The US Equity markets (S&P 500, Dow, NASDAQ and Russell Small Cap) and the German (DAX) index are running in unison and reaching daily new highs. The above four graphs will give you an idea of what our strategy is heading into year-end and early 1st quarter of 2014. The graphs are a longer term (1 ½ year) and a shorter term (7 month) chart of the S&P 500 and the German DAX Index. Keep in mind that the other major indices all look similar. We have talked about this scenario over the last two months. That the markets could continue higher at a pace that we feel is unsustainable. We have remained cautious over the month of September and October maintaining a larger cash position. We are now seeing conditions (technical patterns, economic data and earnings) that are raising concerns of the sustainability of this rally in the short run.
Once again we are at all time highs in the face of uncertainty and multiple headwinds that will start to re-appear near year end and in January. The FED missed the window to begin tapering and the discussion about this topic is being talked about in the news. The only thing causing this market to continue straight up is the FED purchases. The economic data, jobs related data and earnings are not contributing to the rally in the market. Here’s what is happening, non-favorable economic news comes out and Wall Street says the FED is not going to taper so the market rallies. At the same time favorable economic news comes out related to the economy doing better and Wall Street says “see the economy is rebuilding itself” and they rally the markets. You cannot have it both ways. We feel the markets are extended and extremely overbought. We have started building short positions in the S&P 500, NASDAQ and Dow using some of the cash weighting (25%) in the portfolio to do so. At a minimum we are looking for a -3, -5 or -7% corrective move (short term) in the US markets and a corresponding -5 to -9% corrective move in the European markets. We are positioned for both.
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