On July 29 we started trading the short side of the market. At that time the S&P 500 Index had the highest price spread in history above the 200 day moving average. All technical indicators were showing overbought conditions. As earnings season ended, we felt the time was right for profit taking. In the last week of July we raised our cash weighting to 20% and added a 12% short position (using ETF double down funds in the SP and NASDAQ) to the portfolios. With all of these head winds, slower corporate earnings, seasonality, Fed tapering and a market that is at record price levels versus its own 200 day moving average, we believe that a -9% to -12% correction was needed.
UPDATE: Here is where we stand as of September 5, 2013. The headwinds now include Syria, Congress and the upcoming debt ceiling debate. The market is uncertain about multiple issues yet still behaves rationally. Maximum correction so far only reached 1625.84 on the S&P 500, a -4.80% move. Currently the market has slightly rebounded to 1653.08 a -3.11% move from the high while matching the 50 day MA. We remain vigilant that this market is showing signs of further downside risk before resuming the rally from the past 3 years. With that said, we remain committed to our forecast of a corrective move down of -9% followed by a strong 4th quarter rally to possible new highs by year end.
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