Friday, October 30, 2009

Proceed with Caution

We have enjoyed a strong run while running offense since July 20th. Actually, we have been on offense for all but one month since March 12th. Since July 20th we have seen the S&P 500 Equal Weight Index (RSP) gain 16.1% and the S&P 500 Index (SPX) up 11.8% while 30 out of 40 economic sectors gained more than 10% with only one sector (Savings & Loans) falling. While the market’s move has been nothing short of impressive, a breather - of some sort - is not wholly unexpected, nor undesirable.
After Wednesdays (10/28/09) activity, the pendulum in the market has switched from demand being in control to supply being in control. With this shift to wealth preservation there are several things we can do: scale back current positions, set stop-loss points, and wait for pullbacks to initiate new positions. Remaining positive for the market is the fact that equities (US & international) are still strongly favored over cash and the overall trend of the major market indices remains positive.

It's not too surprising that after such a strong rally we see some sort of consolidation and pullback here. We will follow what the indicators are telling us and will not let recent markets unduly influence our decision making process. 2008 was bad for equities, we know that, but that has absolutely no bearing on 2009 or 2010. Right now, we know that this shift from demand to supply suggests that the risk in the market has heightened and we will be proceeding with caution.

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