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The long awaited sell off finally came this week as the market suffered its worst day since November. The decline seems to have somewhat solved the overbought situation as the market rallied back the next day.
Our momentum indicators are still extremely bullish on the stock market. Our positive reading on stocks does not mean that the market is guaranteed to rise from here. There are still many risks on the horizon (Poor corporate earnings, problems in Europe, slowing economy, partisan bickering in Washington, etc) that could cause a selloff. However, our research suggests that when our momentum indicators are bullish the rewards of being invested outweigh the risks.
In the US we have lightened up on our mid cap stock positions for more small cap exposure. Globally, we continue to favor broad based International Developed Stocks. Our shorter term counter-trend indicators are now more bullish after the selloff so we are now almost fully invested.
Fixed Income Markets
Our momentum indicators show all areas of the bond market are weakening. We still see some strength in high yield corporate bonds but we have sold our emerging market bonds.
We continue to hold our counter trend position in long term Treasuries. We understand that over the intermediate and long term Treasuries are probably the worst bet you can make, but over the short term they are looking oversold and could provide some protection if we do have any sort of pull back in stocks.
1. S&P 500