants, and ammonia products. In addition, it offers hard-goods consisting of welding consumables and equipment, safety products, construction supplies, and maintenance, repair, and operating supplies.

Further, the company rents gas cylinders, cryogenic liquid containers, bulk storage tanks, tube trailers, and welding and welding related equipment. It serves repair and maintenance, industrial manufacturing, energy and infrastructure construction, medical, petrochemical, food and beverage, retail and wholesale, analytical, utilities, and transportation industries. The company markets its products through various sales channels, including branch­-based sales representatives, retail stores, strategic customer account programs, telesales, catalogs,

e­-business, and independent distributors through a network of approximately 1,100 locations.

FMC Technologies (FTI): Our average price: $52.53 FMC Technologies, Inc. provides technology solutions for the energy industry worldwide. It operates in two segments, Energy Production Systems and Energy Processing Systems. The Energy Production Systems segment designs and manufactures products and systems, including sub-sea systems used in the offshore production of crude oil and natural gas; surface wellheads and production systems used on both land and offshore platforms; separation systems that separate production flows from wells into oil, gas, sand, and water; and multi-phase meters for production and surface well testing, reservoir monitoring, remote operation, fiscal allocation, process monitoring and control, and turbine and compressor monitoring. It also provides installation and work-over tools; service technicians for installation assistance; and field support for commissioning, intervention, and maintenance of sub-sea systems.

The Energy Processing Systems segment designs, manufactures, and supplies high pressure valves and fittings for oilfield service customers; and manufactures and supplies liquid and gas measurement and transportation equipment and systems to customers involved in the production, transportation, and processing of crude oil, natural gas, and petroleum-­based refined products.

Its products include flowline products, pumps and valves, land­ and marine­-based fluid loading and transfer systems, material handling systems, magnet motors and bearings, and measurement systems for use in custody transfer of crude oil, natural gas, and refined products. This segment also provides engineering, design, and construction management services in connection with the application of blending technology, process controls, and automation for manufacturers in the lubricant, petroleum, additive, fuel, and chemical industries. The company sells to the end­-user through authorized representatives and distributor networks.

F5 Networks, Inc. (FFIV): Our average price: $112.88. F5 Networks, Inc. provides application delivery networking technology that optimizes the delivery of network­-based applications, and the security, performance, and availability of servers, data storage devices, and other network resources in the Americas, EMEA, Japan, and the Asia Pacific. The company offers BIG­IP, an application delivery controller; VIPRION, a chassis­-based application delivery controller; and Fire-Pass, an appliance that provides SSL VPN access for remote users of Internet protocol networks, and applications connected to the networks from Web browser on any device. It also offers Application Security Manager, an application firewall; WebAccelerator that speeds Web transactions by optimizing individual network object requests, connections, and end­-to-end transactions from browser to databases; WAN Optimization Manager, which integrates application delivery with WAN optimization technologies; Access Policy Manager that provides secure, granular, and context­aware control of access to applications; Edge Gateway, a remote access product, which offers context­aware, policy controlled, and remote access to applications at LAN speed; Enterprise Manager that allows customers to discover and view company s products in a single window; and ARX product family, a series of high performance and enterprise­class intelligent file virtualization devices. In addition, F5 Networks provides Data Manager, a software product, which interfaces with file storage devices; iControl, an application programming interface that allows customers to control their products in the network; iRules, a programming language embedded in TMOS architecture; and consulting, training, maintenance, and other technical support services. The company sells its products to enterprise customers and service providers through various channels, including distributors, value­added resellers, and systems integrators.

Pall Corporation (PLL): Our average price: $54.20. Pall Corporation, together with its subsidiaries, manufactures and markets filtration, purification, and separation products and integrated systems solutions worldwide.

The company s Life Sciences segment provides technologies that facilitate the process of drug discovery, development, regulatory validation, and production used in the research laboratories, pharmaceutical and biotechnology industries, food and beverage industry, blood centers, and hospitals at the point of patient care. It also offers medical products that enhance the safety of the use of blood products in patient care and help control the spread of infections in hospitals; and cell therapy products that enable technologies for the regenerative medicine market. In addition, this segment sells various filtration and purification technologies, appurtenant hardware, and engineered systems for the development and commercialization of chemically synthesized and biologically derived drugs, plasma, and vaccines, as well as offers filtration solutions; validation services to drug manufacturers; and laboratory products for use in drug research and discovery, quality control testing, and environmental monitoring applications. Further, it serves the filtration needs of the food and beverage market. The company s Industrial segment provides enabling and process enhancing technologies for the industrial market. It offers filtration and fluid monitoring equipment to the aerospace industry; filtration and purification technologies for the semiconductor, data storage, fiber optic, advanced display, and materials markets; and a suite of contamination control solutions for chemical, gas, water, chemical mechanical polishing, and photolithography processes. This segment also provides various technologies to producers of energy, oil, gas, renewable and alternative fuels, electricity, chemicals, and municipal water.

Portfolio Metrics

Joseph S. Kalinowski, CFA