MDM - Model switches to a Cash signal October 20, 2011

Published : October 20 2011 at 11:03 ET

The model's fail-safe was hit, thus the model returns to cash. The loss on fail-safes is typically a lesser negative than -2% on the NASDAQ Composite unless the market is unusually volatile. In this case, the fail-safe triggered at -2.3%, which is a smaller loss than expected given current levels of volatility.

The market is still in a chop zone, a period that follows a steep correction where the market remains volatile and somewhat trendless.

Quantitative easing out of Europe could push the markets higher in a lackluster fashion as QE1 and QE2 has done for US markets from March 2009 - June 2011.

Many arguments can be made that Euro-QE will be ineffective, but the model does not argue with its fail-safe, thus has moved back to a cash position.

In Euro-news, Germany and France have agreed on increasing the bailout facility. The details now need to be hammered out. This could create additional delays. The markets do not like uncertainty so in the meantime, the markets could head lower. In addition, the action of leading stocks has been anemic at best. That is all to say that the model is not far from switch into a sell signal should selling pressure continue.

In this highly volatile environment, it can be prudent to keep position sizes on the smaller side and pyramid in on a price basis, whether the position is in an ETF from the model's buy or sell signals, or in a stock.

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