Posts Tagged 'market'

The Market and the Sequester

I just wanted to post a short note as many clients and investors in general are questioning what happens to the market if the sequestration takes place. My short answer is…not much.

First, $85 billion in cuts, as I understand it, is for the year. We spend about $1,500 billion a year. That is 5.6% cut in what we have been spending. In 2013 the government is projected to take in the most money ever in terms of revenue. We are spending nearly a $1,000 billion more now than we did in 2007 – prior to the financial crisis. And the “cuts” aren’t so much cuts, as they are reductions in increased spending.

Right now politicians are playing politics by fear mongering the affects of across the board cuts. This is typical negotiating. The reality, that absolutely everyone knows, is that there is $85 billion of wasted spending in government. We just need someone to show some leadership, and whack off the waste instead of “throwing poor kids out into the street”. While both parties can share the blame, it is appalling that President Obama is saying that he cannot move an aircraft carrier to the Middle East because we don’t have the money with the pending mandatory cuts.

Based on today’s solid stock market action, Wall Street is calling Washington’s bluff. The economy is showing solid, if tepid, positive signs. No one wants to be responsible for sidetracking what appears to be a real economic recovery. If “real” programs are cut – shame on Washington. There is no need. And I think that in a worst case scenario, that is what will come out and it will be an embarrassment to all.

The real question to ask is, “Which way does the market go from here?” I have spent the morning, really the last couple of weeks, looking for an answer. While the crystal ball is a little hazy, the fact is the market is neither expensive nor cheap at this point. I’ll be digging into this statement with more detail in my next post. For now we are in a “show me” market. I’m not about to guess at the market’s short term direction. I’ll just sit back and let it show me which way it wants to go… and have an investment plan for whichever way that plays out to be.


Portfolio Alert

In my last post I said that we were growing increasingly concerned over the deteriorating market since last week’s election.

A key area of support historically has been the 200 day moving average (DMA). The DMA is just the average price of a stock or an index for the past 200 market days, or approximately one year. When the current price drops below the average price of the past year, it has been common to see a much deeper decline. While it is always tempting to say, “This time is different” things rarely really are different. The reasons the market may go down, or up, will always be different, but the actual market cycles are really fairly consistent.

As of the market close on Thursday the 15th, SPY – the S&P 500 tracking ETF, has closed below the 200 DMA for 4 of the last 5 days. We consider this to be a very bearish sign. So far, we have sold 20% of our most volatile holdings in our ETF Seasonal Growth strategies leaving us with a 25% cash position. In our income strategies we have sold up to a 20% position and have also kept that in cash. Our smaller growth accounts that only trade one security are all in cash. Our 401(k)’s are still fully invested. Due to the trading restrictions in 401(k) plans we do delay our buys and sells to try and avoid “whipsaws.” That is getting a signal to get right back into the market after a sell signal. This can result in trading restrictions from the 401(k) plan.

Looking forward, we will continue to sell holdings in our growth strategies, and buy a “short ETF.” A security that goes up, when the market goes down, to further hedge our accounts. Our dividend portfolios will go short with 20% of their holdings. I’ll also look at holdings and focus on defensive industries. Currently we are over weighted in energy and I plan on continuing that overweighting. I would expect the 401(k) accounts to go to cash in the next couple of trading days, unless we see a dramatic improvement in the market.

Look for future posts as we do make portfolio adjustments. • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.