Well, today’s negative market action should took the bite out of the oversold reflex trade from Tuesday. The concerns coming from Greece, really poor economic data and the lack of any support from the Federal Reserve for the time being are really causing investors to panic a bit here. Our recommendation recently has been to sell some positions on a rally to 1300 to 1325 but today’s negative action and opening downward gap now brings a lot of that advice into question.
First, let’s keep things in perspective. The market is currently only down about 7% from the peak. This is a far cry from a major market correction and only about a 1/3 of the correction that we witnessed last summer after the end of QE 1. Furthermore, the markets are still somewhat oversold, not as much as they had been, which means the markets could still make an advance from here but about half of the oversold condition alleviated with the rally on Tuesday we are not as confident of a rally back to 1320, however, 1300 is still a valid target in the near future.
On any rally in the next few days back to that level we recommend continuing to raise more cash. We will most likely, unless something drastic happens on Friday (06/24/11), be reducing the allocation model in the newsletter to reflect only about 30% exposure to the “risk” assets for the rest of the summer.
With economic growth markedly slowing, unemployment rising, government benefits as a percentage of disposable income waning this is hardly the environment to be betting heavily on an upside move in the market from here of any magnitude until either things change or the Fed reenters into the markets with a version of QE 3. We still think this is the most likely solution by the end of summer particularly with deficit talks falling apart at the White House.
Caution is advised from here until further notice with the following advice:
- Maintain higher than normal levels of cash
- Don’t chase yield – chase safe and liquid investments
- Fixed Income is better than preferred stocks
- Reduce equity risk particularly in small to mid cap areas and international
- When in doubt – go to cash
I am NOT saying that you should be 100% in cash. I can’t tell you when the market will turn back to the positive right now but it will at some point in the future so you should always maintain some level of equity exposure in the portfolio. However, decrease the level of risk of that equity exposure by selecting lower volatility investments over higher ones like small and mid-capitalization companies.