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The banking crisis in Cyprus dominated the news this week as the market sold off 3 days in a row after being up 10 days in a row. The selloff was blamed on what was going on in Cyprus but that was not the real story. Globally Cyprus is pretty insignificant, most people probably don’t even know where it is. The real story is that markets just don’t go up for 10 straight days without needing a breather from time to time, Cyprus was just an excuse to take some profits. We told a reporter last week that we expected the Fed meeting to be an excuse to take profits, Cyprus just beat Bernanke to the punch.
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 are now heavily weighted towards small cap stocks as they are showing the strongest momentum.. Globally, we have sold our international developed stocks and shifted to US Stocks. The three day selloff has brought the market closer to equilibrium. We have been buying Small Cap Stocks and US Dividend Paying stocks into the recent weakness.