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For a while it was obvious that the market had become overbought and was due for a selloff, all traders needed was an excuse, this past week they got two of them. First, the Fed hinted that QE might end and then Italian elections sparked uncertainty in Europe. Add those things in with the looming sequester and you have all the ingredients for a profit taking selloff. At this point this is all part of normal market machinations. The market doesn’t go up in a straight line and it doesn’t go down in a straight line. Markets overreact on both sides in the short term and then eventually go back to equilibrium.
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.